Transcript We Don’t Need No Stinkin’ Mortgages: Real Estate Sale

Parceling Out Equity
128 ICG
June 9, 2005
Peter Miller
Principal
Genomic Healthcare Strategies
[email protected]
Richard Lucash
Partner
Eckert Seamans
[email protected]
This document is for illustrative purposes only. It is not legal advice
and the numbers should not be applied without consulting with
appropriate professional advisors.
Basics: What’s equity?
A
company has owners
 Ownership is expressed in shares of
stock
 Your % ownership = your shares
divided by the number of outstanding
shares (20 shares of 100 = 20%)
 A stock option is a contract to allow the
holder to buy a share of stock as a set
price
Founders and others
A
common path for a company:
 The
founding team (2-4 people) start the
company
 They may raise some friends & family
investment; possibly angel investment
 If they are successful but the business
requires more resources, they may raise a
first venture capital round, called an A
round
Common allocations
Founding role
Low range
High range
CEO
40%
60%
2 other founders,
each
20%
30%
Board member
.5%
2%+
Advisory Board
member
.5%
2%
Who decides?
 It’s
negotiated
 Among founders it’s frequently an
awkward topic
 Better to have the discussion than not
 It’s important
 But it’s also better not to have
overwhelming victories and humiliating
defeats
How do you resolve disagreements?
 Award
equity over time
 Based
on performance
 Based on activity
 Based on role
 There
are lots of mechanisms
 Talk with your attorney
Not so fast…
 But
it’s not usually that simple
 There are a number of problems which
can get in the way of harmony
 If you’re lucky, you won’t have all of
these
Typical problems
 Kindergarten
report card: “Johnny
doesn’t share”
 The old team from the last company
stills thinks that everyone is a peer
 The thesis adviser emerges
 The business plan competition team
emerges
Typical problems (2)
 Some
full time, some part time
 Vesting? We don’t need no stinking
vesting!
 Founders walk away
Investment & growth
 If
you put a good team together and
have some success, you’ll probably
need additional capital to grow
 Once you have investors less pliant and
family and friends, you’ll have more
constraints
 Staff who enter later don’t get the same
amount of equity
After investment
New staff role Low range
High range
CEO
5%
10%
Head of Sales
2%
5%+
CFO
1%
4%
Option Pool
15%
20%
And how about you?

Suppose, pre-A round:
 CEO
38%
 2 other founders 28% each
 Various others total of 6%
And you take in $500K at a pre-money
valuation of $1 million
 Post money:

 CEO
26%
 2 other founders 18% each
 Various others total of 4.67%
 Investors 33.33%
A note on percents
 Each
case is different
 I did a small survey of knowledgeable
colleagues who varied widely in their
estimates
 Don’t use these number to win
arguments – work it out for your own
particular situation
 Key point – don’t ignore the issue
Peter Miller Background
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MIT undergrad and Sloan School
Experienced and successful entrepreneur in professional
services and software
Long-time adviser, strategist, mentor, board member for
growing companies
Occasional angel investor; one-time investment banker
Now working in life science areas with Genomic Healthcare
Strategies
Past board chairman, MIT Enterprise Forum Inc
Co-Director, MIT Venture Mentoring Service
[email protected]
Options & Restricted Stock
Non-ISO
100 shares
at $10/share
Grant
ISO
Must be FMV
100 shares
at $10/share
Grant
$1,500 paper gain
$2,000 gain
NO TAX YET
TAX – Ordinary Income
100 shares
100 shares
at $25/share
at $30/share
$2,500 gain
TAX – Capital Gain
100 shares
at $55/share
Exercise
Vest
$1,500 paper gain
NO TAX YET
100 shares
at $25/share
$1,000 Sell
investment
$2,000 paper gain
$4,500 gain
NO TAX YET
TAX – Capital Gain
100 shares
100 shares
at $30/share
at $55/share
Vest
Sell
Exercise
2 years
1 year
Restricted Stock
$2,500
gain
$1,000 gain
$1,500
paper
gain
Ordinary
Income
TAX YET
TAX – Ordinary Income TAX –NO
100 shares
100 shares
at $10/share
at $25/share
Grant
Vest
Timing
83(b)
the Tax
Election
$3,000
$4,500 gain
gain
TAX
TAX –– Capital
Capital Gain
Gain
100 shares
at $55/share
Sell
Related Items
 Assignment
 Get
of the technology
from all contributors
 Releases
 Employee
invention/confidentiality/noncompete