Startup Compensation  Demystification & Enlightenment It is not all about money Naeem Zafar Berkeley-Haas Business School ...
Agenda <ul><li>Many entrepreneurs struggle with compensation design </li></ul><ul><ul><li>How much to give to an advisor? ...
Personal Background <ul><li>Faculty member at Univ of Calif Berkeley Haas business school </li></ul><ul><li>Founder Concor...
Founders & Entrepreneurs <ul><li>Compensation design for startups </li></ul><ul><li>http://venturehacks.com/articles/optio...
Equity Distribution (Post Series A) Entrepreneurship All rights reserved © Naeem Zafar
Issue Puzzling Founders  <ul><li>What if one founder fizzle out?  </li></ul><ul><li>What happens to his equity? </li></ul>...
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...
Demystifying Equity Dilution <ul><li>How does dilution works </li></ul><ul><li>Who gets what on a startup team? </li></ul>...
Your Equity Distribution Options <ul><li>Set aside portion of stocks for advisors & consultants & key advisors </li></ul><...
Founding Captable Entrepreneurship All rights reserved © Naeem Zafar
Angel Round Entrepreneurship All rights reserved © Naeem Zafar
Series A Entrepreneurship All rights reserved © Naeem Zafar
Exits Entrepreneurship All rights reserved © Naeem Zafar
Warrants <ul><li>Stock vs. warrants </li></ul><ul><ul><li>Entity  </li></ul></ul><ul><ul><li>Registration issues </li></ul...
Manager’s Toolbox <ul><li>Salary </li></ul><ul><li>Raises </li></ul><ul><li>Bonus </li></ul><ul><li>Stocks (options, restr...
Equity for Managers Entrepreneurship All rights reserved © Naeem Zafar
Resources <ul><li>http://www.salary.com/advice/layouthtmls/advl_display_nocat_Ser56_Par123.html </li></ul>Entrepreneurship...
Common Mistakes <ul><li>Not addressing vesting right </li></ul><ul><li>No founder’s agreement </li></ul><ul><li>Too many b...
Summary <ul><li>Starting a business is not easy … acquire essential knowledge to maximize your chances to succeed </li></u...
Understanding Dilution Entrepreneurship All rights reserved © Naeem Zafar
Example <ul><li>3 people start a company </li></ul><ul><ul><li>10M shares issued </li></ul></ul><ul><ul><li>Each founder h...
Equity Ownership All rights reserved © Naeem Zafar
Example: Initial Money <ul><li>1 st  round investment (product development) </li></ul><ul><ul><li>Pre-money  valuation  ~ ...
Example: Initial Money <ul><li>1 st  round investment (product development) </li></ul><ul><ul><li>Pre-money  valuation ~ $...
Equity Ownership Post Round A All rights reserved © Naeem Zafar
Example: Prod Dev Money Raised <ul><li>2 nd  round investment (Series B)  </li></ul><ul><li>Series B =Product deployment <...
Example: Prod Dev Money Raised <ul><ul><li>Post money is $18M– everyone get diluted </li></ul></ul><ul><ul><ul><li>But get...
Equity Ownership Post B Round All rights reserved © Naeem Zafar
Example: Expansion Money Raised <ul><li>3 rd  round investment (Series C) </li></ul><ul><li>Series C = channel expansion <...
Equity Ownership: Post C
Example: Going Public <ul><li>Initial Public Offering (IPO) </li></ul><ul><ul><li>Valuation by investment bankers ~ $100M ...
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...
Ownership After Going Public All rights reserved © Naeem Zafar
Founders’ Wealth All rights reserved © Naeem Zafar
Summary <ul><li>Starting a business is not easy … acquire essential knowledge to maximize your chances to succeed </li></u...
Upcoming SlideShare
Loading in …5
×

Startup compensation cap tables dilution warrants

12,732 views

Published on

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

Published in: Business
  • 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.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here

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

×