Improperly handling equity is one easy way to kill a startup. San Francisco-based startup attorney Jason Putnam Gordon of Putnam Gordon, P.C. discusses how to properly distribute equity to compensate/reward founders, investors, and other contributors to help build a successful startup. The discussion will includes the basics of valuation and ownership, as well as best practices for founders, employees and consultants, early and then later investors.

1.
Startup Equitable Equity:
Carving up the Ownership Pie
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JASON PUTNAM GORDON, ESQ.
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2. Overview
• Background
• Big Picture and Foundational Basics
• Who Gets What
• Documentation You Need
• Common Pitfalls
• Questions
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JASON PUTNAM GORDON, ESQ.
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3. My Background
• Corporate and Securities Attorney - practicing law since
2005.
• My firm focuses on handling the corporate needs of
emerging-growth companies.
• Licensed in CA, DC, MA, NJ, & PA, but I only practice in
CA.
• I love working with entrepreneurs typically as outside
general counsel.
• I skydive in my spare time and have over 1,000 jumps.
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

4. What is your Background?
• In a startup?
• Founder?
• First startup?
• Who has received funding
before?
• Who has had a founder dispute?
• Previous successful exit?
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

5. Important Caveats
• Today’s Discussion is General Information – Not
Legal Advice
• That means while we’ll be discussing rules and
exceptions, those rules, exceptions, exceptions to the
exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to
review all facts and circumstances. Our off-the-cuff
answers to your questions are not legal advice.
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

6. Big Picture
Create Increasing Value
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com
Company
Increases in Value
Investors
(Capital)
Idea(s)
(Intangible Assets)
Technicians
who have skills
like: sales,
marketing,
business acumen
(Services)

7. Foundational Basics
• What’s the right entity form?
• What’s the form of ownership?
• What is a pre-money valuation
and post-money valuation and
what does that mean in terms
of ownership?
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

8. Foundational Basics -­‐‑ Entity
• Usually, but not always, a
Delaware C-Corp
• Delaware is business friendly
• SoS is comparatively awesome
• Typically better liability protections
for directors and officers
• M&A is typically easier
• Not a pass-through tax entity
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

9. Foundational Basics – Ownership Stakes
• In a corporation –
SHARES OF STOCK NOT
PERCENTAGES!
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

10. Foundational Basics – Valuation
• Pre-money valuation – the value of the
company before the next round of
investment.
• Determining is very difficult for startups
• At the early stage it’s more art than science
• Why convertible debt and convertible equity
are popular
• Post-money valuation – the value of the
company after the round of investment
• Example:
• Pre-money $10,000,000 investment $3,000,000
• Founder A’s shares = 33% of pre-money
• Founder A’s shares = ~25% of post-money
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

11. Who gets what?
• Founders
• There is not a set answer for this.
• There are a seemingly infinite ways to do it.
• Spend time making the right decisions for your startup.
• Here are some general considerations
• Generally the person(s) adding the most value get the
most.
• Not necessarily the idea – value is in the product.
• There are resources online, not recommending any
• http://foundrs.com - calculator
• Idea to IPO events and other events for founders
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

12. Documentation
• Vesting
• Must get agreements in place
• Term, typically four years with a one-year
cliff
• Acceleration single or double trigger
• 83(b) elections!!!
• May get renegotiated by later investors
• Shareholder Agreements
• Rights of first refusal
• Co-sale rights
• Drag along rights
• Restrictions in bylaws
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

13. Common Pitfalls re
Ownership in Startups
• Not forming an entity or the right entity.
• Not getting vesting agreements in place
• Not filing 83(b) elections.
• Not paying attention to securities laws.
• Risk of employment-law issues.
• Undocumented stakes in the company.
• IP that resides in other entities.
• Tax issues – E.g., federal, state, local
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

14. Questions/Comments
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

15. Questions/
Comments
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

16. Important Caveats
• Today’s Discussion is General Information – Not
Legal Advice
• That means while we’ll be discussing rules and
exceptions, those rules, exceptions, exceptions to the
exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to
review all facts and circumstances. Our off-the-cuff
answers to your questions are not legal advice.
16
JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com