Startup Equitable Equity: Carving up the Ownership Pie
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Startup Equitable Equity: Carving up the Ownership Pie 1 JASON PUTNAM GORDON, ESQ. [email protected]
Transcript of Startup Equitable Equity: Carving up the Ownership Pie
Startup Equitable Equity: Carving up the Ownership Pie
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JASON PUTNAM GORDON, ESQ. [email protected]
Overview • Background • Big Picture and Foundational Basics • Who Gets What • Documentation You Need • Common Pitfalls • Questions
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JASON PUTNAM GORDON, ESQ. [email protected]
My Background • Corporate and Securities Attorney - practicing law since
2005. • My firm focuses on handling the corporate needs of
emerging-growth companies. • Licensed in CA, DC, MA, NJ, & PA, but I only practice in
CA. • I love working with entrepreneurs typically as outside
general counsel. • I skydive in my spare time and have over 1,000 jumps.
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JASON PUTNAM GORDON, ESQ. [email protected]
What is your Background? • In a startup? • Founder? • First startup? • Who has received funding
before? • Who has had a founder dispute? • Previous successful exit?
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JASON PUTNAM GORDON, ESQ. [email protected]
Important Caveats
• Today’s Discussion is General Information – Not Legal Advice
• That means while we’ll be discussing rules and exceptions, those rules, exceptions, exceptions to the exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to review all facts and circumstances. Our off-the-cuff answers to your questions are not legal advice.
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JASON PUTNAM GORDON, ESQ. [email protected]
Big Picture Create Increasing Value
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JASON PUTNAM GORDON, ESQ. [email protected]
Company Increases in Value
Investors (Capital)
Idea(s) (Intangible Assets)
Technicians who have skills like: sales, marketing, business acumen (Services)
Foundational Basics • What’s the right entity form? • What’s the form of ownership? • What is a pre-money valuation
and post-money valuation and what does that mean in terms of ownership?
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JASON PUTNAM GORDON, ESQ. [email protected]
Foundational Basics -‐‑ Entity • Usually, but not always, a
Delaware C-Corp • Delaware is business friendly
• SoS is comparatively awesome • Typically better liability protections
for directors and officers • M&A is typically easier
• Not a pass-through tax entity
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JASON PUTNAM GORDON, ESQ. [email protected]
Foundational Basics – Ownership Stakes
• In a corporation – SHARES OF STOCK NOT
PERCENTAGES!
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JASON PUTNAM GORDON, ESQ. [email protected]
Foundational Basics – Valuation • Pre-money valuation – the value of the
company before the next round of investment. • Determining is very difficult for startups • At the early stage it’s more art than science • Why convertible debt and convertible equity
are popular • Post-money valuation – the value of the
company after the round of investment • Example:
• Pre-money $10,000,000 investment $3,000,000 • Founder A’s shares = 33% of pre-money • Founder A’s shares = ~25% of post-money
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JASON PUTNAM GORDON, ESQ. [email protected]
Who gets what? • Founders
• There is not a set answer for this. • There are a seemingly infinite ways to do it. • Spend time making the right decisions for your startup. • Here are some general considerations
• Generally the person(s) adding the most value get the most. • Not necessarily the idea – value is in the product.
• There are resources online, not recommending any • http://foundrs.com - calculator • Idea to IPO events and other events for founders
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JASON PUTNAM GORDON, ESQ. [email protected]
Documentation • Vesting
• Must get agreements in place • Term, typically four years with a one-year
cliff • Acceleration single or double trigger • 83(b) elections!!! • May get renegotiated by later investors
• Shareholder Agreements • Rights of first refusal • Co-sale rights • Drag along rights
• Restrictions in bylaws
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JASON PUTNAM GORDON, ESQ. [email protected]
Common Pitfalls re Ownership in Startups
• Not forming an entity or the right entity. • Not getting vesting agreements in place • Not filing 83(b) elections. • Not paying attention to securities laws. • Risk of employment-law issues. • Undocumented stakes in the company. • IP that resides in other entities. • Tax issues – E.g., federal, state, local
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JASON PUTNAM GORDON, ESQ. [email protected]
Important Caveats
• Today’s Discussion is General Information – Not Legal Advice
• That means while we’ll be discussing rules and exceptions, those rules, exceptions, exceptions to the exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to review all facts and circumstances. Our off-the-cuff answers to your questions are not legal advice.
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JASON PUTNAM GORDON, ESQ. [email protected]
