Equity Structure for Startups

Ahmad Bakhiet & Alex Shoer ahmad@sellplex.com & alex@seeder.cc

Universidad Adolfo Ibanez Mayo 2014

Hello!

Ahmad, from United Kingdom Founder & CEO of Sellplex.com MSc Technology Entrepreneurship BSc Computer Science My twitter: @ahmadbakhiet

Alex, from U.S. but lived in China for last three years. Founder & CEO of Seeder.cc. BBA in Finance from the University of Georgia My twitter: @alexshoer

Quick Poll

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What Can go Wrong?

What Can go Wrong? - Avis bought Zipcar for $491 million in January 2013. - But in fact, both founders left the company more than 10 years ago, as power struggles and disputes prevented both from seeing their shared vision through.

- Now 56, Danielson hasn’t spoken to Chase in more than a decade.

What Can go Wrong? - Facebook is one of the biggest and most sucessful internet companies. Valued at over $100Bn.

- Eduardo Saverin famously sued Mark Zuckerberg to win official co-founder status.

-  Situation was seen by millions of people in the movie

Social Network. - Voting rights.

What Can go Wrong? - In September 2011, Google bought Zagat for $125 million

- It was Google's tenth-largest acquisition ever. - Led by Marissa Mayer, then VP of Maps & Location. - For one lucky person, she made several million for six months of work.

TEAM: Every Start Must Have... Visionary – The person who come up with the idea. The type of person that

identifies the problem that the team will solve and the high level look at how to do it.

Wizzard – This is the operations side of the startup, the person who works the magic and makes the impossible actually happen.

Wiseman – They’re your investor or Advisor. They bring money and experience into the mix.

Willing Slave – One of the most crutial roles is the person who can actually build the product. Outsource this at your peril.

Deal Maker – This is the guy who can sell the idea. They get investors onboard, find customers and sells to clients.

Who is likely to own shares in your company?

Founders (Early)

Employees

Investors Advisors

Overview of equity structures Key Terms:

Stock Classes: Common and Preferred Dilution Vesting Stock vs Options Founder's / Restricted Stock

Typical Startup Progression Idea stage Co-Founder Stage Registering the Company The Family and Friends Round: Incubators, accelerators, grants and “excubators” Angels VC Funds

Funding Stats

Typical Startup Progression

Overview of equity structures Three main models for different situations 1) Simple Equity 2) Weighted/Variable Equity 3) Dynamic Equity

Overview of equity structures Simple Equity

Overview of equity structures Weighted Equity

Dynamic Equity - How it works

- Reduces negotiation - Increases transparency - Eliminates feelings of unfairness - Creates direct incentives - Opens up your equity as a payment tool

Dynamic Equity - How it works

Dynamic Equity - How it works 1) Have a trustworthy leader: the leader will control 100% of the equity while the model is being used 2) The right time to issue the equity is when the company shows real, concrete evidence of value. 3) Assign a relative value to the various inputs provided by each participant 4) Calculate shares by dividing an individual’s contribution by the total contribution

Overview of equity structures Dynamic Equity - Seeder Example Our dynamic equity model rewards each person based on their individual

contribution around four factors: 1) the value of each member’s time 2) the amount of time spent 3) The critical nature of the persons role 4) revenue generation that is a direct result of their introductions. So this

means that any revenue generated by your work will count towards your equity as well.

Early Setup After you decide on your equity model: - Founder agreement (roles/responsibilities) - Liquidation or buyout agreement - Dynamic Equity

Overview of equity structures

Standard Employee Equity

Employees Stocks ●  Option Pool

o  (usually 10% of issued shares) ●  Vesting and Cliffs

o  (4 year and 1 year) Salaries ●  Case Study: Buffer Inc.

Buffer Salary Calculation = job type X seniority X experience + location

job type = base ●  happiness hero = $45,000 ●  content crafter = $50,000 ●  engineer = $60,000 ●  designer = $60,000 ●  Operations officer base = $70,000 ●  Executive officer base = $75,000 seniority = base multiplier ●  Senior + 5% base and 3k/$m revenue ●  Lead +7% base and 4k/$m revenue ●  VP + 10% and 6k/$m revenue ●  C-level +20% and 8k/$m revenue ●  COO +20% and 10k/$m revenue ●  CEO + 20% and 12k/$m revenue

experience = multiplier ●  Master: 1.3X ●  Advanced: 1.2X ●  Intermediate: 1.1X ●  Junior: 1X

location = additional ●  A: +$22K (e.g. San Francisco, Hong

Kong, Sydney, London, Paris, New York) ●  B: +$12K (e.g. Nashville, Birmingham,

Vienna, Austin, Vegas, Tel Aviv) ●  C: +$6K (e.g. Talinn, Warsaw, Bucharest,

Santiago) ●  D: +$0K (e.g. Manila, Delhi, Hanoi)

equity / salary choice ●  you get a choice of more

equity or more salary, if you choose salary, you get +$10K

Advisors: Founder Advisor Template FAST Agreement: ●  Incentivizes advisors appropriately ●  Holds them accountable ●  Terms protects both sides of agreement Structure - Vesting Period: monthly over a 2 year period with a 3-month cliff period. - Assigns IP and confidentiality appropriately - Ensures advisors don’t come after you for more than agreed upon

Advisors: Founder Advisor Template

Advisor Performance Level

Stage

Idea Stage Startup Stage Growth Stage

Standard ____ ____ (0.25%) ____ ____ (0.20%) ____ ____ (0.15%)

Strategic ____ ____ (0.50%) ____ ____ (0.40%) ____ ____ (0.30%)

Expert ____ ____ (1.00%) ____ ____ (0.80%) ____ ____ (0.60%)

Advisor Compensation

Investors - understand dilution

Investors - understand dilution Negotiating. Understand valuation, dilution and difference Pre and post money.

Investors - What to avoid ●  Look for in an investor that has industry experience

and a strong network (smart money) ●  Interview investors like employees ●  Make friends & family a worst case scenario ●  Avoid investors who want too much control ●  Double check terms such as liquidation preference,

delivery of cash, admin fees, and strict protective provisions

Helpful Links 1.  http://foundrs.com/ 2.  http://www.payne.org/index.php/Startup_Equity_For_Employees 3.  http://www.slicingpie.com/ 4.  http://www.businessinsider.com/15-roles-every-startup-needs-filled-2009-3 5.  http://rogernorton.net/blog/2011/the-5-roles-you-need-in-a-startup/ 6.  http://fundersandfounders.com/how-funding-works-splitting-equity/

Preguntas?

Contáctenos Ahmad Bakhiet & Alex Shoer

ahmad@sellplex.com & alex@seeder.cc

Universidad Adolfo Ibanez Abril 2014

Appendix 1 - Advisors: Why they are important?

1. Sounding board for the CEO 2. Opening doors to key customers 3. Assisting with financing 4. Providing credibility by association 5. Recruiting key people 6. Cheerleader 7. Building the initial infrastructure 8. Arbitrator (Peacemaker) 9. Assisting with strategic contracts 10. Backup

Stage Characteristics

Idea Team: The team consists of only part-time founder(s). Customers: The company is in discussions with potential customers to determine demand in the market. The pricing/revenue structure has been developed, but needs market validation. Revenue: The company has no revenue. Investors: At least one group consisting of the founder(s), their friends or family has invested. Product: The specifications for a minimum viable product including wireframes and system designs are complete

Startup Team: The team consists of full-time founder(s) and is in the process of hiring initial employees as needed. Customers: The company has received letters of intent or customer commitments and the market need has been validated. Revenue: The company may be collecting revenue. Investors: Investment may have been raised via friends/family or professional investors (angel, venture capital, etc.). Product: The launch of the minimum viable product is imminent.

Growth Team: The team consists of full time founder(s) and is in the process of hiring employees as needed. Customers: The company has achieved significant traction and user-based growth. Revenue: The company is collecting revenue. Investors: Prior investment may have been raised and the founders are prepared to pitch to professional investors if additional capital is needed. Product: The product has been launched and is periodically refined based on customer feedback.

Appendix 2 - Advisors: Founder Advisor Template