The presentation outlines the complexities of equity distribution among founders and early-stage investors in startup companies, emphasizing the importance of fair ownership division, vesting plans, and the establishment of stock option plans. It details scenarios of financing rounds, valuation changes, and ownership percentages during various stages, culminating in an initial public offering (IPO). Ultimately, the document illustrates how equity and capital structure evolve as a startup grows and seeks funding.

1. Equity Math
This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.

2. Founders Equity
• How best to divide ownership?
• Every company starts off well. Expect the worst
• Equal percentages
– Seems fair initially, watch for non-contributing founders
– Vest rather than grant
• The Grunt Fund Method
– Based on amount of work and/or money contributed
– www.slicingpie.com
• Many times, VCs will alter the structure as a condition of funding

3. Stock Option Plans
• Established when you incorporate
• Founders and early stage investor shares are carved out
– Vesting vs. grants
– Milestones and deliverables
– FAST Model Valuation
• Vesting period
– 2, 3, 4 years
• Acceleration?
– Change of control
– Termination without cause

4. STARTUP COMPANY EQUITY MODEL
The Expanding Pie
I. Formation of Company
Founders A, B and C each purchase 2,000,000 shares of Common Stock at a purchase price of $.001 per share.
Founder B
33%
$2,000
Founder A
Founder C
33%
$2,000
33%
$2,000
Person No.of Shares % of Shares Value
Founder A 2,000,000 33.33% $2,000
Founder B 2,000,000 33.33% $2,000
Founder C 2,000,000 33.33% $2,000
Total Post-Financing 6,000,000 100.0% $6,000
Valuation

5. II. Hiring of Chief Executive Officer and Establishment of Option Plan
The Company hires a CEO who purchases 2,000,000 shares of Common Stock $.01 per share.
Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan
and reserves 2,000,000 shares of Common Stock for issuance under this plan.
The pre-financing valuation is $60,000 and the post-financing ownership structure and valuation are depicted in
the following table and pie chart.
Founder C
20%
$20,000
Founder A
20%
$20,000
President
20%
$20,000
Stock Option
Plan
20%
$20,000
Founder B
20%
$20,000
Person No. of Shares Percent of Shares Value
Founder A 2,000,000 20.0% $20,000
Founder B 2,000,000 20.0% $20,000
Founder C 2,000,000 20.0% $20,000
President 2,000,000 20.0% $20,000
Stock Opt. Plan 2,000,000 20.0% $20,000
Total Post-Financing 10,000,000 100.0% $100,000
Valuation

6. The Company needs capital to complete product development. Accordingly, the Company completes a $1,000,000
venture capital financing at a purchase price of $0.10 per share
Pre-financing valuation of $1,000,000 (10,000,000 shares with a value of $0.10 per share).
The shares sold in the financing are typical, venture capital Series A Preferred Stock with each share of Series A
Preferred Stock being convertible into one share of Common Stock.
Person No. of Shares Percent of Shares Value
Founder A 2,000,000 10.0% $200,000
Founder B 2,000,000 10.0% $200,000
Founder C 2,000,000 10.0% $200,000
President 2,000,000 10.0% $200,000
Stock Opt. Plan 2,000,000 10.0% $200,000
Series A Inv. 10,000,000 50.0% $1,000,000
Total Post-Financing
Valuation
20,000,000 100.0% $2,000,000
III. Seed Round
Founder A
10%
$200,000
Series A Inv.
50%
$1,000,000
Stock
Option Plan
10%
$200,000
Founder B
10%
$200,000
Founder C
10%
$200,000
President
10%
$200,000

7. IV. Series A Preferred Stock Financing
An additional $5,000,000 will be required to complete development plus sales and marketing.
Accordingly, the Company undertakes a $ 5,000,000 Series A Preferred Stock financing at a purchase price of $0.50
per share, representing a pre-financing valuation of 10,000,000 (20,000,000 shares with a value of $0.50 per share)
Series A Inv.
33.3%
$5,000,000
Founder A
6.66%
$1,000,000
Founder C
6.66%
$1,000,000
Person No. of Shares Percent of Shares Value
Founder A 2,000,000 6.66% $1,000,000
Founder B 2,000,000 6.66% $1,000,000
Founder C 2,000,000 6.66% $1,000,000
President 2,000,000 6.66% $1,000,000
Stock Opt. Plan 2,000,000 6.66% $1,000,000
Series A Inv. 10,000,000 33.33% $5,000,000
Series B Inv. 10,000,000 33.33% $5,000,000
Total Post-Financing
Valuation
30,000,000 100.0% $15,000,000
Series B Inv.
33.3%
$5,000,000
Founder B
6.66%
$1,000,000
President
6.66%
$1,000,000
Stock
Option Plan
6.66%
$1,000,000

8. V. Initial Public Offering
The Company decides to undertake an initial public offering. As a result of the offering, the shares of Series A and Series B Preferred Stock
held by the venture capital investors will be automatically converted into Common Stock at the conversion rate of 1 share of Common Stock
for each share of Preferred Stock, and all shares sold in the offering will be Common Stock.
A total of 10,000,000 are to be sold by the Company. The shares will be sold at a price of $2.50 per share, representing a pre-financing
valuation of $75,000,000 (30,000,000 shares with a value of $2.50per share).
Series A Inv.
25%
$25,000,000
Founder C
5%
$5,000,000
Person No. of Shares Percent of Shares Value
Founder A 2,000,000 5% $5,000,000
Founder B 2,000,000 5% $5,000,000
Founder C 2,000,000 5% $5,000,000
President 2,000,000 5% $5,000,000
Stock Opt. Plan 2,000,000 5% $5,000,000
Series A Inv. 10,000,000 25% $25,000,000
Series B Inv. 10,000,000 25% $25,000,000
Public Investors 10,000,000 25% $25,000,000
Total Post-Financing
Valuation
40,000,000 100.0% $100,000,000
Series B Inv.
25%
$25,000,000
Public Investors
25%
$25,000,000