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Equity Ownership ENTR599, Winter A Perry Samson Aaron Crumm

Equity Ownership ENTR599, Winter A Perry Samson Aaron Crumm. Basic Course Agenda. Time and Place Place Duderstadt Room 3350 Time 8:30 am to 11:30 am (Michigan Time, 8:40 am to 11:30 am) Typical Agenda Review Homework Assignment

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Equity Ownership ENTR599, Winter A Perry Samson Aaron Crumm

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  1. Equity OwnershipENTR599, Winter APerry SamsonAaron Crumm

  2. Basic Course Agenda Time and Place • Place Duderstadt Room 3350 • Time 8:30 am to 11:30 am (Michigan Time, 8:40 am to 11:30 am) Typical Agenda • Review Homework Assignment • One or more random students will be selected by faculty to concisely and persuasivelypresent their individual results in a compelling fashion. • Content Lectures per Syllabus • Homework Assignment Preparation • Guest Speaker or Other Content

  3. Educational Objectives • This course is designed to present the Entrepreneur’s perspective of equity ownership. • The student shall develop the critical thinking skills and analytical frameworks necessary to appreciate the trade-offs of equity ownership while making decisions around hiring, day to day operations, fund raising, long term operation, or exit from their business. • The ideal graduate from this course will be able to make informed decisions to efficiently and effectively deploy their precious equity.

  4. Specific Equity Tools • Corporate Formation • Capitalization Table • Investor Term Sheet • Understanding of Business Types and Funding Paths • Founder’s Stake Allocation and Future Option Budgets • Shareholder Agreement Terms • *Corporate by Laws(*limited discussion) *The topics and information presented in this course should in NO WAY be considered as legal or tax advice!!!!!!!!! *Every Entrepreneur should seek professional legal and tax advice for decisions surrounding Equity Ownership.

  5. Resources • The World Wide Web. • Popular Press • Slicing Pie, Mike Moyer • Venture Deals, Brad Feld • SAIC Solution, J. Robert Beyster • The Founder’s Dilemmas, Noam Wasserman • Disciplined Entrepreneurship, Bill Aulet • Films(DVDs available upon request) • Something Ventured – The history of Venture Capital • Triumph of the Nerds • Silicon Valley, PBS Special • We the Owners (available for streaming from UofM library) • http://digital.films.com/PortalPlaylists.aspx?aid=20441&xtid=52820 • USER: Accountuser20441, PASSWORD: digital

  6. Professor Perry Samson Weather Underground Lecture Tools

  7. Dr. Aaron Crumm Adaptive Materials Inc. Ultra Electronics - AMI

  8. Syllabus • Week 1. Equity 101 and Founder’s Stakes • Week 2. Basic Capitalization Table • Week 3. FFF and Angels • Week 4. Venture Investments • Week 5. Valuations and Strategic Investors • Week 6. EO, Boot Strapping, Non-Dilutive • Week 7. Non-Profits, Hybrids, JOBS Act • Week 8. Final Exam and Oral Presentations

  9. Evaluation and Grading • 40% Homework • Quality, accuracy, and support of weekly homework assignments. • 20% Participation • Throughout the semester every student will be called upon at least once to present in front of their peers as part of the weekly homework assignments. • Grading will be based on demonstrated grasp of the topic and the ability to deliver concise, persuasive content with compelling delivery. • 40% Final Exam • Take home exam to translate a case study into a capitalization table and entrepreneur’s exit valuation. Individual students will give a short presentation on their results and respond to questions from the teaching staff.

  10. Why do you want to be an Entrepreneur? Whiteboard Exercise

  11. Real Life Stories of Entrepreneurship • Zip Car Acquisition, http://www.cnbc.com/id/100349819 • Founded by Antje Danielson and Robin Chase • IPO April 2011, Acquired by AVIS for $500M in March 2013. • Robin Chase owned 2.96% at acquisition. • Facebook IPO, http://whoownsfacebook.com • Mark Zuckerbergretains 28.2% • Next Largest Holder is investor Accel Partners retained 10% What is the difference? (ENTR 599 Equity Ownership)

  12. Capitalization Table • The Capitalization Table tracks changes in equity ownership as a function of corporate expenditures of equity to gain funding, partnerships, or human capital.

  13. Capitalization Table Price/Share Voting Rights % Ownership Investors Classes of Stock

  14. http://fundersandfounders.com/how-funding-works-splitting-equity/http://fundersandfounders.com/how-funding-works-splitting-equity/

  15. http://fundersandfounders.com/how-funding-works-splitting-equity/http://fundersandfounders.com/how-funding-works-splitting-equity/

  16. http://fundersandfounders.com/how-funding-works-splitting-equity/http://fundersandfounders.com/how-funding-works-splitting-equity/

  17. What is Equity? Whiteboard exercise

  18. Shares by any other name… • Authorized • Total number of shares available per the Articles of Incorporation. It represents the maximum number of shares a company can issue. • Issued • Shares are issued when the company sells them to an investor and receives cash or some other benefit in return. • Outstanding • Once issued, shares are outstanding as long as investors hold them and the company has not repurchased them. • If the corporation purchases its own stock through a share buyback, an account called treasury stock is created to hold the stock. These shares are no longer considered shares outstanding, and they neither vote nor receive dividends. Treasury stock appears as a negative amount, reducing shareholders’ equity, because this amount has been returned to previous shareholders.

  19. What is an Entrepreneurial Business?

  20. Entrepreneurship “Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled” HBS professor Howard Stevenson, 1975 “They see an opportunity and don’t feel constrained from pursuing it because they lack resources,” says Stevenson. “They’re used to making do without resources.” http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html

  21. Key Resources Technology Money People People Technology Money The Entrepreneur’s Task…. The Next Several Slides were extracted from an iCorps Session

  22. People Value Tech Money Key Skill of Professional Entrepreneur Engaging the Ecosystem to Support the Venture Entrepreneurship Opportunity Ecology of Innovation Engaging the Ecosystem Builds and Ecology of Innovation

  23. I II III IV Cash Flow Time The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT

  24. II III IV Cash Flow Time The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Pure entrepreneurship” I

  25. I II III IV Cash Flow Time The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Strategic focus”

  26. I II III IV Cash Flow Time The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Systems Building”

  27. I II III IV Cash Flow Time The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Corporate Management”

  28. P P P P T T T T M M M M THE ENTREPRENEUR’S TASK Pull a Vision of the Future into the Present I II III IV Cash Flow Time Freeman, J. & Engel, J. (2007)

  29. P P P P T T T T M M M M THE ENTREPRENEUR’S TASK “Nail It” “Scale It” I II III IV Cash Flow Time Freeman, J. & Engel, J. (2007)

  30. What start-up business categories exist?

  31. Lifestyle Startups Work to Live their Passion Startup • Serve known customer with known product. • Work for their passion not for scale or exit.

  32. Social Entrepreneurship Startups Large Non-Profit Social Startup • Solve pressing social problems • Social Enterprise: Profitable • Social Innovation: New Strategies

  33. Small Business StartupsWork to Feed the Family 5.7 million small businesses in the U.S. <500 employees 99.7% of all companies ~ 50% of total U.S. workers http://www.sba.gov/advo/stats/sbfaq.pdf Startup Small Business • Serve known customer with known product • Exit Criteria • Business model found • - Profitable business • Build a management team

  34. Scalable Startup “Nail It” “Scale It” Scalable Startup Large Company • Ascalable startup is designed to grow BIG • Typically needs large amounts of high risk capital • What Silicon Valley means when they say “Startup”

  35. Scalable Startup “Nail It” “Scale It” Scalable Startup Large Company Goal is to solve for: unknown customer & unknown features • Exit Criteria • Business model found • Total Available Market > $500M • Can grow to $100M/year

  36. Buyable StartupBorn to Sell “Nail It” “Scale It” Scalable Startup $5M to $5B Acquisition Sell to larger company Typically: Internet, Mobile, Gaming Apps, Big Data, Hardware

  37. How do the Different Categories Differ? • Draw the relative curves for; • Lifestyle Business • Social Innovation • Small Business • Scalable Startup • Buyable Startup

  38. What Type of Startup Entity are You Contemplating? Why? The type of corporate entity establishes the legal rules governing equity ownership and control.

  39. Establishing a Corporate Entity Once you understand your entrepreneurial objectives, consult your legal and tax experts to determine the best possible corporate entity for your business. http://www.diffen.com/difference/LLC_vs_S_Corporation http://www.bizfilings.com/learn/s-corporation-vs-c-corporation.aspx https://www.incorporate.com/business_structure_comparison_chart.html

  40. Corporate Documents – By Laws http://www.onestreet.org/starting-an-organization/110-bylaws • Work with your fellow leaders to ensure that your bylaws will cause the sort of leadership behaviors necessary for your organization to thrive. • Your bylaws must include: • Purpose of the organization (aka mission statement) • Whether or not the organization has members and what privileges they have, • Responsibilities of different leadership roles, • How leaders are chosen and removed, • How amendments are made to the bylaws, • Any other specifics required in your country.   *The topics and information presented in this course should in NO WAY be considered as legal or tax advice!!!!!!!!! *Every Entrepreneur should seek professional legal and tax advice for decisions surrounding Equity Ownership.

  41. Corp Docs – Articles of Incorporation http://www.legalflip.com/Article.aspx?id=23&pageid=112 The Articles of Incorporation serve essentially four (4) purposes: • It brings the corporation "to life"; • It represents a contract between the corporation and the shareholders of the corporation; • It represents a contract between the corporation and the state; and • It puts everyone on notice about the corporation’s existence. Articles of Incorporation generally contain the following information: • Name & Address: • Purpose: engage in any purpose for which individuals may lawfully pursue • Duration: usually "continue in perpetuity” • Capital Structure: Authorized stock; Number of shares per class of stock (and any preferences) and par value (minimum value that each share must sell for) *The topics and information presented in this course should in NO WAY be considered as legal or tax advice!!!!!!!!! *Every Entrepreneur should seek professional legal and tax advice for decisions surrounding Equity Ownership.

  42. What is the Right Founder Allocation? Establish the Business • Business Type • Lifestyle, Non-profit, Small Business, Scalable, Buyable, etc. • Business Entity Determination • Sole Proprietorship, LLC, LLP, C-Corp, S-Corp, 501c, etc. • Establish Governing Documents • Corporate By-Laws and Articles of Incorporation

  43. Establishing Founder’s Stakes

  44. Founder Stakes • Founder Stakes represent the first round of equity granted for any NewCo. Round 1 of 5: Founders

  45. Establishing Founder’s Stakes Also Known As The ticking time bomb buried within every start-up…

  46. Who is a Founder? • Founders are people who take a very particular kind of risk. • Founders as a function of Corporate Stage of Life • Founding (Nail it). • Startup (Nail it). • Real company (Scale it). • Real company (Scaled). http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split/

  47. Who is a Founder? • Founders are people who take a very particular kind of risk. • Founders as a function of Corporate Stage of Life • Founding (Nail it).  The only money the company has is what you put in.  You are getting no money out of the company.  The company will probably fail, and you will lose all the money you put in, plus the lost salary, plus you have to find a new job. • Startup (Nail it).  The company has money, either from investors or from revenue. Your salary is less than what you’d get at a big company.  50/50 odds the company fails. The difference between your startup salary and the BigCosalary is at risk. • Real company (Scale it).  You get “market” salary.  It’s unlikely the company fails, and if it does, your downside is limited to unemployment. • Real company (Scaled).  You are part of BigCo. http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split/

  48. Who is a Founder? • Rule of Thumb: if you’re working for a company that’s so young it can’t pay you, you’re a founder.  If you are drawing a market salary on your first day at work, you are not. • http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split/

  49. What is a Founder Worth? Rule #1. Fair but not Equitable. Consider the past, present, and future contributions and opportunity costs of every founder.

  50. What is a Founder Worth? • A founder’s primary jobis to get their company money – either by raising investment or by generating revenue. • A founder is valued by two things: • Their contribution • Their market value

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