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Sta
rtin
g a
Hig
h-T
ech
Bus
ines
s
This
pre
sent
atio
n is
pub
lishe
d at
eys
u.or
g20
04
Jim
Sw
anso
nM
ike
Bai
rd
cont
act i
nfo
at fi
rsto
nlin
e.co
m o
r eys
u.or
g
Con
tent
s of
Eng
inee
ring
You
r Sta
rt-up
--C
opyr
ight
©20
03 b
y Pr
ofes
sion
al P
ublic
atio
ns, I
nc. A
ll rig
hts
rese
rved
. N
o pa
rt of
this
pub
licat
ion
may
be
repr
oduc
ed, s
tore
d in
a re
triev
al s
yste
m, o
r tra
nsm
itted
, in
any
form
or b
y an
y m
eans
, ele
ctro
nic,
mec
hani
cal,
phot
ocop
ying
, rec
ordi
ng, o
r oth
erw
ise,
with
out t
he p
rior w
ritte
n pe
rmis
sion
of t
he
publ
ishe
r.
Cop
yrig
ht ©
2003
, 200
4Ja
mes
A. S
wan
son
and
Mic
hael
L. B
aird
Rev
. 3/1
5/20
06 1
0:06
:50
AM
Abo
ut
the
inst
ruct
ors
-Jim
Sw
anso
nP
ast
CEO
, CFO
Ram
tek,
Cor
p. –
publ
ic c
oP
ast
CEO
Los
Alt
os T
ech
nol
ogie
sP
artn
er, L
os A
ltos
In
cuba
tor
firs
ton
line.
com
SB
Deg
ree
MIT
, MB
A &
JD
Sta
nfo
rd U
niv
ersi
tyP
eace
Cor
psA
uth
or:
Engi
neer
ing
Your
Sta
rt-U
p: A
Gui
de
for
the
Hig
h-Te
ch E
ntre
pren
eur
(Pro
fess
ion
al
Pu
bs. I
nc.
, 2n
dEd
. 20
03
) ey
su.o
rg
Abo
ut
the
inst
ruct
ors
-Mik
e B
aird
Pas
t V
.P. E
ng.
Ask
Jee
ves,
In
c. a
sk.c
omon
e of
mos
t su
cces
sfu
l In
tern
et I
PO
s in
his
tory
Pas
t C
TO S
nap
-on
In
c. $
2 b
illio
n c
o.P
artn
er, L
os A
ltos
In
cuba
tor
firs
ton
line.
com
P
hD
Com
pute
r Sc
ien
ce, M
BA
Au
thor
: En
gine
erin
g Yo
ur S
tart
-Up:
A G
uide
fo
r th
e H
igh-
Tech
Ent
repr
eneu
r(P
rofe
ssio
nal
P
ubs
. In
c., 1
99
2, 2
00
3);
Sta
rtin
g a
Hig
h-Te
ch
Com
pany
(IEE
E P
ress
, 19
95
) ey
su.o
rg
Sess
ion
IB
asic
En
trep
ren
eurs
hip
Bas
ics
for
busi
nes
s su
cces
s fo
r th
e en
trep
ren
euri
al e
ngi
nee
rW
riti
ng
a co
mpe
llin
g bu
sin
ess
plan
Get
tin
g fu
nde
d, Q
& A
Sess
ion
II
Adv
ance
d En
trep
ren
eurs
hip
Cap
ital
izin
g yo
ur
star
t-u
pLe
gal s
tru
ctu
res
Stoc
k (r
estr
icte
d, c
omm
on,
pref
erre
d…)
Stoc
k O
ptio
ns
(ISO
's, N
QSO
's)
, O
ther
wea
lth
bu
ildin
g ve
hic
les
Stoc
k &
Opt
ion
Gra
nts
, ves
tin
g,
§83
(b)
elec
tion
s…V
alu
atio
n, Q
& A
Toda
y...
Is a
sta
rt-u
p fo
r yo
u?
Are
you
a
“hu
nte
r”or
a “
farm
er?”
Inte
rnal
izin
g th
e fi
ve f
unda
men
tal
succ
ess
fact
ors
for
lau
nch
ing
and
fun
din
g a
succ
essf
ul t
ech
nol
ogy-
fuel
ed s
tart
-up.
How
to
iden
tify
kill
er p
rodu
cts
or
serv
ices
for
exp
loit
ing
grow
ing
lucr
ativ
e pr
otec
ted
nic
he
mar
kets
.
You
r N
eeds
: W
ho
Are
You
?
Empl
oyed
, th
inki
ng
of s
tart
ing
own
bu
sin
ess?
O
wn
a (
smal
l) b
usi
nes
s?Lo
oked
/ lo
okin
g fo
r /
rais
ed
fun
ds?
Wri
tten
a b
usi
nes
s pl
an?
fun
ded?
re
ject
ed?
5 A
udi
ence
Qu
esti
ons?
Rea
son
s C
ited
for
Sta
rtin
g O
ne'
s O
wn
Bu
sin
ess
Self-
empl
oym
ent
/Aut
onom
y
Inco
me
/Wea
lth
The
chal
leng
e
To p
ursu
e an
idea
Util
ize
skill
s
Bui
ld e
stat
e fo
r fam
ily
No
bette
r alte
rnat
ive
Mee
t oth
er's
exp
ecta
tions
Bui
ld a
n or
gani
zatio
n
Res
pect
/Rec
ogni
tion
Con
trib
ute
to s
ocie
ty
To li
ve in
the
area
Oth
er (s
peci
fied
byre
spon
dent
)
29%
19%
12%
8%
7%5%
4%
2%2%
1%1%1%
9%
From
Whe
re to
Whe
re?
Fortune
500
engi
neer
ing
man
ager
Life
styl
eco
nsul
tanc
yInco
me
subs
titut
ion
busi
ness
Hig
h-gr
owth
te
am-d
riven
bu
sine
ss
Sale
s Em
ploy
ees
(mill
ions
)
> $2
0>
50
$1 –
$20
5 –
50
$0 –
$10
–4
Entr
epre
neur
in a
Si
ngle
pro
duct
sta
rt-u
p
The
Inco
me-
Subs
titu
tion
Wea
lth
-Cre
atio
n S
pect
rum
Bus
ines
s si
zesm
all
larg
e
slowfa
st
Inco
me
Subs
titu-
tion
Wea
lth
Bui
ldin
gG
row
th
rate
Bu
sin
ess
Size
, Ris
k, a
nd
Rew
ard
P(Su
rviv
al) i
s in
vers
ely
prop
ortio
nal t
o ris
k
Low Medium High
Ris
k
Ret
ail s
tore
s
Tech
nolo
gy-b
ased
pro
duct
s (h
igh-
grow
th o
bjec
tive)
Tech
nolo
gy-b
ased
co
nsul
ting
(lo
w g
row
th
obje
ctiv
e)
P(fa
ilure
)H
igh
0.7
0
.5
0.
3
Low
Rew
ard
Low High Low
Low
0.3
0
.5
0.7
Hig
h
P(su
rviv
al) =
1.0
-p(
failu
re)
Effo
rt A
lloca
ted
by F
oun
ders
D
uri
ng
Firs
t Si
x M
onth
s
0%5%10%
15%
20%
25%
30%
35%
Engi
neer
ing
Sale
s/m
arke
ting
Man
ufac
turin
gFi
nanc
e/ad
min
istr
atio
n
31%
28%
25%
16%
5 B
asic
s fo
r Su
cces
sB
eyon
d "T
he
Big
Ide
a, t
he
Pas
sion
, th
e V
isio
n"…
mak
ing
it r
eal…
invo
lves
…
Man
agem
ent
Mar
kets
an
d C
ust
omer
sP
ropr
ieta
ry P
rodu
cts,
Tec
hn
olog
y,
Serv
ices
Att
ract
ive
Fin
anci
ng
and
RO
IC
ompe
llin
g B
usi
nes
s P
lan
Do
You
Nee
d a
Rad
ical
N
ew I
dea?
Firs
t of
Fiv
e El
emen
ts o
f St
art-
Up
Succ
ess
Prod
ucts
or
Serv
ices
Mar
kets
and
Cus
tom
ers
Man
agem
ent
Team
s
Bus
ines
sPl
an
Fina
ncin
gId
entif
iabl
e cu
stom
ers.
Not
a m
issi
onar
y sa
le.
Mar
ket–
Pull.
Not
Tec
hnol
ogy–
push
.
Mar
ket n
iche
with
15%
–30
% m
arke
t sha
re p
ossi
ble.
Kno
w 5
pro
spec
ts b
y na
me,
read
y to
buy
.
Shor
t pro
cure
men
t cyc
le.
bene
fits
cust
omer
s
finan
cial
co
ntro
lsm
anag
emen
t
mar
ket
engi
ne
tech
nolo
gy
fuel
rapi
d pr
ofita
bilit
y
prod
ucts
21
3a
3b
m a r k e t s
5
4bu
sine
ss p
lan
mon
ey (R
OI)
Mar
ket-
and
Cu
stom
er-
Dri
ven
Tech
nol
ogy-
Fuel
ed B
usi
nes
s M
ach
ine
Com
peti
tive
For
ces
inY
our
Mar
ketp
lace
Cus
tom
er b
ase
Exis
ting
com
petit
ors
Com
petit
ors:
•
Who
? •
Gro
win
g?
•H
ow lo
ng in
bus
ines
s?
•W
hat s
ales
vol
umes
? •
How
big
? •
How
man
y cu
stom
ers?
•
Mar
ket s
hare
? •
Prod
uct n
iche
? •
Sim
ilarit
ies/
diss
imila
ritie
s?
•H
ow w
ill y
ou c
ompe
te w
ith th
em?
–pr
oduc
t sup
erio
rity?
–
pric
e?
–ad
vert
isin
g?
–in
nova
tion/
tech
nolo
gy?
•H
ow is
you
r bus
ines
s be
tter?
Wha
t
is
you
r "di
stin
ctiv
e co
mpe
tenc
e?"
–pr
ice?
–
man
agem
ent?
–
prod
uct?
–
serv
ice,
del
iver
y?
–op
erat
ions
? •
Bar
riers
to e
ntry
for n
ew c
ompe
titor
s?
New
com
petit
ors?
Your
nic
he?
Mar
keti
ng
Stra
tegy
Mar
kets
ver
sus
Mar
keti
ng
Gill
ette
intr
oduc
es T
he S
enso
r™ra
zor
for
men
¦Ret
ail p
rice:
$3
.75
with
thr
ee b
lade
s
¦R&
D c
osts
: $
200
mill
ion
¦Fi
rst-
year
adv
ertis
ing
budg
et:
$110
mill
ion
¦Es
timat
ed a
nnua
l ret
ail s
ales
: $
390
mill
ion
Even
if y
ou c
ould
inve
nt a
su
perio
r ra
zor
blad
e, w
ould
you
w
ant
to c
ompe
te in
thi
s ga
me?
Seco
nd
of F
ive
Elem
ents
of
Star
t-U
p Su
cces
sM
arke
ts a
ndC
usto
mer
s
Man
agem
ent
Team
s
Bus
ines
sPl
an
Fina
ncin
g
Boa
rd o
f D
irect
ors
CEO
CFO
VP-E
ngin
eerin
g (C
TO)
VP-M
arke
ting
& S
ales
Prod
ucts
or
Serv
ices
Man
agem
ent
Com
plet
enes
s-Ex
peri
ence
Gri
d
Inexperi
ence
d (0)
Very
experi
ence
d (2)
Com
plet
e te
am (2
)
Part
ial
team
(1)
01
13
34
No team
(0)
Experi
ence
d (1)
2
2
2
Team
Siz
e an
d P
rodu
ct S
tatu
sin
Bu
sin
ess
Pla
n R
ecep
tion
Man
agem
ent s
tatu
s
Mos
t des
irabl
eLe
vel 4
. A
ll m
embe
rs
on b
oard
and
ex
perie
nced
.
4 +
1 =5
4 +
2 =
64
+ 3
= 7
4 +
4 =
8Le
vel 3
. A
ll m
embe
rs
iden
tifie
d; s
ome
on
boar
d on
ly a
fter f
undi
ng.
3 +
1 =
43
+ 2
= 5
3 +
3 =
63
+ 4
= 7
Leve
l 2.
Two
foun
ders
; ot
hers
not
iden
tifie
d.2
+ 1
= 3
2 +
2 =
42
+ 3
= 5
2 +
4 =
6Le
vel 1
. S
ingl
e en
trepr
eneu
r.1
+ 1
= 2
1 +
2 =
31
+ 3
= 4
1 +
4 =
5
Prod
uct s
tatu
s=>
Leve
l 1.
Idea
onl
y;
mar
ket
assu
med
.
Leve
l 2.
Pro
toty
pe
oper
able
bu
t not
de
velo
ped
for prod
uctio
n;
mar
ket
assu
med
.
Leve
l 3.
Pro
duct
fu
lly
deve
lope
d;
few
or n
o us
ers;
m
arke
t as
sum
ed.
Leve
l 4.
Pro
duct
fu
lly
deve
lope
d;
satis
fied
user
s;
mar
ket
esta
blis
hed.
Thir
d of
Fiv
e El
emen
ts o
f St
art-
Up
Succ
ess
Prod
uct F
amily
.
Easi
ly u
nder
stan
dabl
e.
Easi
ly S
old.
Shor
t Dev
elop
men
t Tim
e.
Mar
kets
and
Cus
tom
ers
Man
agem
ent
Team
s
Prod
ucts
or
Serv
ices
Bus
ines
sPl
an
Fina
ncin
g
Prop
rieta
ry T
echn
olog
y.
Cos
t ve
rsu
s P
erce
ived
Dif
fere
nti
atio
n M
odel
Per
ceiv
ed c
ost
ve
rsu
s co
mpe
titi
onLo
wH
igh
Hig
h
Low
Perceived differentiation versus competition
Mar
ket
succ
ess
likel
y
Mar
ket
failu
re
likel
ySucc
ess h
ighly
uncerta
in
Fou
rth
of
Five
Ele
men
ts o
f St
art-
Up
Succ
ess
Mar
kets
and
Cus
tom
ers
Prod
ucts
or
Serv
ices
Bus
ines
sPl
anFina
ncin
gFo
rm.
Con
tent
.
How
man
y pa
ges?
How
mu
ch t
ime
to
wri
te?
Wh
en t
o w
rite
it?
Wh
at's
in it
?W
ritt
en f
or w
hom
?Ty
pes
of p
lan
s:
Fun
din
g;
Ope
rati
onal
Man
agem
ent
Team
s
Fift
h o
f Fi
ve E
lem
ents
of
Star
t-U
p Su
cces
s
Mar
kets
and
Cus
tom
ers
Prod
ucts
or
Serv
ices
Bus
ines
sPl
an
Fina
ncin
g
Nev
er r
un
ou
t of
mon
ey.
Fair
Val
uat
ion
.
Att
ract
ive
RO
I
Man
agem
ent
Team
s
Wri
tin
g a
com
pelli
ng
busi
nes
s pl
anEl
emen
ts o
f a
succ
essf
ul a
nd
fun
dabl
e pl
anSo
me
sam
ple
plan
ou
tlin
esA
nal
ysis
of
a cl
assi
c ve
ntu
re c
apit
al-
fun
ded
busi
nes
s pl
anFa
tal f
law
s an
d de
al k
iller
s –
how
to
avoi
d th
em"T
ips
and
Tric
ks"
for
wri
tin
g th
e pl
an
Elem
ents
of
a su
cces
sfu
l an
d fu
nda
ble
plan
Mar
kets
an
d C
ust
omer
s (c
ompe
llin
g…)
Man
agem
ent
Team
(pr
oven
…)
Pro
duct
s an
d Se
rvic
es
(pro
prie
tary
…)
Bu
sin
ess
Pla
n (
con
ten
t, f
orm
at,
pres
enta
tion
)Fi
nan
cin
g (R
OI,
pro
-for
mas
…)
Som
e sa
mpl
e pl
an o
utl
ines
See
Engi
neer
ing
Your
Sta
rt-U
pfo
r m
any
sam
ple
outl
ines
An
alys
is o
f a
clas
sic
ven
ture
ca
pita
l-fu
nde
d bu
sin
ess
plan
Gen
us,
In
c. C
ase
Stu
dy ($
9.5
M, 1
98
1)
Sect
ion
nam
e
Num
ber
of p
ages
Com
men
ts
Exe
cutiv
eS
umm
ary
2It
is c
ompe
lling
and
pow
erfu
l.
Mar
ketin
gA
naly
sis
15Th
e se
ctio
n is
com
preh
ensi
ve.
Pro
duct
Ana
lysi
s4
Say
s w
hat t
he p
rodu
ct w
ill do
, no
thin
gab
out
how
it w
ill be
dev
elop
ed o
r inv
ente
d.Te
chno
logy
is n
ot b
eing
sol
d he
re.
Ope
ratio
nsP
lan
1Th
e st
rong
man
agem
ent t
eam
, with
pro
ven
track
reco
rds,
can
adm
inis
ter o
pera
tions
.M
anag
emen
tan
d ke
ype
rson
nel
8Th
ree
two-
page
résu
més
for t
hepr
esid
ent/g
ener
al m
anag
er, t
he V
.P. f
inan
ce,
and
the
V.P
. eng
inee
ring,
plu
s an
org
aniz
atio
nch
art s
ays
it al
l.
No
men
tion
is m
ade
of a
nyke
y en
gine
ers
who
mig
ht d
esig
n th
e pr
oduc
t.Fi
nanc
ial D
ata
12Te
lls in
vest
ors
how
muc
h m
oney
the
busi
ness
is g
oing
to m
ake,
whe
n, a
nd w
hat w
ill be
spe
ntto
mak
e it
happ
en.
Som
e fa
tal f
law
s an
d de
al
kille
rs –
how
to
avoi
d th
emLo
fty
Mis
sion
Sta
tem
ent
(e.g
., re
duce
w
orld
hu
nge
r, p
low
10
% o
f pr
ofit
s in
to c
har
ity…
)M
issi
ng
any
of t
he
5 b
asic
s of
su
cces
s w
/o a
ckn
owle
dgin
g th
e fa
ctIm
pute
d R
OI
not
att
ract
ive
Fixa
tion
on
"co
ntr
ol,"
ove
rt g
reed
"Dis
trib
ute
d le
ader
ship
," o
r pr
ofes
sed"
soci
alis
t" m
anag
emen
t ph
iloso
phie
s
Cas
e St
udy
: O
ne
Bu
sin
ess
Pla
n
that
Will
Nev
er b
e Fu
nde
dEn
trep
ren
eur
look
ing
for
$5
00
,00
0
for
15
% o
f th
e co
mpa
ny
(Im
plie
d pr
e-m
oney
val
uat
ion
=
$2
.83
mill
ion
; po
st-m
oney
va
luat
ion
= $
3.3
mill
ion
)P
roje
cted
Sal
es o
f $
1 m
illio
n in
3
year
sM
anag
emen
t te
am is
on
e pe
rson
Mar
ket
is "
ever
yon
e"
"Tip
s an
d Tr
icks
" fo
r w
riti
ng
the
plan
Can
som
eon
e el
se w
rite
you
rpl
an?
Wh
en t
o u
se a
con
sult
ant?
Wat
ch o
ut
for
prom
ises
to
hel
p ra
ise
fun
ds, e
spec
ially
wit
h u
p-fr
ont
fees
.
Ope
rati
onal
Sta
ges
of C
ompa
ny
Gro
wth
—W
hen
to
Wri
te Y
our
Pla
n
Con
cept
Mar
ket
deve
lopm
ent
Stea
dy s
tate
Pro
duct
dev
elop
men
t
Seed
Seed
Still
wor
kin
g,
you
for
mu
late
yo
ur
idea
s in
a
busi
nes
s pl
an
outl
ine,
an
d yo
u s
tart
to
build
you
r m
anag
emen
t te
am
You
qu
it
you
r jo
b to
pu
rsu
e bu
sin
ess
plan
nin
g fu
ll ti
me.
You
r co
-fou
nde
rs
may
rem
ain
w
orki
ng
Fun
din
g is
ob
tain
ed.
You
r te
am
mem
bers
jo
in y
ou in
th
e bu
sin
ess
lau
nch
Con
cept
Get
tin
g Fu
nde
d
Sou
rces
of
star
t-u
p ca
pita
l"S
hop
pin
g”th
e pl
anV
entu
re c
apit
al –
is it
for
you
?
Sou
rces
for
See
d C
apit
alfo
r H
igh
-Tec
h C
ompa
nie
s
0%10%
20%
30%
40%
50%
60%
70%
80%
Personalsavings
Privateinvestors(angels)
Non-financialcorporations
Family andfriends
Venturecapital funds
Public stockofferings
74%
7%6%
5%5%
3%
Perc
ent b
y nu
mbe
r of d
eals
Not
e: "
Fam
ily a
nd fr
iend
s" p
lays
a sm
alle
r ro
le in
hig
h-te
ch
star
t-up
s tha
n fo
r m
ost o
ther
smal
lbu
sine
sses
Pers
onal
savi
ngs
dom
inat
es!
VC
s ve
rsu
s A
nge
lsA
nge
ls s
upp
ort
~3
0,0
00
deal
s pe
r ye
arV
entu
re f
un
ds b
ack
~2
,00
0+
dea
ls p
er y
ear
Ven
ture
cap
ital
–is
it f
or y
ou?
Wh
o is
get
tin
g fu
nde
d? (
read
, at
ten
d…)
Wh
at's
you
r "s
core
" (o
n t
he
5
succ
ess
fact
ors)
Ou
tsid
e ad
vice
(se
ek it
, an
d lis
ten
)
"Sh
oppi
ng"
the
VC
pla
n
Un
solic
ited
"O
ver
the
tran
som
" pl
ans:
% f
un
ded
~=
0U
se V
C d
irec
tori
es o
nly
as
a ro
ad
map
(W
AV
C is
goo
d)
Stro
ng
part
ner
s ar
e w
ell-
con
nec
ted
(wor
k on
dev
elop
ing,
or
join
ing,
a
team
)
Sum
mar
yC
omm
it
(mak
e th
e ri
ght
deci
sion
for
you
rsel
f)Ed
uca
te y
ours
elf
(rea
d, n
etw
ork,
ex
plor
e, e
xper
imen
t, in
vest
tim
e an
d m
oney
, bu
ild r
elat
ion
ship
s, b
uild
pr
otot
ypes
, cu
ltiv
ate
pote
nti
al
cust
omer
s)P
lan
(w
hat
will
res
ult
in s
ucc
ess
for
you
?)Ex
ecu
te (
pers
ist,
bu
t kn
ow w
hen
to
call
a lo
ss)
Sta
rtin
g a
Hig
h-T
ech
Bus
ines
s
Sess
ion
II
Adv
ance
d En
trep
ren
eurs
hip
2004
This
pre
sent
atio
n is
pub
lishe
d at
http
://w
ww
.eys
u.or
g
Jim
Sw
anso
nM
ike
Bai
rd
Adv
ance
d En
trep
ren
eurs
hip
Cap
ital
izin
g yo
ur
star
t-u
pLe
gal s
tru
ctu
res
Stoc
k (r
estr
icte
d, c
omm
on, p
refe
rred
…)
Stoc
k O
ptio
ns
(ISO
's, N
QSO
's)
, Oth
er
wea
lth
bu
ildin
g ve
hic
les
Stoc
k &
Opt
ion
Gra
nts
, ves
tin
g, §
83
(b)
elec
tion
s…V
alu
atio
n, Q
& A
Kn
owle
dge
is $
$$
Lack
of
know
ledg
e of
fin
anci
ng
tric
ks,
stoc
k gr
ant,
an
d st
ock
opti
on
prac
tice
s ca
n d
o m
ore
to li
mit
you
r fi
nan
cial
su
cces
sth
an la
ckin
g kn
owle
dge
of t
he
fun
dam
enta
l bas
ics
for
busi
nes
s su
cces
s:—
Mar
kets
an
d cu
stom
ers
—M
anag
emen
t te
am—
Pro
duct
s an
d se
rvic
es—
Att
ract
ive
RO
I,
—Su
ppor
ted
by a
wri
tten
Bu
sin
ess
Pla
n
The
Rel
ativ
e Im
port
ance
of
Sto
ck
Free
dom
Lost
sal
ary
Exci
tem
ent
Ris
ksR
ewar
ds
Fun Fi
nanc
ial
inde
pend
ence
Emot
iona
l in
depe
nden
ce
Lost
va
catio
nLo
st fr
inge
be
nefit
s
Shor
t ter
m
secu
rity
Lost
fam
ily
time
Incr
ease
d
stre
ss
Stoc
kBet
ter s
alar
y
Cap
ital
izin
g yo
ur
Star
t-U
p –L
evel
s of
Fin
anci
ng
To r
aise
th
e m
oney
you
nee
d to
sp
eak
the
lan
guag
e…Se
ed f
inan
cin
gEa
rly
stag
e fi
nan
cin
g—
Star
t-U
p—
Firs
t-st
age
Expa
nsi
on f
inan
cin
g—
2n
d, 3
rd, 4
th s
tage
sIP
O/A
cqu
isit
ion
/Bu
you
t fi
nan
cin
g
Cap
ital
izin
g yo
ur
Star
t-U
p (c
ont.
)
Pri
vate
vs.
Pu
blic
sal
es o
f st
ock
—P
riva
te s
tock
off
erin
gs—
SEC
Reg
istr
atio
n R
equ
irem
ents
—In
itia
l Pu
blic
Off
erin
gs (
IPO
s)—
SCO
Rs
Sm
all C
ompa
ny
Off
erin
g
Reg
istr
atio
n
§12
44
IR
S sm
all b
usi
nes
s st
ock
(com
mon
st
ock
loss
es c
an b
e tr
eate
d as
"o
rdin
ary"
rath
er t
han
"ca
pita
l" lo
sses
)
Lega
l Str
uct
ure
san
d ow
ner
ship
veh
icle
s
Sole
Pro
prie
tors
hip
s P
artn
ersh
ips
Cor
pora
tion
s-'
C'
-Su
b-C
hap
ter
'S'
Lim
ited
Lia
bilit
y C
ompa
nie
s (L
LCs)
Inco
rpor
ate
wit
h a
n e
xper
ien
ced
law
yer!
Stoc
k O
wn
ersh
ip, G
ran
t an
d A
war
d P
ract
ices
for
Y
our
Star
t-U
p
Man
y qu
esti
ons…
Fou
nde
rs' s
tock
; o
ptio
ns;
in
cen
tive
st
ock
opti
ons;
non
-qu
alif
ied
stoc
k op
tion
s; s
tock
gra
nts
; v
esti
ng
sch
edu
les;
how
man
y sh
ares
?
wh
en?
leg
al &
tax
con
side
rati
ons.
Div
idin
g U
p th
e P
ie !
You
Foun
ding
empl
oyee
s
Key
empl
oyee
s
Inve
stor
sY
ou
Fou
ndi
ng
empl
oyee
sIn
vest
ors
You
Fou
ndi
ng
empl
oy-
ees
Pre
-fin
anci
ng
Earl
y st
age
fin
anci
ng
Expa
nsi
on f
inan
cin
gIP
O /
Acq
uis
itio
n /
B
uyo
ut
fin
anci
ng
You
Au
thor
ized
an
dO
uts
tan
din
g Sh
ares
Au
thor
ized
= n
um
ber
of s
har
es y
ou
can
issu
e (o
f n
o im
port
ance
to
valu
atio
n o
r pe
rcen
tage
ow
ner
ship
ca
lcu
lati
ons)
Ou
tsta
ndi
ng
~=
"Is
sued
" =
nu
mbe
r of
sh
ares
gra
nte
d or
pu
rch
ased
.
Com
mon
vs.
Pre
ferr
ed S
tock
“Pre
ferr
ed”
for
inve
stor
s—
Has
pre
fere
nce
on
liqu
idat
ion
—U
sual
ly h
as (
cum
ula
tive
) di
vide
nd
righ
ts;
Rig
hts
to
RO
I be
fore
com
mon
; C
onve
rts
to
com
mon
at
"exi
t"—
Oft
en h
as a
nti
-dilu
tion
rig
hts
“Com
mon
”fo
r fo
un
ders
an
d ke
y em
ploy
ees
Res
tric
ted
Stoc
k
Secu
riti
es la
ws
—re
stri
ctio
ns
on
tran
sfer
(st
ock
is n
ot r
egis
tere
d)C
ompa
ny
rest
rict
ion
s —
on t
ran
sfer
(y
ou n
eed
to b
e ve
sted
bef
ore
you
ca
n s
ell s
tock
). P
lus,
th
e co
mpa
ny
/ ex
isti
ng
inve
stor
s h
ave
righ
ts o
f fi
rst
refu
sal…
•Sto
ck G
ifts
an
d G
ran
ts—
Fou
nde
rs' s
tock
•Sto
ck O
ptio
ns
—In
cen
tive
(IS
Os)
—N
on-Q
ual
ifie
d (N
QSO
s)
See
Tabl
e fo
r D
etai
ls
ISO
Cas
e St
udy
-"E
xplo
itin
g em
ploy
ee d
esir
e fo
r st
ock
opti
ons"
—se
llin
g st
ock
in d
isgu
ise
Job
offe
rs c
ome
wit
h n
um
erou
s st
ock
opti
ons
wit
h…
only
2 y
ear
vest
ing
(mu
st e
xerc
ise
w/i
n s
hor
t pe
riod
th
erea
fter
)1
10
% f
air-
mar
ket-
valu
edo
ubl
e u
p if
exe
rcis
e im
med
iate
ly
How
Man
y Sh
ares
to
Gra
nt?
Ru
les
of t
hu
mb
Com
mon
sto
ck is
con
side
red
to b
e "w
orth
" w
hat
's b
ein
g pa
id f
or t
he
pref
erre
d, a
lth
ough
com
mon
is
pric
ed t
ypic
ally
at
1/1
0th
of
pref
erre
dO
ptio
n o
n c
omm
on s
tock
"w
orth
" 1–
2X
an
nu
al s
alar
y is
goo
d
How
Man
y Sh
ares
to
Gra
nt?
(co
nt.
)R
ule
of
thu
mb
(ver
y ro
ugh
)If
CEO
get
s 1
00
sh
ares
Dir
ect
repo
rts
(VP
s) g
et 1
0N
ext
leve
l rep
orts
get
1an
d so
on
…
Ves
tin
g Sc
hed
ule
san
d C
ondi
tion
s –
Exer
cisi
ng
Opt
ion
sV
esti
ng
is t
ypic
ally
ove
r 3
, 4, 5
ye
ars;
w/
linea
r, s
tair
-ste
p,
thre
shol
d m
odel
sEx
erci
se m
ust
be
don
e w
/in
1-3
m
onth
s of
ter
min
atio
n o
f em
ploy
men
t fo
rIS
Os
Fou
nde
rs' S
tock
Com
mon
sto
ck;
Pay
alm
ost
not
hin
g if
bu
y be
fore
fu
ndi
ng;
V
esti
ng
is b
y ti
me,
& m
ay a
lso
be b
ased
on
per
form
ance
. P
oor
perf
orm
ance
can
res
ult
in d
iluti
on
of y
our
own
ersh
ip (
eith
er v
ia p
arti
al
vest
ing,
or
inve
stor
s' p
erfo
rman
ce-
base
d co
nve
rsio
n f
orm
ula
s)
Sect
ion
83
(b)
Elec
tion
Allo
ws
you
to
"pay
tax
es n
ow"
on a
ny
gain
fro
m b
uyi
ng
fou
nde
rs s
tock
at
a fa
vora
ble
pric
e, a
nd
then
NO
T h
avin
g to
pay
tax
es w
hen
ves
tin
g co
ndi
tion
s ex
pire
(w
hen
sto
ck c
ould
be
wor
th
ton
s) —
only
pay
tax
es la
ter
if s
tock
is
sold
A
void
s ta
x su
rpri
ses
late
rFo
un
ders
sh
ould
alw
ays
elec
t 8
3(b
) —
Man
y do
n't
(u
sin
g in
expe
rien
ced
law
yers
?)
Ven
ture
Cap
ital
Rat
chet
s
Sign
ific
ant
anti
-dilu
tion
pro
tect
ion
fo
r in
vest
ors
via
chan
ge in
co
nve
rsio
n p
rivi
lege
s of
pre
ferr
ed
to c
omm
on if
late
r pr
icin
g dr
ops.
Ex
ampl
e:
Rat
chet
s ar
e V
ery
com
mon
Mak
e ag
gres
sive
pro
mis
es, d
on't
pe
rfor
m, a
nd
you
may
pay
Stoc
k W
arra
nts
An
oth
er in
stru
men
t of
sop
his
tica
ted
inve
stor
s to
incr
ease
th
eir
own
ersh
ipA
llow
s pu
rch
ase
of a
ddit
ion
al s
tock
in
th
e fu
ture
, at
olde
r fa
vora
ble
pric
eU
sed
prop
erly
, war
ran
ts e
nco
ura
ges
you
r in
vest
ors
to s
tay
in t
he
play
(y
ou m
ust
insi
st o
n in
crea
sin
g w
arra
nt
con
vers
ion
pri
ces)
Pu
nit
ive
Fin
anci
ng
Rat
chet
s (
invo
ked
on lo
wer
pr
icin
g)Tu
rnar
oun
ds (
if p
rici
ng
flat
;
man
agem
ent
may
be
repl
aced
)R
e-st
arts
(if
pri
cin
g de
clin
es;
m
anag
emen
t is
rep
lace
d)
Com
pan
y V
alu
atio
n
Pre
-mon
ey d
efin
edP
ost-
mon
ey d
efin
edR
ule
of
thu
mb
(~$
3-5
mill
ion
is
pre-
mon
ey v
alu
atio
n f
or a
sta
rt-u
p w
ith
a g
ood
man
agem
ent
team
, a
hot
mar
ket
w/
iden
tifi
ed
cust
omer
s, a
nd
a "p
rote
cted
" pr
odu
ct
Pre
-mon
ey d
efin
ed
Exam
ple:
1,00
0,00
0 sh
ares
out
stan
ding
:30
0,00
0 so
ld f
or $
0.01
/sha
re $
3,00
0 (f
ound
er's
co
mm
on
shar
es)
700,
000
sold
for
$1.
00/s
hare
$7
00,0
00 (
pref
erre
d sh
ares
)To
tal p
aid-
in-e
quity
$7
03,0
00If
new
inve
stor
s w
illin
g to
pay
. e.g
., $
2.00
/sha
re, p
re-
mon
ey v
alua
tion
is $
2,00
0,00
0
Pos
t-m
oney
def
ined
Exam
ple
cont
inue
d:1,
000,
000
shar
es o
utst
andi
ng:
New
inve
stor
s w
illin
g to
pay
$2
.00/
shar
e, f
or 1
mill
ion
new
sh
ares
(co
ntrib
ute
$2,0
00,0
00).
Tota
l pai
d-in
-equ
ity -
$2,7
03,0
00.
Post
-mon
ey v
alua
tion
= #
sha
res
outs
tand
ing
* la
st p
rice
= 2
,000
,000
* $
2/sh
are
=
$4,0
00,0
00
Pos
t-m
oney
def
ined
(con
t.)
Exam
ple
cont
inue
d: (u
sing
"pe
rcen
tage
" ap
proa
ch)
Impu
ted
valu
atio
n =
am
ount
inve
sted
÷%
pur
chas
ed(f
rom
am
ount
inve
sted
= v
alua
tion
* %
pur
chas
ed)
In a
bove
exa
mpl
e: in
vest
ors
boug
ht 1
mill
ion
new
sha
res,
w
hich
bec
ome
50%
of
the
com
pany
, and
Impu
ted
valu
atio
n =
$2,
000,
000 ÷
50%
= $
4,00
0,00
0
"A $
2 m
illio
n ad
ditio
n to
a $
2 m
illio
n va
luat
ion
com
pany
eq
uate
s to
a $
4 m
illio
n po
st-m
oney
val
uatio
n"
Pos
t-m
oney
def
ined
(co
nt.
)
Scen
ario
Entr
epre
neu
r:
"M
y co
mpa
ny
is w
orth
$
2 m
illio
n"
VC
:
"Is
th
at p
re-
or p
ost-
mon
ey?"
[Tra
nsl
atio
n]
"Is
that
bef
ore
or a
fter
w
e pu
t in
$2
mill
ion
?"C
oncl
usi
on:
sim
ple
stu
ff —
bett
er h
ave
it d
own
col
d
Sum
mar
yIn
corp
orat
e w
ith
an
exp
erie
nce
d la
wye
rM
ain
tain
cle
an c
orpo
rate
rec
ords
, fo
llow
you
r by
law
s an
d ar
ticl
es o
f in
corp
orat
ion
; M
ain
tain
CP
A a
udi
ted
fin
anci
als
Full
disc
losu
re t
o in
vest
ors
—al
way
sC
reat
e fa
ir, m
otiv
atin
g, w
in-w
in
perf
orm
ance
-bas
ed s
tock
an
d op
tion
st
ruct
ure
s; U
nde
rsta
nd
dilu
tion
ris
ks
Sum
mar
y (c
ont.
)D
on't
vio
late
sec
uri
ties
law
s D
on't
neg
lect
tax
con
sequ
ence
s (e
.g.
§83
(b)
elec
tion
s, §
12
44
sto
ck
decl
arat
ion
s, u
se o
f ta
x-de
ferr
ing
ISO
's…
)V
alu
atio
n is
in t
he
eyes
of
the
buye
rN
ever
eve
r ru
n o
ut
of m
oney
Stop
an
d sm
ell t
he
rose
s to
o
