Lean Start-up Business Tactics Seminar - Who Owns Your Company?
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The document discusses equity distribution in startups, highlighting the importance of fairness and perception in equity allocation among founders and employees. It presents a structured approach to allocate shares across different waves of contributors while maintaining founder control. Additionally, it covers the implications of funding rounds on ownership and the potential conflicts that arise with investors.
Lean Start-up Business Tactics Seminar - Who Owns Your Company?
- 1. The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother's keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon thee. Jules Winnfield, Pulp Fiction
- 2. Who owns your Startup? Keith McGreggor, Ph.D. Director of VentureLab the inequity of equity
- 4. # 1 early stage incubator # 1 engineering/science incubator # 2 overall
- 6. Who owns your Startup?
- 8. equity
- 9. eq•ui•ty 1. the quality of being fair and impartial. 2. the value of the shares issues by a company. 3. the value after the deduction of any liabilities the equity of treatment she owns 62% of the startup’s equity equity = assets - liabilities
- 10. eq•ui•ty 1. the quality of being fair and impartial. 2.the value of the shares issues by a company. 3. the value after the deduction of any liabilities the equity of treatment she owns 62% of the startup’s equity equity = assets - liabilities
- 13. overall observation equity should be viewed as proportional to the risk taken
- 14. guiding principle fairness, and the perception of fairness, matters more than owning a large slice
- 15. observation people are added to the company in waves or layers founders, first employees, etc.
- 16. observation each wave is larger than the last later waves take less risk
- 17. technique allocate shares such that each wave gets the same amount and that the total of all waves is equal to the founders shares
- 18. technique suppose there will be 5 waves founders 5,000 wave 1 1,000 wave 2 1,000 wave 3 1,000 wave 4 1,000 wave 5 1,000
- 19. 50% 50% founders: 5,000 shares Two founders @ 2,500 shares each time 0
- 20. 4%4% 4% 4% 42% 42% 1st wave : 1,000 shares Four employees @ 250 shares each time year one
- 21. 2nd wave : 1,000 shares 20 new hires @ 50 shares each time year two
- 22. each wave gets same number of shares 72% 16% 12%
- 23. wave 4 wave 3 wave 2 wave 1 Founder B Founder A idea : founders maintain control throughout
- 24. important typical schedule 4-5 years: 25% after 1st year then 2% each month always VEST shares (yes, founders too!)
- 25. important shares should be allocated but not immediately distributed
- 26. FAQ what if I need a salary? IOU more shares for my idea? nope what if I’m not full-time? not founder what if I bring equipment, patents, etc.? IOU Never trade away your equity
- 27. why? Because we don’t know what the shares are worth
- 28. inequity
- 29. investors Friends, Family, & Fools Angels Venture Capitalists
- 30. investors Friends, Family, & Fools Angels Venture Capitalists goals Help out Help / Make $ Make $
- 31. investors Friends, Family, & Fools Angels Venture Capitalists stock Common … Preferred Founders & Employees Common
- 32. 50% 50% founders: 5,000 shares Two founders @ 2,500 shares each time 0
- 33. 50% 50% what’s it worth?
- 34. post-money valuation 50% 50% + $$$ pre-money valuation
- 35. 50% 50% +$$$ +$$$ rounds of funding
- 36. a different “class” than common additional rights preferred stock
- 37. liquidation dividends voting participation … preferred stock rights max(investment,ownership) regular priority payments vote on company matters payback + common …
- 40. 33% 33% 33% ownership after A round founders investor rights
- 42. 33% 22% 22% 22% ownership after B round founders investor A rights investor B rights
- 43. 30% 30% 30% 10% A + option pool! founders investor rights option pool
- 44. 10% 33% 19% 19% 19% B + option pool founders investor A rights investor B rights option pool
- 45. Founders have to reverse vest Typically for 3 years! oh, by the way…
- 46. Each round of investors is participating preferred. They get paid back AND stock. ! Round A is 2x participating (more risk). Round B is 1x participating. oh, by the way…
- 47. 10% 33% 19% 19% 19% what’s it worth? founders investor A rights investor B rights option pool
- 49. 10% 33% 19% 19% 19% founders = ? = $30M
- 50. 10% 33% 19% 19% 19% Round B preferred = $30M 1x($4M) + 33% common
- 51. 10% 33% 19% 19% 19% Round A preferred = $30M 2x($1M) + 19% common
- 52. 10% 33% 19% 19% 19% = $24M each founder 19% of $24M = $4.6M $30M - $4M - $2M
- 53. 10% 33% 19% 19% 19% founder = 19% $14M = $2.7M = $14M what if … $20M - $4M - $2M
- 56. 36% 9% 18% 18% 18% angel founders VC A VC A invests $8M, 2x valuation $22M angel now worth $1.98M
- 57. VC B invests $13M, 1x 14% 7% 21% 29% 14% 14% angel VC A VC B founders valuation $44M angel now worth $3.8M
- 58. sold to company X for $30M 14% 7% 21% 29% 14% 14% angel VC A VC B founders angel now worth $2.1M …?
- 59. 14% 7% 21% 29% 14% 14% all common stock $0 angel true story $30M - $13M - $16M - $1M * 1x 2x VC A VC B founders angel worth $0
- 60. Each investor costs founders money & control. moral “The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.”
- 61. venturelab.gatech.edu @venturelab / @keithmcgreggor keith@venturelab.gatech.edu 75 Fifth St NW, Suite 415, Atlanta GA 30308