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

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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
  • Startup compensation cap tables dilution warrants

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

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