TAG: Equity
You Don't Own What You Think: Percentages Lie
TheFunded.com Advice
Posted by EZ-stuff on 2008-04-21
Tags: Negotiation Terms Equity
You have a piece of paper or a spreadsheet that shows how much you own of your company, normally called a capitalization table. You may have common stock. You may have options. When you take a venture round, the capitalization table neither represents your ownership nor the allocation of shareholder value. Most of the terms that create the Preferred Stock for venture capitalists chip away at the value of common stock and options, so much so that, after a few rounds of investments, the value of common and options are largely worthless. Let's take a look at why and what can be done.
There are the obvious "big" preferred terms that eat away at shareholder value in most liquidity events, such as promising to re-pay the investment first through a "liquidation preference" and then allowing the venture investors to "participate" in the remaining value allocation. Another classic term is to place founder equity in escrow and force the founder to earn it back over years. Then, there are the slew of other terms that reallocate smaller chunks of value, such as cumulative dividends, redemption rights, ratchets, right of first refusals, and expense reimbursements. Finally, there are the many uncertain outcomes, such as allocating escrow to a preference waterfall, that force last minute negotiations where the preferred shareholders have control in many liquidity situations.
Here are some tips for a management team to retain value AND ownership through the process:
(1) Encourage competitive bidding among interested investors
(2) Raise more money than you need and limit the number of investment rounds to two
(3) Eliminate all secondary terms from term sheets and investment agreements
(4) Control a majority of the board under all circumstances
(5) Insist on executed employment contracts with equity and cash guarantees on liquidity
(6) Add mandatory preferred approval of liquidity offers at pre-defined prices
If other people have tips. add them below. It is about time that the capitlization table represents reality!
PRIVATE: Members Only"Venture Capitalists Make Sheep Look Like Independent Thinkers"
TheFunded.com Discussion
Posted by Anonymous on 2009-01-22
Tags: Venture Business Trends Private Equity
Would You?
TheFunded.com Discussion
Posted by Anonymous on 2010-06-15
Tags: Preparation Incubators Equity
Loi From a Large Private Investor
TheFunded.com Discussion
Posted by Anonymous on 2009-02-08
Tags: Negotiation Equity Terms
Anyone Know How Much Equity Ownership to Give to Your Advisors?
TheFunded.com Discussion
Posted by Anonymous on 2009-01-08
Tags: Operations Advisor Equity
General Equity
TheFunded.com Discussion
Posted by Anonymous on 2011-04-14
Tags: Equity
Reasonable Equity % as First Employee?
TheFunded.com Discussion
Posted by Anonymous on 2011-03-31
Tags: Equity Employee
How Much Equity Should I Give?...And at What Rate?
TheFunded.com Discussion
Posted by Anonymous on 2011-02-09
Tags: Equity
How Much Equity to Share with a Very Close and Helpful Advisor?
TheFunded.com Discussion
Posted by Anonymous on 2009-12-09
Tags: Negotiation Equity Advisor
Appropriate Size of Equity Grant for Employee Coming on Pre Funding
TheFunded.com Discussion
Posted by Anonymous on 2009-02-03
Tags: Operations Equity Employees
Equity for Developers
TheFunded.com Discussion
Posted by Anonymous on 2009-02-02
Tags: Operations Equity Employees
Secondary Selling
TheFunded.com Discussion
Posted by Anonymous on 2009-02-02
Tags: Operations Founders Equity
A question about First Round and Y Combinator ?
TheFunded.com Discussion
Posted by Anonymous on 2009-01-27
Tags: Preparation Equity
Alternate Currency Other Than Cash
TheFunded.com Discussion
Posted by Anonymous on 2009-01-01
Tags: Operations Compensation Equity
Anyone Ever Offer Different Price Per Share for the Same Round of Investment?
TheFunded.com Discussion
Posted by Anonymous on 2008-12-20
Tags: Negotiation Valuation Equity
Reverse Stock Split... Why?
TheFunded.com Discussion
Posted by Anonymous on 2008-12-11
Tags: Negotiation Equity Reverse Stock Split
Funders Request to Renegotiate a Series
TheFunded.com Discussion
Posted by Anonymous on 2008-11-08
Tags: Operations Equity Renegotiation
Is There a Market to See Pre Ipo Shares?
TheFunded.com Discussion
Posted by Anonymous on 2008-09-06
Tags: Operations Secondary Private Equity
Partial Cash Out of Founders Shares
TheFunded.com Discussion
Posted by Anonymous on 2008-08-16
Tags: Negotiation Equity Liquidity
Equity Compensation
TheFunded.com Discussion
Posted by Anonymous on 2008-07-29
Tags: Operations Compensation Equity
Would You 'Pool' Some of Your Founders Stock with Other Founders to Share Risk/Reward
TheFunded.com Advice
Posted by chimala on 2008-06-18
Tags: Operations Founders Equity
You probably heard of this concept - founders of VC funded startups contribute some of their stock to a 'fund' and thereby share the risk/reward. This kinda works like an insurance in case your startup goes to the dead pool.
The question is, as a startup entrepreneur, would you be in favor of such a proposal"
PRIVATE: Members Only