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May 16th, 2012 One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.
I’ll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I’ll explain.
But first, let me lay out a few things for those who aren’t well versed in these matters. The
. . . → Read More: Valuation and Option Pool — Understand the trade off
May 16th, 2012 While vesting is a simple concept, it can have profound and unexpected implications. Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options (for the rest of this post, I’ll simply refer to the equity as “stock” although exactly the same logic applies to options.) If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs
. . . → Read More: Term Sheet — Vesting, Single and Double Trigger Acceleration
May 15th, 2012 Options and restricted stock in a startup are subject to vesting. This is done to associate the rewards of equity ownership with the time and effort put into creating value for the company.
Although vesting schedules can be infinitely flexible in theory, in practice they don’t vary that much. You’ll find that the majority of option plans and restricted stock agreements are identical in meaning and vary slightly with how vesting is structured. Most vesting schedules have the following parameters:
Vesting period. This is the expected period for full vesting. It is typically 4 years (48mos) in the case of
. . . → Read More: Vesting Calculator for Restricted Stock and Stock Options
May 10th, 2012 Venture capitalists, angel investors and start-up lawyers these days tend to be obsessed with “intellectual property,” or IP.
And for good reason: In the information economy, the core assets of a new venture are likely to be talented people, the IP they create, and little else.
To maximize future value, founders should try to lay a solid IP foundation even before a new start-up is incorporated. Here are five common mistakes to avoid:
1. “Contamination.”
Perhaps the single greatest source of IP anxiety in Silicon Valley stems from the fact that engineers and executives tend to build on what they
. . . → Read More: 5 ‘IP’ Mistakes Start-ups Should Avoid
May 2nd, 2012 One of the common areas of misunderstanding, and therefore conflict, in financing negotiations has to do with the relationship between the pre-money valuation and the option pool.
Investors want the company to have an adequate option pool for future hiring and it is customary to include the pool in the pre-money valuation. Some entrepreneurs see this as nothing more than a veiled attempt at lowering the value of the company. Well, yes and no. No in that investor aren’t actually lowering the value of the company as the option pool is net new–it comes on top of what they value
. . . → Read More: Option Pool, Post-Money and True Pre-Money. Trade Pool for Valuation.
April 20th, 2012 One of the first tough decisions that have to make is how to allocate or split the equity among co-founders. The easy answer of splitting it equally among all co-founders, since there is minimal value at that point, is usually the worst possible answer, and often results in a later startup failure due to an obvious inequity.
Another common “failure to start” situation I see is one where the “idea person” insists that the idea is 90% of the value (and 90% of the equity). In the real world, the A startup is all about “execution” – meaning the equity
. . . → Read More: Splitting the Founders Stock — Amount Depends on Contribution
April 17th, 2012 This is a Youtube video explanation of a cap (capitalization) table example that is available online. It may take a while get your head around the terminology and concepts involving the option pool and note conversion, and their impact on valuation. It is worth taking time to understand this if you want to see how the option pool and valuation can be played off against each other. Entrepreneurs need to understand this if negotiating with investors.
. . . → Read More: Venture Hacks Series A Cap Table, with Note Conversion and Option Pool
April 6th, 2012 As Obama signs the JOBS Act into law, crowdfunding becomes legal and companies get more flexibility in going public. Here’s the good and the bad.
. . . → Read More: JOBS Act: 5 things to look forward to (and 5 to dread)
September 26th, 2011 There are many items useful to entrepreneurs on the site including:
- Example cap (capitalization) table spreadsheet
- Term Sheet Creator
- Non-disclosure Agreements
- Employment Agreements
- Stock Option plans
- Confidential Information and Invention Assignment Agreement for Employees & Consultants
. . . → Read More: Orrick – Start-Up Tool Kit – Term Sheet Creator – Start-Up Forms Library
September 26th, 2011 As the founder of a startup, one of the first issues you need to address is how to finance your company’s operations. If you are lucky enough to be able to fund your startup out-of-pocket, or through generous family members, congratulations. You can probably skip the rest of this post and get back to building your business. However, if you are like most founders, you won’t be able to self-fund your company entirely and your revenues won’t exist yet, or won’t be adequate to grow the company. In some instances you may be able to obtain or if you have some type of hard asset or significant ac
. . . → Read More: Financing Your Startup: How to Sell Stock without Going to Jail
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