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EQUITY OWNERSHIP PRE VENTURE
Use this workbook to determine the appropriate percentage ownership in a pre-financing situation for:
Founders
The first hire
Other hires
Boards of Directors
Boards of Advisors
Service providers
Technology licensing office of sponsoring university
The "Summary results" worksheet gives the average ownership %'s for 16 companies
The workbook includes 22 worksheets
Worksheet Description
1 Introduction
2 Summary results
3 Key points
4 Forms of equity
5 Types of stockholders
6 Detailed analysis used to calculate the summary results
7 - 22 Examples 1 - 16
Worksheet = Introduction
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EQUITY OWNERSHIP PRE VENTURE
KEY POINTS
1 Equity allocations are subjective
2 Market data is available, but tough to find
3 You need to develop an equity plan, like
Initial hires get more shares than later hires (sunset algorithm)
An employee at one level gets 2x the number of shares an employee at a lower level
4 You should prepare a pro-forma capitalization (“cap”) table, from today to the liquidity event
Anticipate dilution
Calculate proceeds for each shareholder
Focus on % owned, not the number of shares
5 In offer letters, always refer to shares, not % ownership
6 Share ownership should reward future performance, which means it should vest over time
7 Retain the right to buy back the shares if an employee exits the company prior to the liquidity event
8 Selecting the form of equity, the pricing and the vesting requires legal advice
9 Paper up the commitments -- early
Worksheet = Key points
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EQUITY OWNERSHIP PRE VENTURE
PRE FINANCING OWNERSHIP %'S
Range
Average From To
Founders 84.0% 65.0% 99.0%
Hire #1 6.8% 1.0% 16.0%
Hire #2 3.5% 0.0% 4.5%
Hire #3 1.5% 0.0% 4.0%
Hire #4 1.2% 0.0% 3.0%
Directors 1.2% - 1.3% 0.8% 1.6%
Advisors 1.1% 0.8% 1.5%
Service providers 0.9% 0.4% 1.3%
Technology licensing offices 3.0% 3.0% 3.0%
Note -- the "average" column represents the average % ownership from 16 separate situations.
This information is taken from the summary on the worksheet titled "Detail Analysis".
Worksheet = Summary results
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EQUITY OWNERSHIP PRE VENTURE
TYPES AND FORMS OF EQUITY
1 Options
Qualified, non qualified
Exercise price
Exercise dates (vesting)
Daily, monthly, annually
Cliff
Acceleration upon liquidity event
2 Cheap stock
Pricing
Buy back rights
3 Equity appreciation rights
Pricing
Start date for calculating the appreciation
4 Conclusion
Consult tax / legal specialists
Accounting implications may be significant
Income tax implications may be significant for the individual
Worksheet = Forms of equity
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EQUITY OWNERSHIP PRE VENTURE
TYPES OF STOCKHOLDERS
1 Founders
2 Co founders
3 Early hires
The first hire
Others
4 Directors / advisors
5 Service provides – lawyers and consultants
6 Equity investors
FFF ("friends, fools and family")
Seed / Angel
Venture
7 Lenders
Banks (warrants)
Venture lenders (warrants)
8 TLO (technology licensing office)
9 Professors of technical founders
10 Professional management (brought in by VC’s)
Worksheet = Types of stockholders
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EQUITY OWNERSHIP PRE VENTURE
Company # Average 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Founders 83.8% 83.1% 80.4% 65.8% 80.0% 78.7% 71.6% 75.7% 97.1% 98.0% 75.4% 95.4% 96.2% 98.7% 56.6% 93.9% 94.8%
Hire #1 6.8% 6.8% 7.2% 16.4% 14.1% 2.4% 4.1% 11.6% 3.2% 1.8% 5.9% 1.0%
Hire #2 3.5% 4.5% 2.5% 6.1% 1.1% 1.5% 2.1% 9.7% 2.5% 4.0% 0.7%
Hire #3 1.5% 1.0% 1.5% 2.2% 1.0% 1.0% 1.2% 1.5% 4.0% 0.5%
Hire #4 1.2% 0.7% 1.4% 0.8% 1.0% 0.8% 1.0% 3.0%
Hire #5 3.6% 0.5% 1.0% 0.8% 16.5% 1.0% 2.0%
Hire #6 0.6% 0.4% 0.9% 0.6% 0.4% 0.7% 0.5%
Director #1 1.2% 1.5% 0.8% 1.5% 1.5% 1.0% 1.0% 1.4% 1.6% 0.9%
Director #2 1.3% 1.5% 0.8% 1.5% 1.5% 1.0% 1.4% 1.6% 0.9%
Advisor #1 1.1% 1.2% 1.1% 1.0% 1.5% 1.3% 0.8% 1.0%
Advisor #2 1.2% 1.2% 1.1% 1.5% 1.3% 1.0%
Advisor #3 1.1% 1.2% 1.1% 1.3% 1.0%
Advisor #3 1.2% 1.2%
Service providers 0.9% 0.4% 1.0% 1.3%
Technology licensing office 3.0% 3.0%
Seed inv 9.4% 7.1% 6.4% 20.0% 4.2%
Reserved 5.7% 5.1% 3.6% 8.3%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Worksheet = Detail analysis
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EQUITY OWNERSHIP PRE VENTURE
Formation Hires Directors Total %
Co founder #1 -- husband 250,000 250,000 20.8%
Co founder #2 -- wife 150,000 150,000 12.5%
Co founder #3 300,000 300,000 24.9%
Co founder #4 300,000 300,000 24.9%
Hire #1 82,000 82,000 6.8%
Hires 2-12 85,000 85,000 7.1%
Directors (2) 30,000 30,000 2.49%
Director adjustment 6,000 6,000 0.50%
1,000,000 167,000 36,000 1,203,000 100.0%
Outcome Company was acquired
Notes
Two founders did not want husband/wife founders to control the equity
First hire paid the company $7k to come work at the company
Used sunset algorithm, where grants are based on hire date
Adjusted directors equity to keep it at 1.5%
Worksheet = 1
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EQUITY OWNERSHIP PRE VENTURE
Formation Employees Subtotal %
Co founder #1 333,333 333,333 26.8%
Co founder #2 333,333 333,333 26.8%
Co founder #3 333,333 333,333 26.8%
Hire #1 90,000 90,000 7.2%
Hires 2 - 6 93,000 93,000 7.5%
Venture 0 0.0%
Option pool 63,000 63,000 5.1%
1,000,000 246,000 1,246,000 100.0%
Outcome TBD ("to be determined")
Notes
Each founder is full time, and is a Director
Hire #1 was responsible for raising venture financing
Prior to venture $, company raised significant customer advances
Worksheet = 2
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EQUITY OWNERSHIP PRE VENTURE
Formation Employees Dir/Adv Total
Founder 1,000,000 1,000,000 65.8%
Hire #1 250,000 250,000 16.4%
Hires #2 & 3 125,000 125,000 8.2%
Directors (2) 25,000 25,000 1.6%
Advisors (4) 75,000 75,000 4.9%
TLO 31,000 11,000 3,000 45,000 3.0%
Seed investors 0 0.0%
…
Venture 0 0.0%
Option pool 0 0.0%
1,031,000 386,000 103,000 1,520,000 100.0%
Outcome TBD
Notes
Technical founder licensed technology
CEO drove the seed and venture financings
CEO and directors invested in seed round (not shown)
TLO carve out was 3%, up to first $xxm of financing
… Seed investors include legal feed paid in equity (not shown)
Worksheet = 3
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EQUITY OWNERSHIP PRE VENTURE
Formation Hires Directors Total %
Co founder #1 250,000 250,000 20.0%
Co founder #2 250,000 250,000 20.0%
Co founder #3 250,000 250,000 20.0%
Co founder #4 250,000 250,000 20.0%
First hire -- CEO 176,000 176,000 14.1%
Other employees 36,000 36,000 2.9%
Directors (2) 37,000 37,000 3.0%
Venture 0 0.0%
1,000,000 212,000 37,000 1,249,000 100.0%
Outcome Company was acquired
Notes
Co founders worked full time w/o pay for two years
Founders knew CEO from prior situation
Directors shares accelerated 1 year upon selling the company
Company received venture term sheet and offer to buy company simultaneously
Worksheet = 4
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EQUITY OWNERSHIP PRE VENTURE
Formation Seed Hires Total %
Co founder #1 -- husband 900,000 900,000 70.9%
Co founder #2 -- wife 100,000 100,000 7.9%
Seed investors 90,000 90,000 7.1%
Hire #1 30,000 30,000 2.4%
Later hires and pool 108,000 108,000 8.5%
Law firm 5,000 5,000 0.4%
Directors (2) 37,000 37,000 2.9%
1,000,000 95,000 175,000 1,270,000 100.0%
Outcome IPO
Notes
Husband retained significant equity position
Law firm was paid in equity
Worksheet = 5
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EQUITY OWNERSHIP PRE VENTURE
Formation Hires Directors CEO Subtotal %
Co founder #1 525,000 525,000 37.6%
Co founder #2 475,000 475,000 34.0%
First hire 57,000 57,000 4.1%
Other employees 63,000 63,000 4.5%
Advisors (3) 46,000 46,000 3.3%
CEO 230,000 230,000 16.5%
Venture 0 0.0%
Pool 0 0.0%
1,000,000 120,000 46,000 230,000 1,396,000 100.0%
Outcome TBD
Notes
Co founder #1 was full time, and #2 was part time
Advisors included professor who mentored founders
CEO brought in before venture financing raised
Worksheet = 6
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EQUITY OWNERSHIP PRE VENTURE
Formation Employees Dir / Adv Total %
Founder 1,000,000 -220,000 780,000 75.7%
Hire #1 120,000 120,000 11.6%
Hire #2 100,000 100,000 9.7%
Directors / Adv (3) 31,000 31,000 3.0%
1,000,000 0 31,000 1,031,000 100.0%
Outcome TBD
Notes
Founder brought in hires 1 and 2 as, essentially, partners
Directors and advisor share proceeds upon sale of company
Worksheet = 7
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EQUITY OWNERSHIP PRE VENTURE
Formation Advisors Husband adj Total %
Co founder #1 -- wife 1,000,000 -400,000 600,000 58.3%
Co founder #2 -- husband 400,000 400,000 38.8%
Advisors (2) 30,000 30,000 2.9%
1,000,000 30,000 0 1,030,000 100.0%
Outcome TBD
Notes
Wife gave an interest in the company to husband when he became a citizen
No written stock agreements -- all done on a handshake
Worksheet = 8
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EQUITY OWNERSHIP PRE VENTURE
Formation Director Lawyer Total %
Founder #1 600,000 600,000 58.8%
Founder #2 200,000 200,000 19.6%
Founder #3 100,000 100,000 9.8%
Founder #4 100,000 100,000 9.8%
Director 10,000 10,000 1.0%
Lawyer 10,000 10,000 1.0%
1,000,000 10,000 10,000 1,020,000 100.0%
Outcome Company was acquired
Founder #1 was CEO and lead founder
Director given (not sold) stock
Portion of legal fees paid in equity
Worksheet = 9
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EQUITY OWNERSHIP PRE VENTURE
Formation Seed Hires Total %
Co founder #1 500,000 500,000 37.7%
Co founder #2 500,000 500,000 37.7%
Seed investors 85,000 85,000 6.4%
Hire #1 42,000 42,000 3.2%
Hires 2 - 8 100,000 100,000 7.5%
Later hires and pool 100,000 100,000 7.5%
1,000,000 85,000 242,000 1,327,000 100.0%
Outcome TBD
Founders' shares owned directly and by holding company
Formal valuation analysis done to price equity grants
Worksheet = 10
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EQUITY OWNERSHIP PRE VENTURE
Formation Divorce Hires Directors Adj Total %
Co founder #1 500,000 400,000 900,000 81.8%
Co founder #2 500,000 -400,000 50,000 150,000 13.6%
Hire #1 20,000 20,000 1.8%
Hires other 0 0.0%
Directors (2) 30,000 30,000 2.7%
1,000,000 0 20,000 30,000 50,000 1,100,000 100.0%
Outcome Company was acquired
Notes
Ownership redistributed upon divorce
Founder / CEO adjusted ownership just before selling the company
Worksheet = 11
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EQUITY OWNERSHIP PRE VENTURE
Formation Advisors Total %
Co founder #1 500,000 500,000 48.1%
Co founder #2 500,000 500,000 48.1%
Employees 0 0.0%
Advisors 40,000 40,000 3.8%
1,000,000 40,000 1,040,000 100.0%
Outcome TBD
Notes
Founders each owned 50%
No stock for employees
Worksheet = 12
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EQUITY OWNERSHIP PRE VENTURE
Formation Consultant Total %
Founder 1,000,000 1,000,000 98.7%
Consultant 13,000 13,000 1.3%
1,000,000 13,000 1,013,000 100.0%
Outcome TBD
Notes
Sole founder wanted 100% control
Consultant exercised option
Worksheet = 13
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EQUITY OWNERSHIP PRE VENTURE
Formation Hires Dir / Adv Seed inv Total %
Founder 1,000,000 1,000,000 56.6%
Initial hire 105,000 105,000 5.9%
Later hires 239,000 239,000 13.5%
Directors (2) 56,000 56,000 3.2%
Seed inv 353,000 353,000 20.0%
Advisor 14,000 14,000 0.8%
1,000,000 344,000 56,000 367,000 1,767,000 100.0%
Outcome Company was acquired
Directors given stock at nominal cost
Seed $ raised in year 6
Advisor represented seed investors at B/D meetings
Worksheet = 14
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EQUITY OWNERSHIP PRE VENTURE
Formation Dir/Adv Financing Total %
Founder 1,000,000 1,000,000 93.90%
Directors (2) 20,000 20,000 1.88%
Seed investors 45,000 45,000 4.23%
Founder debt ??? 0 0.00%
Angel investors ??? 0 0.00%
1,000,000 20,000 45,000 1,065,000 100.00%
Outcome TBD
Notes
Founder had worked with Directors in prior situation
Initial financing from friends of founder
Does not reflect founder's loan, which will convert to equity upon financing
Angel investor's debt to convert to equity upon financing
Worksheet = 15
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EQUITY OWNERSHIP PRE VENTURE
Formation Hires Dir / Adv Total %
Co founder #1 500,000 500,000 47.4%
Co founder #2 500,000 500,000 47.4%
Hire #1 11,000 11,000 1.0%
Other hires 11,000 11,000 1.0%
Advisors (3) 32,000 32,000 3.0%
1,000,000 22,000 32,000 1,054,000 100.0%
Outcome Company was acquired
Notes
Founders worked full time at company
Worksheet = 16
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