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Are you a founder? Do you know how much of your startup you own? What are the ways founders divide up equity? How much ownership do investors usually take? In this seminar we will explore these topics, including tips on bootstrapping, fundraising, and the like, all from the point of view of an evidence-based entrepreneur.
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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
Who owns your Startup?
Keith McGreggor, Ph.D. Director of VentureLab
the inequity of equity
#1 early stage incubator#1 engineering/science incubator
#2 overall
Who owns your Startup?
equity
inequity
equity
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
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
100%
your startup
20%
20% 60%
your startup
?%
?%
?%
overall observation
equity should be viewed as proportional
to the risk taken
guiding principle
fairness, and the perception of fairness, matters more than
owning a large slice
observation
people are added to the company in waves or layers
founders, first employees, etc.
observation
each wave is larger than the last
later waves take less risk
technique
allocate shares such that each wave gets the same amount
and that the total of all waves is equal to the founders shares
techniquesuppose 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
50% 50%
founders: 5,000 sharesTwo founders @ 2,500 shares each
time 0
4%4%4%
4%
42%
42%
1st wave : 1,000 sharesFour employees @ 250 shares each
time year one
2nd wave : 1,000 shares20 new hires @ 50 shares each
time year two
each wave gets same number of shares
72%
16%
12%
wave 4
wave 3
wave 2
wave 1 Founder B
Founder A
idea : founders maintain control throughout
important
typical schedule 4-5 years: 25% after 1st year
then 2% each month
always VEST shares(yes, founders too!)
important
shares should be allocated but not immediately distributed
FAQwhat if I need a salary? IOUmore shares for my idea? nopewhat if I’m not full-time? not founderwhat if I bring equipment, patents, etc.? IOU
Never trade away your equity
why?
Because we don’t know what the shares are worth
inequity
investors
Friends, Family, & Fools
Angels
Venture Capitalists
investors
Friends, Family, & Fools
Angels
Venture Capitalists
goals
Help out
Help / Make $
Make $
investors
Friends, Family, & Fools
Angels
Venture Capitalists
stock
Common
…
Preferred
Founders & Employees Common
50% 50%
founders: 5,000 sharesTwo founders @ 2,500 shares each
time 0
50% 50%
what’s it worth?
post-money valuation
50% 50% + $$$
pre-money valuation
50% 50% +$$$ +$$$
rounds of funding
a different “class” than common additional rights
preferred stock
liquidation dividends
voting participation
…
preferred stock rights
max(investment,ownership) regular priority payments vote on company matters payback + common …
example
50% 50% + $$$
post-money $3M
+ $1M
pre-money $2M
50% 50%
33%
33%
33%
ownership after A round
founders
investor
rights
post-money $12M
+ $4M
pre-money $8M
33%
33%
33%
33%
22%22%
22%
ownership after B round
founders
investor A
rights
investor B
rights
30%
30%
30%
10%
A + option pool!
founders investor
rights
option pool
10%
33%
19%
19%
19%
B + option pool
founders
investor Arights
investor B
rightsoption pool
Founders have to reverse vest Typically for 3 years!
oh, by the way…
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…
10%
33%
19%
19%
19%
what’s it worth?
founders
investor Arights
investor B
rightsoption pool
10%
33%
19%
19%
19%
example purchase
= $30M
10%
33%
19%
19%
19%
founders = ?
= $30M
10%
33%
19%
19%
19%
Round B preferred
= $30M
1x($4M) + 33% common
10%
33%
19%
19%
19%
Round A preferred
= $30M
2x($1M) + 19% common
10%
33%
19%
19%
19%
= $24M
each founder 19% of $24M = $4.6M
$30M - $4M - $2M
10%
33%
19%
19%
19%
founder = 19% $14M = $2.7M
= $14M
what if …
$20M - $4M - $2M
33%
33%
33%
true story
29%
14%29%
29%
angel
angel invests $100K
founders
valuation $714K
36%
9% 18%
18%
18%
angel
founders
VC A
VC A invests $8M, 2x
valuation $22M
angel now worth $1.98M
VC B invests $13M, 1x
14%7%
21%29%
14%
14%angel
VC AVC B
founders
valuation $44M
angel now worth $3.8M
sold to company X for $30M
14%7%
21%29%
14%
14%angel
VC AVC B
founders
angel now worth $2.1M …?
14%7%
21%29%
14%
14%
all common stock $0
angel
true story$30M
- $13M - $16M - $1M *
1x2x
VC AVC B
founders
angel worth $0
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.”
venturelab.gatech.edu
@venturelab / @keithmcgreggor
keith@venturelab.gatech.edu
75 Fifth St NW, Suite 415, Atlanta GA 30308
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