Improperly handling equity is one easy way to kill a startup. San Francisco-based startup and venture capital attorney Jason Putnam Gordon of Polsinelli LLP will discuss how to properly distribute equity to founders, investors, and other contributors to help build a successful startup. The program will cover the following: 1. An overview of startup ownership 2. Best practices for founders, employees, and consultants 3. How dilution works 4. Why you should not allow a fear of dilution to drive non-market compensation agreements 5. How round valuation affects ownership interests 6. Issues with early- and then later-stage investors 7. Common pitfalls and startup-killing mistakes 8. And much, much more Come with your questions and be prepared to get excited about startup equity!

1. Startup Equitable Equity:
Carving up the Ownership Pie
Presented on May 13, 2020 by Jason Putnam Gordon
Email: jgordon@polsinelli.com

2. 2
• Background
• Big Picture and Foundational Basics
• Distribution of Equity
• Documentation You Need
• Common Pitfalls
• Questions
Overview

3. My Background
• Corporate and Securities Attorney - practicing law since 2005
• My practice 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

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?

5. Important Caveats
• Today’s Discussion is General Information – Not Legal Advice.
• We will be discussing rules, exceptions, and exceptions to exceptions.
Those rules, exceptions, and the exceptions to the exceptions may not be
applicable to your situation.
• You need to retain competent legal counsel to review all facts and
circumstances before weighing in with advice.
• Off-the-cuff answers to your questions are not, and should not be taken as,
legal advice.

6. Big Picture

7. Big Picture
Create Increasing Value
Company
Increases in Value
Investors
(Capital)
Idea(s)
(Intangible Assets)
Technicians who
have skills like:
sales, marketing,
business acumen
(Services)

8. Foundational Basics
• What’s the right entity form?
• What’s the form of ownership?
• What is a pre-money valuation and post-money valuation?
• What does that mean in terms of ownership?

9. Foundational Basics - Entity
• Usually, but not always, a Delaware C-Corp
• OWNERSHIP IS REPRESENTED IN SHARES OF STOCK—NOT
PERCENTAGES.

10. Foundational Basics - Valuation
• Pre-money valuation – the value of the company before the next round of
investment.
• Post-money valuation – the value of the company after the round of investment.
• Very Simple Example (not factoring in the option pool or any other equity):
• Pre-money $10,000,000
• 10,000,000 shares split among three equal founders
• Founder A = 3,333,333 shares or 33%
• Investment $3,000,000 at $1.00/share (Post-money is $13,000,000)
• Founder A = 3,333,333 of ~25% with a paper value of $3,333,333

11. Foundational Basics - Example
Continued
• Subsequent Round:
• Pre-money is $30,000,0000
• Investment is $10,000,000 (~$2.31/share = $30,000,000/13,000,000 shares)
• ~4,329,000 shares to new investor (=$10,000,000/$2.31
• Total outstanding shares post close is 17,329,000
• Founder A – has ~19.2% (3,333,333/17,329,000)
• Previously, the stake was worth $3,333,333
• Now it’s worth $7,699,999
• Decrease in percentage ownership from 33% to 25% to 19.2%
• Increase in value from ~$0 to $3,333,333 to $$7,699,999

12. 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
• https://techcrunch.com/2020/01/09/deciding-how-much-equity-
to-give-your-key-employees/
• Idea to IPO events and other events for founders

13. Documentation
• Vesting
• Shareholder Agreements
• Restrictions in bylaws

14. 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

15. Polsinelli PC provides this material for informational purposes only. The material provided herein is general and is not intended to
be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances,
possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an
attorney-client relationship.
Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results;
that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and
should not be based solely upon advertisements.
© 2020 Polsinelli® is a registered trademark of Polsinelli PC. Polsinelli LLP in California. Polsinelli PC (Inc.) in Florida.
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