Parceling Out Equity 128 ICG June 9, 2005 Peter Miller Richard Lucash Principal Partner Genomic Healthcare Strategies Eckert Seamans 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.

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

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

Common allocations Founding roleLow rangeHigh range CEO 40%60% 2 other founders, each 20%30% Board member.5%2%+ Advisory Board member.5%2%

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

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

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

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

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

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

After investment New staff roleLow rangeHigh range CEO5%10% Head of Sales2%5%+ CFO1%4% Option Pool15%20%

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%

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

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

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

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