Startup compensation cap tables dilution warrants

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all questions entrepreneurs have about cap tables, stock, common mistakes, more on www.startup-advisor,.com

all questions entrepreneurs have about cap tables, stock, common mistakes, more on www.startup-advisor,.com

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  • Having a small business or startup business with tons of decision to make is mind bubbling brain-wreck, but I tried reading the Book Slicing pie by Mike Moyer and it all made sense, in his book he emphasized the startup equity by providing an example; also talked about splitting equity using grunt calculator and dig in to details on equity structure, founders equity, equity compensation, and differentiating your choice on salaries or equity.
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  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com
  • All Rights Reserved (c) Naeem Zafar BizEducationWorkshops.com & ConcordiaVentures.com

Transcript

  • 1. Startup Compensation Demystification & Enlightenment It is not all about money Naeem Zafar Berkeley-Haas Business School CEO Bitzer Mobile Twitter: @naeem www.NaeemZafar.com
  • 2. Agenda
    • Many entrepreneurs struggle with compensation design
      • How much to give to an advisor?
      • How much to attract a VP level person
      • What about a co-founder
    • Guidelines and best practices while designing a package to attract talent
    • 9 levers that you can use to design compensation
    • Common mistakes about using stocks and stock options as well as tax issues
    Entrepreneurship All rights reserved © Naeem Zafar
  • 3. Personal Background
    • Faculty member at Univ of Calif Berkeley Haas business school
    • Founder Concordia Ventures – advisory to entrepreneurs
    • CEO of three companies (semiconductor & software)
    • Worked in engineering, research, marketing & sales
    • Experience at one large multinational & 7 startups
    • One IPO (Initial Public Offering)
    • Four acquisitions, One merger, two “wind-down”, One “restart”
    • Raised over $70M in multiple ways (VC, asset sale, debt, angel)
    • Extensive experience in working with people from all cultures
    • Traveled to 73 countries, lived in 3
    • Brown University engineering 1981, Univ of Minnesota
    • Charter member of TiE Silicon Valley, President of OPEN SV
    • Advised or mentored over 1,000 entrepreneurs
    All rights reserved © Naeem Zafar Startup Workshop
  • 4. Founders & Entrepreneurs
    • Compensation design for startups
    • http://venturehacks.com/articles/option-pool-shuffle#market
    • http://onstartups.com/tabid/3339/bid/66/Startup-Founder-Compensation-Useful-Results-From-A-Recent-Survey.aspx
    • http://www.ackwire.com/
    • http://startuplawyer.com/venture-capital/series-a-startup-ceo-salary
    • http://www.payne.org/index.php/Startup_Equity_For_Employees
    Entrepreneurship All rights reserved © Naeem Zafar
  • 5. Equity Distribution (Post Series A) Entrepreneurship All rights reserved © Naeem Zafar
  • 6. Issue Puzzling Founders
    • What if one founder fizzle out?
    • What happens to his equity?
    • What about death or disability?
    Entrepreneurship All rights reserved © Naeem Zafar
  • 7. Other Issues
    • Tax
    • AMT
    • ISO
    • NSQ
    • 83b
    • Private stock transfer
    Entrepreneurship All rights reserved © Naeem Zafar
  • 8. Demystifying Equity Dilution
    • How does dilution works
    • Who gets what on a startup team?
    Naeem Zafar © All Rights Reserved
  • 9. Your Equity Distribution Options
    • Set aside portion of stocks for advisors & consultants & key advisors
    • Founders should end up with bulk of shares
    • Dilution will happen when money is raised
    • Do simple one page agreements & convert to legal agreement when time to incorporate
    All rights reserved © Naeem Zafar
  • 10. Founding Captable Entrepreneurship All rights reserved © Naeem Zafar
  • 11. Angel Round Entrepreneurship All rights reserved © Naeem Zafar
  • 12. Series A Entrepreneurship All rights reserved © Naeem Zafar
  • 13. Exits Entrepreneurship All rights reserved © Naeem Zafar
  • 14. Warrants
    • Stock vs. warrants
      • Entity
      • Registration issues
    • Strike price
    Entrepreneurship All rights reserved © Naeem Zafar
  • 15. Manager’s Toolbox
    • Salary
    • Raises
    • Bonus
    • Stocks (options, restricted, RSU)
    • Commission
    • Titles
    • Plum assignments
    • freebies
    • Cross functional exposure
    Startup Workshop All rights reserved © Naeem Zafar
  • 16. Equity for Managers Entrepreneurship All rights reserved © Naeem Zafar
  • 17. Resources
    • http://www.salary.com/advice/layouthtmls/advl_display_nocat_Ser56_Par123.html
    Entrepreneurship All rights reserved © Naeem Zafar
  • 18. Common Mistakes
    • Not addressing vesting right
    • No founder’s agreement
    • Too many board members or shareholders
    • Raising money & issue common shares
    • Getting too high a valuation & doing a down-round later
    • Not filing 83b
    • Using stock as salary
    Entrepreneurship All rights reserved © Naeem Zafar
  • 19. Summary
    • Starting a business is not easy … acquire essential knowledge to maximize your chances to succeed
    Startup Workshop All rights reserved © Naeem Zafar www.FiveMountainPress.com
  • 20. Understanding Dilution Entrepreneurship All rights reserved © Naeem Zafar
  • 21. Example
    • 3 people start a company
      • 10M shares issued
      • Each founder has 25%, reserve 25% for employees & advisors
      • Price $0.01 (resulting in company valuation of $100K)
    All rights reserved © Naeem Zafar
  • 22. Equity Ownership All rights reserved © Naeem Zafar
  • 23. Example: Initial Money
    • 1 st round investment (product development)
      • Pre-money valuation ~ $2M
      • Per share price = $2M/10M shares = $0.20
      • Investors put in $3M (buy shares at $0.20)  15 M new shares will be issued
    All rights reserved © Naeem Zafar
  • 24. Example: Initial Money
    • 1 st round investment (product development)
      • Pre-money valuation ~ $2M
      • Per share price = $2M/10M shares = $0.20
      • Investors put in $3M (buy shares at $0.20)  15 M new shares will be issued
      • Post money is $5M ($2M pre plus $3M new money)
        • Investors own 60% of the company now
      • Total number of shares = 10M + 15M new = 25M
    All rights reserved © Naeem Zafar
  • 25. Equity Ownership Post Round A All rights reserved © Naeem Zafar
  • 26. Example: Prod Dev Money Raised
    • 2 nd round investment (Series B)
    • Series B =Product deployment
      • Pre-money valuation ~ $10M
      • New share price = $10M/25M shares = $0.40
      • Investors put in $8M (buy shares at $0.40)
        • New 20M shares issued ($8M / $0.40 per share)
        • Total 45M shares (existing 25M + new 20M)
    All rights reserved © Naeem Zafar
  • 27. Example: Prod Dev Money Raised
      • Post money is $18M– everyone get diluted
        • But gets smaller share of a bigger pie
      • Added 5M to ESOP (Employee pool)
      • Total shares = 50M
    All rights reserved © Naeem Zafar
  • 28. Equity Ownership Post B Round All rights reserved © Naeem Zafar
  • 29. Example: Expansion Money Raised
    • 3 rd round investment (Series C)
    • Series C = channel expansion
      • Pre-money valuation ~ $50M
      • New share price $50M/50 shares = $1.00/share
      • Investors put in $15M
      • Post money is $65M– everyone get diluted
        • But gets smaller share of a bigger pie
      • 15M new shares issued (total 65M)
    All rights reserved © Naeem Zafar
  • 30. Equity Ownership: Post C
  • 31. Example: Going Public
    • Initial Public Offering (IPO)
      • Valuation by investment bankers ~ $100M
      • Reverse split shares 5:1 to get decent price at IPO
        • Market needs to see stock price in $6 to $18 range
        • Now 65M outstanding shares become 13M but they are 5x more valuable
        • 13M shares pre IPO
    All rights reserved © Naeem Zafar
  • 32. Example: Going Public
      • Sell 2M new shares at IPO at $100/13=7.70 per share
      • Raise $15.4M for operations (less fees)
      • Employee lock up
      • Founder lockup
    All rights reserved © Naeem Zafar
  • 33. Ownership After Going Public All rights reserved © Naeem Zafar
  • 34. Founders’ Wealth All rights reserved © Naeem Zafar
  • 35. Summary
    • Starting a business is not easy … acquire essential knowledge to maximize your chances to succeed
    Startup Workshop All rights reserved © Naeem Zafar www.FiveMountainPress.com