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Parceling Out Equity

Parceling Out Equity. 128 ICG June 9, 2005 Peter Miller Richard Lucash Principal Partner Genomic Healthcare Strategies Eckert Seamans peterm@genomichealthcarestrategies.com rlucash@eckertseamans.com

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Parceling Out Equity

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  1. Parceling Out Equity 128 ICG June 9, 2005 Peter Miller Richard Lucash Principal Partner Genomic Healthcare Strategies Eckert Seamans peterm@genomichealthcarestrategies.com rlucash@eckertseamans.com 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.

  2. 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

  3. 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

  4. Common allocations

  5. 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

  6. 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

  7. 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

  8. 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

  9. Typical problems (2) • Some full time, some part time • Vesting? We don’t need no stinking vesting! • Founders walk away

  10. 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

  11. After investment

  12. 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%

  13. 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

  14. Peter Miller Background • 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 • peterm@genomichealthcarestrategies.com

  15. Sell Sell Vest Vest Sell Vest Options & Restricted Stock Non-ISO $1,500 paper gain NO TAX YET $2,000 gain TAX – Ordinary Income $2,500 gain TAX – Capital Gain 100 shares at $10/share 100 shares at $25/share 100 shares at $30/share 100 shares at $55/share Grant Exercise $1,000 investment ISO $1,500 paper gain NO TAX YET $2,000 paper gain NO TAX YET $4,500 gain TAX – Capital Gain Must be FMV 100 shares at $10/share 100 shares at $25/share 100 shares at $30/share 100 shares at $55/share Grant Exercise 2 years 1 year Restricted Stock $2,500 gain TAX – Ordinary Income $1,000 gain TAX – Ordinary Income $1,500 paper gain NO TAX YET $3,000 gain TAX – Capital Gain $4,500 gain TAX – Capital Gain Timing the Tax 83(b) Election 100 shares at $10/share 100 shares at $25/share 100 shares at $55/share Grant

  16. Related Items • Assignment of the technology • Get from all contributors • Releases • Employee invention/confidentiality/noncompete

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