Startup Equitable Equity - Carving Up the Ownership Pie

Startup Equitable Equity:
Carving up the Ownership Pie
1
JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

Overview
•  Background
•  Big Picture and Foundational Basics
•  Who Gets What
•  Documentation You Need
•  Putting it All Together
•  Common Pitfalls
•  Questions
2

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.
3

What is your Background?
•  In a startup?
•  Founder?
•  First startup?
•  Who has received funding
before?
•  Previous successful exit?
4

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.
5

Big Picture
Create Increasing Value
6
Company
Increases in Value
Investors
(Capital)
Idea(s)
(Intangible Assets)
Technicians
who have skills
like: sales,
marketing,
business acumen
(Services)

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?
7

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
8

Foundational Basics – Ownership Stakes
•  In a corporation –
SHARES OF STOCK NOT
PERCENTAGES!
9

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
10

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
11

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
12

PuLing It All Together -‐‑
Hypo
1/1/10 – 4 Founders – 2.5 million shares 4 yr
vest/ 1-yr cliff – option pool of 2.5 million.
6/1/10 – 1 founder leaves
1/1/11 – Convertible Round $500,000 with 20%
discount – no cap.
6/1/11 – Employees have exercised 500,000
options
13

PuLing It All Together –
Hypo Continued
1/1/12 – A Round 4.4 million in funding with pre-
money valuation of 10 million allowing for
convertible notes to be included in post-
money valuation ($5 million round)
Pre-financing = Common =$1/share
3 founders have collectively 7.5 million shares = 75% =
2 million remaining in option pool = 20%
Exercised options are 500,000 = 5% to employees
Post-financing
3 founders have 7.5 million shares = 50%
Exercised options are 500,000 shares = 3.33%
Option pool has 2 million = 13.33%
Convertible note holders have around 600,000 shares of
preferred = 4.%
A investors have 4.4 million = 29.33%
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

Questions/Comments
16

Questions/
Comments
17

Startup Equitable Equity - Carving Up the Ownership Pie

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Startup Equitable Equity - Carving Up the Ownership Pie

Similar to Startup Equitable Equity - Carving Up the Ownership Pie (20)

More from ideatoipo

More from ideatoipo (20)

Recently uploaded

Recently uploaded (20)

Startup Equitable Equity - Carving Up the Ownership Pie