Lean Start-up Business Tactics Seminar - Who Owns Your Company?

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Are you a founder? Do you know how much of your startup you own? What are the ways founders divide up equity? How much ownership do investors usually take? In this seminar we will explore these topics, including tips on bootstrapping, fundraising, and the like, all from the point of view of an evidence-based entrepreneur.

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Lean Start-up Business Tactics Seminar - Who Owns Your Company?

  1. 1. The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother's keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon thee. Jules Winnfield, Pulp Fiction
  2. 2. Who owns your Startup? Keith McGreggor, Ph.D. Director of VentureLab the inequity of equity
  3. 3. # 1 early stage incubator # 1 engineering/science incubator # 2 overall
  4. 4. Who owns your Startup?
  5. 5. equity inequity
  6. 6. equity
  7. 7. eq•ui•ty 1. the quality of being fair and impartial. 2. the value of the shares issues by a company. 3. the value after the deduction of any liabilities the equity of treatment she owns 62% of the startup’s equity equity = assets - liabilities
  8. 8. eq•ui•ty 1. the quality of being fair and impartial. 2.the value of the shares issues by a company. 3. the value after the deduction of any liabilities the equity of treatment she owns 62% of the startup’s equity equity = assets - liabilities
  9. 9. 100% your startup
  10. 10. 20% 20% 60% your startup ?% ?% ?%
  11. 11. overall observation equity should be viewed as proportional to the risk taken
  12. 12. guiding principle fairness, and the perception of fairness, matters more than owning a large slice
  13. 13. observation people are added to the company in waves or layers founders, first employees, etc.
  14. 14. observation each wave is larger than the last later waves take less risk
  15. 15. technique allocate shares such that each wave gets the same amount and that the total of all waves is equal to the founders shares
  16. 16. technique suppose there will be 5 waves founders 5,000 wave 1 1,000 wave 2 1,000 wave 3 1,000 wave 4 1,000 wave 5 1,000
  17. 17. 50% 50% founders: 5,000 shares Two founders @ 2,500 shares each time 0
  18. 18. 4%4% 4% 4% 42% 42% 1st wave : 1,000 shares Four employees @ 250 shares each time year one
  19. 19. 2nd wave : 1,000 shares 20 new hires @ 50 shares each time year two
  20. 20. each wave gets same number of shares 72% 16% 12%
  21. 21. wave 4 wave 3 wave 2 wave 1 Founder B Founder A idea : founders maintain control throughout
  22. 22. important typical schedule 4-5 years: 25% after 1st year then 2% each month always VEST shares (yes, founders too!)
  23. 23. important shares should be allocated but not immediately distributed
  24. 24. FAQ what if I need a salary? IOU more shares for my idea? nope what if I’m not full-time? not founder what if I bring equipment, patents, etc.? IOU Never trade away your equity
  25. 25. why? Because we don’t know what the shares are worth
  26. 26. inequity
  27. 27. investors Friends, Family, & Fools Angels Venture Capitalists
  28. 28. investors Friends, Family, & Fools Angels Venture Capitalists goals Help out Help / Make $ Make $
  29. 29. investors Friends, Family, & Fools Angels Venture Capitalists stock Common … Preferred Founders & Employees Common
  30. 30. 50% 50% founders: 5,000 shares Two founders @ 2,500 shares each time 0
  31. 31. 50% 50% what’s it worth?
  32. 32. post-money valuation 50% 50% + $$$ pre-money valuation
  33. 33. 50% 50% +$$$ +$$$ rounds of funding
  34. 34. a different “class” than common additional rights preferred stock
  35. 35. liquidation dividends voting participation … preferred stock rights max(investment,ownership) regular priority payments vote on company matters payback + common …
  36. 36. example 50% 50% + $$$
  37. 37. post-money $3M + $1M pre-money $2M 50% 50%
  38. 38. 33% 33% 33% ownership after A round founders investor rights
  39. 39. post-money $12M + $4M pre-money $8M 33% 33% 33%
  40. 40. 33% 22% 22% 22% ownership after B round founders investor A rights investor B rights
  41. 41. 30% 30% 30% 10% A + option pool! founders investor rights option pool
  42. 42. 10% 33% 19% 19% 19% B + option pool founders investor A rights investor B rights option pool
  43. 43. Founders have to reverse vest Typically for 3 years! oh, by the way…
  44. 44. Each round of investors is participating preferred. They get paid back AND stock. ! Round A is 2x participating (more risk). Round B is 1x participating. oh, by the way…
  45. 45. 10% 33% 19% 19% 19% what’s it worth? founders investor A rights investor B rights option pool
  46. 46. 10% 33% 19% 19% 19% example purchase = $30M
  47. 47. 10% 33% 19% 19% 19% founders = ? = $30M
  48. 48. 10% 33% 19% 19% 19% Round B preferred = $30M 1x($4M) + 33% common
  49. 49. 10% 33% 19% 19% 19% Round A preferred = $30M 2x($1M) + 19% common
  50. 50. 10% 33% 19% 19% 19% = $24M each founder 19% of $24M = $4.6M $30M - $4M - $2M
  51. 51. 10% 33% 19% 19% 19% founder = 19% $14M = $2.7M = $14M what if … $20M - $4M - $2M
  52. 52. 33% 33% 33% true story
  53. 53. 29% 14% 29% 29% angel angel invests $100K founders valuation $714K
  54. 54. 36% 9% 18% 18% 18% angel founders VC A VC A invests $8M, 2x valuation $22M angel now worth $1.98M
  55. 55. VC B invests $13M, 1x 14% 7% 21% 29% 14% 14% angel VC A VC B founders valuation $44M angel now worth $3.8M
  56. 56. sold to company X for $30M 14% 7% 21% 29% 14% 14% angel VC A VC B founders angel now worth $2.1M …?
  57. 57. 14% 7% 21% 29% 14% 14% all common stock $0 angel true story $30M - $13M - $16M - $1M * 1x 2x VC A VC B founders angel worth $0
  58. 58. Each investor costs founders money & control. moral “The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.”
  59. 59. venturelab.gatech.edu @venturelab / @keithmcgreggor keith@venturelab.gatech.edu 75 Fifth St NW, Suite 415, Atlanta GA 30308

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