Startup Equity 101: Ownership, Risk and Stock Types
•Download as KEY, PDF•
8 likes•3,202 views
Recommended
Recommended
More Related Content
What's hot
What's hot (20)
Similar to Startup Equity 101: Ownership, Risk and Stock Types
Similar to Startup Equity 101: Ownership, Risk and Stock Types (20)
Recently uploaded
Recently uploaded (20)
Startup Equity 101: Ownership, Risk and Stock Types
- 1. Startup Equity 101 Primer r tners, LLC ippi ng Point Pa Text ger, T ana perations M by Jamie Lee, O @wimlink @gitweets #Equity101
- 2. Disclaimer
- 3. Disclaimer I’m not an accountant or a lawyer. The information contained herein and ensuing discussion should NOT be considered tax or legal advice. The information is intended to help you get familiarized with general concepts in startup finance, which may or may not apply to your employment situation. Thank you! Jamie Lee @jieunjamie
- 5. Cliff’s Notes version GOOD TO KNOW
- 6. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company
- 7. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company
- 8. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW
- 9. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time
- 10. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time •tax implications of owning, buying, and selling equity
- 11. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time •tax implications of owning, buying, and selling equity •company valuation at liquidity event
- 12. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time •tax implications of owning, buying, and selling equity •company valuation at liquidity event
- 13. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time •tax implications of owning, buying, and selling equity •company valuation at liquidity event
- 14. 1. Equity = Ownership in company
- 15. 1. Equity = Ownership in company
- 16. 1. Equity = Ownership in company Apple went public in Dec 1980.
- 17. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14
- 18. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14 COB price = $29
- 19. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14 COB price = $29 Split-adjusted IPO price = $2.75
- 20. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14 COB price = $29 Split-adjusted IPO price = $2.75 Current price = $571
- 21. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14 COB price = $29 Split-adjusted IPO price = $2.75 Current price = $571 Startup equity is
- 22. 1. Equity = Ownership in company Apple went public in Dec 1980. IPO offer price = $14 COB price = $29 Split-adjusted IPO price = $2.75 Current price = $571 Startup equity is high risk = high return
- 23. 2. High risk can also mean no return
- 24. 2. High risk can also mean no return
- 25. 2. High risk can also mean no return
- 26. 2. High risk can also mean no return
- 27. 2. High risk can also mean no return Very few startups become as successful as Apple. Most will fail.
- 28. 2. High risk can also mean no return Very few startups become as successful as Apple. Most will fail. Investing in a startup or
- 29. 2. High risk can also mean no return Very few startups become as successful as Apple. Most will fail. Investing in a startup or owning equity in a startup has
- 30. 2. High risk can also mean no return Very few startups become as successful as Apple. Most will fail. Investing in a startup or owning equity in a startup has tax and regulatory ramifications.
- 31. 3. Common vs. Preferred Stock
- 32. 3. Common vs. Preferred Stock
- 33. 3. Common vs. Preferred Stock Holders Employees Investors Price Usually lower than price of Usually higher than common preferred Rights at Has claim to company's assets and "Preference" to get paid before common acquisition earnings, but gets paid AFTER holders. Preference amount is generally or preferred holders, IF money is left greater than the amount invested. liquidation over, per cap table. Rights at Equal footing as preferred Preference goes away IPO Privileges Common stockholder of Varies widely: can include board seat, Corporation may attend annual information rights, right to participate in stockholder meeting. future rounds of funding, right of first refusal, anti-dilution right, etc
- 34. 3. Common vs. Preferred Stock Holders Employees Investors Price Usually lower than price of Usually higher than common preferred Rights at Has claim to company's assets and "Preference" to get paid before common acquisition earnings, but gets paid AFTER holders. Preference amount is generally or preferred holders, IF money is left greater than the amount invested. liquidation over, per cap table. Rights at Equal footing as preferred Preference goes away IPO Privileges Common stockholder of Varies widely: can include board seat, Corporation may attend annual information rights, right to participate in stockholder meeting. future rounds of funding, right of first refusal, anti-dilution right, etc
- 35. 3. Common vs. Preferred Stock Holders Employees Investors Price Usually lower than price of Usually higher than common preferred Rights at Has claim to company's assets and "Preference" to get paid before common acquisition earnings, but gets paid AFTER holders. Preference amount is generally or preferred holders, IF money is left greater than the amount invested. liquidation over, per cap table. Rights at Equal footing as preferred Preference goes away IPO Privileges Common stockholder of Varies widely: can include board seat, Corporation may attend annual information rights, right to participate in stockholder meeting. future rounds of funding, right of first refusal, anti-dilution right, etc
- 36. 3. Common vs. Preferred Stock Holders Employees Investors Price Usually lower than price of Usually higher than common preferred Rights at Has claim to company's assets and "Preference" to get paid before common acquisition earnings, but gets paid AFTER holders. Preference amount is generally or preferred holders, IF money is left greater than the amount invested. liquidation over, per cap table. Rights at Equal footing as preferred Preference goes away IPO Privileges Common stockholder of Varies widely: can include board seat, Corporation may attend annual information rights, right to participate in stockholder meeting. future rounds of funding, right of first refusal, anti-dilution right, etc
- 37. 3. Common vs. Preferred Stock Holders Employees Investors Price Usually lower than price of Usually higher than common preferred Rights at Has claim to company's assets and "Preference" to get paid before common acquisition earnings, but gets paid AFTER holders. Preference amount is generally or preferred holders, IF money is left greater than the amount invested. liquidation over, per cap table. Rights at Equal footing as preferred Preference goes away IPO Privileges Common stockholder of Varies widely: can include board seat, Corporation may attend annual information rights, right to participate in stockholder meeting. future rounds of funding, right of first refusal, anti-dilution right, etc
- 38. 4. Employee stock ownership
- 39. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%.
- 40. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%.
- 41. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%. Title Of total outstanding shares CEO 5-10% C-level Executives 1-3% VP, Directors 0.5-2% Managers .25-1%
- 42. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%. Title Of total outstanding shares CEO 5-10% C-level Executives 1-3% VP, Directors 0.5-2% Managers .25-1%
- 43. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%. Title Of total outstanding shares CEO 5-10% C-level Executives 1-3% VP, Directors 0.5-2% Managers .25-1%
- 44. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%. Title Of total outstanding shares CEO 5-10% C-level Executives 1-3% VP, Directors 0.5-2% Managers .25-1%
- 45. 4. Employee stock ownership Typically, total non-founder employee equity pool tends to be between 10% - 20%. Title Of total outstanding shares CEO 5-10% C-level Executives 1-3% VP, Directors 0.5-2% Managers .25-1%
- 46. 5. Types of Employee Stock
- 47. 5. Types of Employee Stock Purpose: To attract and retain talented employees
- 48. 5. Types of Employee Stock Purpose: To attract and retain talented employees
- 49. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members
- 50. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply
- 51. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply
- 52. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply 2. Restricted stock: employees at early stage company
- 53. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply 2. Restricted stock: employees at early stage company Granted while value of stock is relatively low
- 54. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply 2. Restricted stock: employees at early stage company Granted while value of stock is relatively low
- 55. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply 2. Restricted stock: employees at early stage company Granted while value of stock is relatively low 3. Options: most common form of employee equity
- 56. 5. Types of Employee Stock Purpose: To attract and retain talented employees 1. Founder stock: founders & founding team members Special vesting schedule may apply 2. Restricted stock: employees at early stage company Granted while value of stock is relatively low 3. Options: most common form of employee equity ESOP: Employee Stock Option Plan
- 57. 6. Stock Options
- 58. 6. Stock Options
- 59. 6. Stock Options What you get When you have stock options, you don't own stock. You own the right to buy stock at an agreed-upon price, or strike price. You exercise your option when you buy stock. Nitty Gritty The board of directors sets the strike price based on fair market value(FMV) of common stock. ”At the money” options mean that FMV is equal to strike price. Legal & Tax Fine Once you exercise your option, you are immediately liable Print for tax on the gain, or difference between FMV and strike (Consult your lawyer price, as ordinary income. Capital gain from stock held and accountant!) longer than one year is taxable as long term capital gains.
- 60. 6. Stock Options What you get When you have stock options, you don't own stock. You own the right to buy stock at an agreed-upon price, or strike price. You exercise your option when you buy stock. Nitty Gritty The board of directors sets the strike price based on fair market value(FMV) of common stock. ”At the money” options mean that FMV is equal to strike price. Legal & Tax Fine Once you exercise your option, you are immediately liable Print for tax on the gain, or difference between FMV and strike (Consult your lawyer price, as ordinary income. Capital gain from stock held and accountant!) longer than one year is taxable as long term capital gains.
- 61. 6. Stock Options What you get When you have stock options, you don't own stock. You own the right to buy stock at an agreed-upon price, or strike price. You exercise your option when you buy stock. Nitty Gritty The board of directors sets the strike price based on fair market value(FMV) of common stock. ”At the money” options mean that FMV is equal to strike price. Legal & Tax Fine Once you exercise your option, you are immediately liable Print for tax on the gain, or difference between FMV and strike (Consult your lawyer price, as ordinary income. Capital gain from stock held and accountant!) longer than one year is taxable as long term capital gains.
- 62. 7. Capital Gains Tax
- 63. 7. Capital Gains Tax •Ordinary income tax can be as high as 35%.
- 64. 7. Capital Gains Tax •Ordinary income tax can be as high as 35%. • Short term CGT applies to securities held for less than one year and is the same as Ordinary Income Tax.
- 65. 7. Capital Gains Tax •Ordinary income tax can be as high as 35%. • Short term CGT applies to securities held for less than one year and is the same as Ordinary Income Tax. • Long term CGT applies to securities held more than a year and is capped at 15%.
- 68. 8. Restricted Stock What you get Restricted stock is a stock granted as a form of compensation with restrictions. Nitty Gritty Often the restriction is continued employment during a set period of time, upon which the shares vest. Or the restriction can be performance-based. Legal & Tax Fine Under 83(b) IRS code, you can recognize "income" upon Print granting of stock. Income is difference between FMV and (Consult your stock price, which are typically the same. Meaning no lawyer and income is recognized. accountant!)
- 69. 8. Restricted Stock What you get Restricted stock is a stock granted as a form of compensation with restrictions. Nitty Gritty Often the restriction is continued employment during a set period of time, upon which the shares vest. Or the restriction can be performance-based. Legal & Tax Fine Under 83(b) IRS code, you can recognize "income" upon Print granting of stock. Income is difference between FMV and (Consult your stock price, which are typically the same. Meaning no lawyer and income is recognized. accountant!)
- 70. 8. Restricted Stock What you get Restricted stock is a stock granted as a form of compensation with restrictions. Nitty Gritty Often the restriction is continued employment during a set period of time, upon which the shares vest. Or the restriction can be performance-based. Legal & Tax Fine Under 83(b) IRS code, you can recognize "income" upon Print granting of stock. Income is difference between FMV and (Consult your stock price, which are typically the same. Meaning no lawyer and income is recognized. accountant!)
- 71. 10. Dilution (part of life) Images not drawn to scale
- 72. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Images not drawn to scale
- 73. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale
- 74. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale
- 75. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership
- 76. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares
- 77. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Total shares outstanding:
- 78. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Total shares outstanding: 10M shares, $1/share
- 79. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Total shares outstanding: 10M shares, $1/share $100,000
- 80. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Total shares outstanding: 10M shares, $1/share $100,000 Slice of a small pie
- 81. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Total shares outstanding: 10M shares, $1/share $100,000 Slice of a small pie
- 82. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares outstanding: 10M shares, $1/share $100,000 Slice of a small pie
- 83. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: 10M shares, $1/share $100,000 Slice of a small pie
- 84. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Slice of a small pie
- 85. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie
- 86. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie $6M
- 87. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie $6M
- 88. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie $6M
- 89. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie $6M
- 90. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share 10M shares, $1/share $100,000 Total $ raised: Slice of a small pie $6M
- 91. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share Total shares 10M shares, $1/share outstanding: $100,000 Total $ raised: Slice of a small pie $6M
- 92. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share Total shares 10M shares, $1/share outstanding: $100,000 Total $ raised: 12M shares, $3/share Slice of a small pie $6M
- 93. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share Total shares 10M shares, $1/share outstanding: $100,000 Total $ raised: 12M shares, $3/share Slice of a small pie $6M $300,000
- 94. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share Total shares 10M shares, $1/share outstanding: $100,000 Total $ raised: 12M shares, $3/share Slice of a small pie $6M $300,000 Skinnier slice of a bigger pie
- 95. 10. Dilution (part of life) Each new issuance of stocks results in dilution of existing shareholders. Post-dilution Pre-dilution Images not drawn to scale Dilution is an INEVITABLE outcome of company growth. 1% ownership 100,000 shares Series A funding .8333% ownership Total shares 2M shares issued 100,000 shares outstanding: at $3/share Total shares 10M shares, $1/share outstanding: $100,000 Total $ raised: 12M shares, $3/share Slice of a small pie $6M $300,000 Skinnier slice of a bigger pie
- 96. 12. Vesting for long-term value creation
- 97. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common.
- 98. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common.
- 99. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire
- 100. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 0%
- 101. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 0% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 102. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 0% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 103. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 0% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 104. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 0% 25% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 105. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 0% 25% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 106. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 0% 25% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 107. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 0% 25% 50% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 108. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 0% 25% 50% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 109. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 0% 25% 50% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 110. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 0% 25% 50% 75% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 111. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 0% 25% 50% 75% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 112. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 4th year 0% 25% 50% 75% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 113. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 4th year 0% 25% 50% 75% 100% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 114. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 4th year 0% 25% 50% 75% 100% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 115. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 4th year 0% 25% 50% 75% 100% 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 116. 12. Vesting for long-term value creation Vesting means that ownership of options or stocks accrue to you over a fixed period of time. 4 year vesting with 1 year cliff is common. day 1 of hire 1st anniversary 2nd year 3rd year 4th year 0% 25% 50% 75% 100% Oops 1 year cliff means you don't vest anything during the 1st year. If you leave during this period, you leave with no equity or options. Unvested options and grants maybe repurchased by the company and returned to employee pool.
- 117. Example Scenario Restricted Stock Grants 100,000 shares with 4 year vest, 1 year cliff
- 118. Example Scenario Restricted Stock Grants 100,000 shares with 4 year vest, 1 year cliff End of... Company Total Shares YOUR Value of Your Equity Event Notes Valuation Vested YOUR Ownership Shares shares Year 1 $10MM 10MM 25K $25K .25% 25% vested $1/share Series A $36MM 12MM 25K $75K .21% 2M Series A Preferred Your ownership is Funding Stocks are issued at diluted from .25% $3/share, $12MM to .21%. $3/share preference Year 2 $36MM 12MM 50K $150K .42% 50% vested $3/share Acquisition $48MM 12MM 50K $180K .42% Series A Investors Liquidation can have $12MM trigger accelerated preference. vesting of ALL 100K $3.6/share shares (variable)
- 119. Cliff’s Notes version GOOD TO KNOW •your percentage of ownership = shares you own divided by total number of shares issued by company GOTTA KNOW •vesting schedule, or how your equity is accrued to you over time •tax implications of owning, buying, and selling equity •company valuation at liquidity event
- 120. Recap - What can you do? Knowledge is Power
- 121. Recap - What can you do? Knowledge is Power 1.Ask how much money company has raised in how many rounds of funding.
- 122. Recap - What can you do? Knowledge is Power 1.Ask how much money company has raised in how many rounds of funding. 2.Consider the whole package.
- 123. Recap - What can you do? Knowledge is Power 1.Ask how much money company has raised in how many rounds of funding. 2.Consider the whole package. 3. Know when to buy and sell.
- 124. Recap - What can you do? Knowledge is Power 1.Ask how much money company has raised in how many rounds of funding. 2.Consider the whole package. 3. Know when to buy and sell. 4. Be in the know, stay in touch with news.
- 125. Good reads & Sources - Ackwire, Completly Anonymous Startup Salaries: http://www.ackwire.com/ - Andy Payne, Startup Equity for Employees: http://www.payne.org/index.php/Startup_Equity_For_Employees - Apple Investor Relations, FAQ: http://investor.apple.com/faq.cfm - Brad Feld, Blog archive on Term Sheets: http://www.feld.com/wp/archives/2005/08/term-sheet-series-wrap-up.html - Fred Wilson, MBA Monday Series on Equity: http://www.avc.com/a_vc/2010/09/employee-equity.html http://www.avc.com/a_vc/2008/11/restricted-stoc.html - How Stuff Works, Stock Options: http://money.howstuffworks.com/personal-finance/financial-planning/stock-options1.htm - Paul Graham, Equity Equation: http://paulgraham.com/equity.html - Pop History of DIg, "Apple Rising: 1976 - 1985" http://www.pophistorydig.com/?tag=apple-computer-ipo - Startup Company Lawyer http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83b-election/ - ZD Net, Facebook IPO: Final Numbers: http://www.zdnet.com/blog/facebook/facebook-ipo-final-numbers/ 13257 - Wikipedia, Restricted Stock: http://en.wikipedia.org/wiki/Restricted_stock - Wikipedia, Preferred Stock: http://en.wikipedia.org/wiki/Preferred_stock
Editor's Notes
- \n
- Key things to keep in mind. This presentation is probably most relevant to: \n- Very early stage company: somewhere between founding and raising seed or Series A funding (It’s okay if you don’t know these terms. We’ll be going over them) \n\nSomeone looking to join an early stage startup as employee \n\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- What does it mean to have equity in a company?\n \nIt means you are a part owner in a company. \n \nIf your company is successful and is sold or taken public, you share in the gains. \n \nThat’s what happened to 1,000 employees of Apple when the company went public in 1980. More than 40 employees became millionaires because of their stock options. Steve Jobs, holding 7.5 million shares, was worth about $217 million dollars. \n \nBut let’s put things into perspective. In the very beginning, in 1976 Steve Jobs had to convince Steve Wozniak to quit Hewlett Packard to co-found Apple and work out of a garage. \n \nJoining a startup is still a risky business. \n \nAs they say in finance, startup equity has high risk, high return profile. \n \nWhat does ownership mean to you?\n\nFYI Stock certificates are becoming obsolete in the US, as they are no longer required from companies and are being replaced by electronic registration. \n
- \n
- \n
- \n
- \n
- \n
- \n
- \n
- There is class inequity \n
- There is class inequity \n
- There is class inequity \n
- There is class inequity \n
- There is class inequity \n
- There is class inequity \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- “Rule of thumb” \nMay or may not apply to your company, your industry, your region because of different situations, term sheets, lawyers, and accountants \nAll employees are issued \n
- \n
- \n
- \n
- \n
- \n
- \n
- \n
- \n
- \n
- \n
- 409 Valuation explanation \nConsult a startup lawyer or ask Liberty\n\nSplit into stock and restricted stock\n\nEmployees are incentivized to increase the value of company \n
- 409 Valuation explanation \nConsult a startup lawyer or ask Liberty\n\nSplit into stock and restricted stock\n\nEmployees are incentivized to increase the value of company \n
- 409 Valuation explanation \nConsult a startup lawyer or ask Liberty\n\nSplit into stock and restricted stock\n\nEmployees are incentivized to increase the value of company \n
- 409 Valuation explanation \nConsult a startup lawyer or ask Liberty\n\nSplit into stock and restricted stock\n\nEmployees are incentivized to increase the value of company \n
- Securities – bond, equity, \n
- Securities – bond, equity, \n
- Securities – bond, equity, \n
- Ask if you can make 83b election if you get restricted stock\n
- Ask if you can make 83b election if you get restricted stock\n
- Ask if you can make 83b election if you get restricted stock\n
- Ask if you can make 83b election if you get restricted stock\n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- Dilution applies to both corporations and llc’s. \nPaul Graham: If n is the fraction of company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- The idea is to prevent a "hit and run" situation. \nAfter 1 year cliff, it’s common for ownership of stock/options/units to vest monthly or quarterly. \n
- \n
- valuation is what people think your company is worth \nliquidity event is when investors and employees can cash out, when company is sold or taken public\n
- \n
- \n
- \n
- \n
- \n