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