shares, %, valuation

• shares: startup ownership is divided in small parts, e.g. startup = total 4M common stock shares
• percent of ownership: % of shares held from total shares, e.g. 10% of 4M shares = 400k shares
• valuation: startup is worth 1M $, 10% shares held = 400k shares = 100K $

price of 1 share  = 1 M $/ 4 M shares = 0.25 cents

low price of share is good for selling them

Vesting of shares

• Common stock shares vest in 4 years
• 1 year cliff: leavers before 1 year get 0 shares
• Each year a 25% of the assigned shares is vested

Even founders play by these rules!

this vesting schedule protects the startup

Common stock shares have voting rights in Board

Founders fail cliff

Year 0

• Founder 1 = 50 % not vested
• Founder 2 = 50 % not vested
• Founder 2 fails the cliff
• Founder 2's 50% goes back to shares pool
• Founder 1 assumes 100 work and %

Year 1

• Founder 1 vests 25 %

ties (e.g. 50% - 50%) are not good for startup agility

New founders at year 1

Year 1

• Founder 1 on-boards new founders
• Founder 1 = 25 %, 40% not vested
• Founder 3 = 10% not vested
• Founder 4 = 5% not vested
• Shares pool for employees 20%

Year 2

• Founder 1 = 25 % + (40/3)% newly vested
• Founder 3 = 2,5 % vested, 7,5% not vested
• Founder 4 = 1,25 % vested, 3,75% not vested

shares at startup

• 100% of common stock shares
• 80% shares for founders
• 20% shares pool for employees

4M shares is a good number

to issue the authorized shares is a Board decision

Investors

• Startup total of shares is 1M
• Investor invests 100K $ for 10% of startup
• 10% in preferred stock shares (100K) are issued and added to total of shares = 1,1M shares
• New shares cause dilution of % of shares held by stakeholders (even the investor's 100K shares = 9,09%)
• Preferred shares vest immediately, other differences with common stock shares exist!
• Startup post-valuation (after investment) is 1M $ = 10% * 100K $

accept investment is a Board decision

while terms of the deal are negotiated by CEO

Founder invest

• Startup total of shares is 1M
• Founder has 10% in common stock shares (100K)
• Founder invests 100K $ for 10 % of startup (100K)
• Founder is now an investor also!
• Founder gets 9,09% in preferred stock shares (100K)
• Founder holds 9,09% in common shares after dilution (100K)

Employee stock options

• Same vesting schedule (4 years, 1 year cliff)
• Good mechanism to keep talent/fidelity
• Seat in the Board posible
• Different % grants according to role: e.g. VPs, Directors, advisors, key employees

Specific conditions of the grant is a Board decision

shares math

• startup valuation $ / total shares = $ value of 1 share

• startup post-valuation = % shares issued * dollars invested, e.g. 10 % * 100K $ invested = 1M $ post valuation

• The goal is to increase startup post-valuation, gain liquid to operate

• every dollar invested raises stakeholder total money due to post-valuation

• every share issued dilutes % of shares held, but not its amount

Dilution math

• Startup has 1M shares
• Founder holds 10% in common stock shares = 100K shares
• 10% of preferred shares are issued = 100K
• Total of stocks is increased up to 1,1M = 1M + 100K
• Startup post-valuation is 1M after funding (10% * 100K $)
• Founder holds 100K shares out of 1,1 M = 9,09 % in shares. Dilution of 0,1%!
• A share is worth 1 M $ / 1,1M = 0,9090909 $
• Founder 100K shares (9,09%) are worth = 90909,09 $. Value gain!

 Founder's % dilutes but his total $ grows!

No Dilution math

• Shares total 1M
• Founder holds 10% = 100K shares
• 10% of preferred stock shares are issued = 100K
• Total of shares is increased up to 1,1M
• Startup post-valuation is 1M (10% * 100K $)
• Founder holds 10% shares out of 1,1 M = 110K shares ... 10K shares increase!!
• A share is worth 1 M $ / 1,1M stocks = 0,9090909 $
• Founder 110K shares are worth = 99999,99 $
• 99999,99 − 90909,09 = Founder won 9090,9 $ compared to last slide "dilution math" !!

This math does not work

investors will not accept this