Contenu connexe Similaire à How to Split the Pie, Raise Money and Reward Contributors (20) How to Split the Pie, Raise Money and Reward Contributors1. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Idea to IPO
How to Split the Pie, Raise Money
and Reward Contributors
#startup #ideatoipo
1
Roger Royse
@rroyse00
2. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Disclaimer
No information contained in this presentation is to be construed as legal advice.
No information contained in this presentation is intended or related to any
particular factual situation. Nothing herein forms an attorney-client relationship. If
legal advice or other expert assistance is required, the services of a competent
professional should be sought.
2
4. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
4
The Stakeholders
Founders
Service
Providers
Investors
5. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Founder’s Equity
5
Vesting
Equal Percentages
Subjective
Formula
6. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
How many founders?
One is rarely the right answer
Two is deadlock potential
Three will always be 2 against 1
Four is deadlock potential
Five is too many
6
7. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Splitting Founders Equity
The founder’s first decision
The case of Zipcar:
50/50 handshake deal
Co-Founder 1 (Robin) built the startup, crafted its business
plan, and cold-called customers
Co-Founder 2 didn’t even quit her day job, and contributed
little
Her rushed negotiation had compromised her team’s longer-
term effectiveness by causing her “a huge amount of angst
over the next year and a half.”
7
8. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Equal Split
An exit may be 10 years away
Contribution in year 1 may not reflect total contribution to the group
The real work is in the future
Adjust through vesting and additional grants
8
9. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Dynamic Split Models – General Concept
Traditional fixed-split model: Equity given based on anticipated contributions
DYNAMIC-SPLIT MODEL: Equity given based on actual contributions
9
Inputs:
The dynamic model assigns a relative
FMV weight to various contributions from
each participant and contributions put into
model:
Outputs:
Depending on the relative weighted
contributions of each team member, that
member is allocated a corresponding
percentage of outstanding equity.
On “split,” members could return old
equity, or be given new equity, to ensure
each member gets appropriate percentage
of company.
Time spent working
Intellectual property
Commissions
Cash
Facilities
Equipment and
Supplies
10. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The Founders’ Pie Calculator
Created by Frank Demmler, professor, Tepper School of Business at Carnegie
Mellon University
A founder’s value add is divided into 5 categories:
1. Idea
2. Business Plan Preparation
3. Domain Expertise
4. Commitment and Risk
5. Responsibilities
Each category is given a value on a scale of 0 to 10
The value is multiplied by the founder’s score to come up with a weighted
score
10
11. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Founders’ Pie Calculator Example
Frank Demmler, professor, Tepper School of Business at Carnegie Mellon University
11
Founder 1 Founder 2
Idea 70 21
Business Plan 10 2
Domain Expertise 15 30
Commitment &
Risk
28 42
Responsibilities 12 18
Total Points 135 113
% of Total Founder
Equity Pool
54.43% 45.57% 100%
12. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Grunt Fund
Source: http://www.slicingpie.com/the-grunt-fund-calculator/
12
13. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Grunt Fund Detail
Source: http://www.slicingpie.com/the-grunt-fund-calculator/
13
14. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Royse Subjective Method
Full time or part time
Technical or Non-technical
Industry expertise
Size and Stage
Cash compensation
Other contributions
Pressure valves – vesting, option pool, phantom plans
14
15. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Later Hires
Paul Graham 1/(1-n) formula (how much can the employee improve the
outcome)
Fred Wilson option pool formula = Cumulative salaries between rounds/post
money valuation = option pool
Leo Polovets, AngelList job postings
Hire #1: 2% – 3% of equity
Hires #2 through #5: 1% – 2%
Hires #6 and #7: 0.5% – 1%
Hires #8 through #14: 0.4% – 0.8%
Hires #15 through #19: 0.3% – 0.7%
Hires #21 through #27: 0.25% – 0.6%
Hires #28 through #34: 0.25% – 0.5%
15
16. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Advisors
16
FAST Model
Valuation
Stock v.
Options
Milestones and
Deliverables
Vesting
17. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Currency
Options
NSOs
ISOs
Extended NSOs
RSUs
Restricted Stock
Phantom Plan Units
17
18. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Partial Recourse Debt Sale
Partial Recourse Promissory Note
Less capital to purchase the shares at the outset
Commercially reasonable repayment terms
Adequate stated interest
Partial Recourse to Maker
51% recourse for stock sale
Section 83(b) election
Capital gains treatment on restricted stock
18
19. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Vesting
Who should vest?
How long?
Acceleration?
Change of control
Termination without cause
Double and single triggers
19
20. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Founder Vesting
Term, milestones, commencement
Acceleration
Single and double triggers
Fire the Founder
20
21. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The VC’s View of Vesting
VC will require unvesting shares, so vesting period could be 8 years
Fund life can be 7-10 years
Most exits are M&A – fewer and longer IPOs
Extended Option exercise periods
21
22. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Class F Super-Voting Stock
Special class of common that has super-voting rights
Facebook, Google Snap
May be negotiated away in institutional round
22
23. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Transfer Restrictions
Right of First Refusal (ROFR)
Carveouts
Company and then investor
Lock Ups
Co-sale Rights
Drag Along
Buy Sell
Rule 144
23
24. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Cap Table
Common Stock
Options
Warrants
Convertibles
Preferred Stock
24
25. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Cap Table
Cap Table.xls
25
26. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Capitalization
26
Founders 5,000,000 38% 5,000,000 45%
Stock Pool 2,000,000 15% n/a
Series A 3,000,000 23% 3,000,000 27%
Series B 3,000,000 23% 3,000,000 27%
total 13,000,000 100% 11,000,000 100%
Fully Diluted % Issued %
27. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Effect of Valuation Caps
Company that sells a $1,000,000 SAFE with a $4,000,000 pre-money valuation cap
That means that the SAFE will take 20% of the capitalization ($1,000,000/$5,000,000)
27
Founders 4,000,000 100% 4,000,000 100%
Stock Pool 0 0% n/a
total 4,000,000 100% 4,000,000 100%
Fully Diluted % Issued %
28. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Pre-Money vs. Post-Money SAFEs
Pre-Money – cap based on value of the company before SAFE ( and other
SAFEs) and option pool
Company friendly
SAFE holders share option pool and other SAFEs dilution
Cannot predict what percent SAFE will get until conversion
Post-Money – based on value after financing
Y Combinator form
Parties have certainty as to percentages
Founders take option pool dilution
SAFEs do not dilute each other
28
29. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Cap Tables – Series Seed Example
..FormsSeed Financing Spreadsheet.xlsx
29
30. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Liquidation Preference
Who gets paid first and how much?
30
31. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Example of Liquidation Preference
1x non-participating convertible preferred
$1,000,000 invested for 10%
Ex 1: Exit (sale) of company for $5,000,00
Ex 2: Sale for $20,000,000
31
32. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Management Incentive Plans
Sale at or below preferences
Percentage of proceeds off the top for management
Tax
Corporate
Securities
Fiduciary
32
33. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Carve Out Plans – Share of sales proceeds
Pool or earnout
Are shares subject to vesting?
What if someone leaves – who gets forfeitures?
Are incentives aligned?
Earnouts
33
34. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
In re Trados Inc. Shareholder Litigation
Board adopted a management incentive plan (MIP) that was structured so
that once an offered sale price for Trados exceeded the venture capitalists’
liquidation preference, compensation to the preferred stockholders would
increase substantially at the expense of common stockholders.
Preferred received most of their preferences, MIP got $7.8 million, common
got nothing
Interested director transaction
Entire fairness standard
Fair process
Fair price
34
35. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Taxation for Compensatory Partnership Interests
Tax allocation issues
Capital shift
Taxable event for the member receiving capital.
Profits interests
Share of future income and appreciation – like an option
35
36. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Incorporation of an LLC
Start-ups started as LLCs may want to or need to convert into a corporate form at
a later point because:
Venture capital investors more comfortable with corporate form
Potential IPO (but UP-C increasingly popular alternative)
Availability of Section 368 reorganization on exit
ISOs
General increased liquidity
Qualified Small Business Stock exemption
Issuance of stock in a C corporation on incorporation of an LLC may qualify as
QSB stock
Stock held in C Corp following termination of S Corp election does not qualify
because stock was not issued in a qualifying corporation
36
37. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Additional Considerations
Employee vs Independent Contractor
Wage & Hour Laws
Intellectual Property Issues
Prior Employer’s Facilities
Invention Assignments
37
38. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Employee vs. Independent Contractor Issues
The Differences in Tax Treatment
Employee
Business Owner
Independent Contractor
38
39. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The Story of Homejoy
Used an algorithm to connect homeowners with contract-for-hire cleaners and
schedule visits
Raised $40 million in venture funding
Treated its cleaners as independent contractors, and not employees
CEO said the “deciding factor” in failure to raise money and failure was
worker classification lawsuits (ReCode July 17, 2015)
39
40. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Employment Status: The Law
The presumption is that the worker is an Employee (Cal. Lab. Code §3357)
Different agencies/jurisdictions have different tests
IRS
DOL/FLSA
CA Common Law and EDD
Statutory Employees
40
41. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Employment Status: The Law
IRS: The Control Test
Behavioral Control
Financial Control
Type of Relationship
DOL/FLSA: Economic Realities Test/Silk Factors
Focus is on the degree of control the Company has over the worker performing the
service. The key inquiry is the right to control not whether the Company actually
exercises the control.
In July 2015 DOL issued administrative guidance and explained that the test
focuses on whether the worker is economically dependent on the hiring entity or is
in business for herself/himself.
CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of Industrial
Relations (1989) 48 Cal.3d 341
This is a multi-factored test with the most significant factor considered is whether
the principal has control or the right to control the worker as to the work done and
the manner and means in which it is performed.
Statutory Employees
41
42. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
What if I’m Still Not Sure?
File Form SS-8 with IRS:
Determination of Work
Statutes for Purpose of
Federal Employment Taxes
and Income Tax Withholding
42
43. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Dynamex Decision
Dynamex Operations West, Inc. v. Superior Court of Los Angeles adopts a
three factor ABC test, which presumes a worker is an employee unless all of
the following tests are satisfied
Worker is free from control and direction of hiring authority
Worker performs work outside the usual course of the hiring entity’s business, AND
Worker is engaged in an independently established trade, occupation of business
of the same nature
43
44. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
AB-5
California Assembly Bill 5 codified Dynamex in the Labor Code and the
Unemployment Insurance Code “For purposes of the provisions of this code and
the Unemployment Insurance Code, and for the wage orders of the Industrial
Welfare Commission…”
Assembly Bill 2257 exempts a long list of job categories from AB5
video photographers and editors, freelance writers, content contributors, editors,
translators, fine artists, and musicians
broadens the business-to-business exemption of AB5
creates an exemption for individual business people who contract with each other
California Trucking Association challenged the constitutionality of AB5 in federal
court
CA AG sued rideshare companies seeking to enjoin compliance; CA appeals
court upheld ruling that Uber and Lyft must classify drivers as employees
44
45. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
AB-5
Proposition 22 would consider app-based drivers to be independent
contractors and not employees or agents
Uber, Lyft and DoorDash spent more than $220 million on Prop 22 (San Jose
Mercury News Oct 24, 2020)
California Labor Federation, representing 1,200 unions with 2.1 million
members, vowed to defeat the effort (LA Times August 30, 2019)
45
46. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Failing To Protect IP
Protect your intellectual property from claims of ownership by employers,
employees, consultants and competitors
PIAIA or CIAIA
Broadly Drafted Invention Assignments
Federal Defend Trade Secrets Act
Cal Labor Code
46
47. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
California Labor Code § 2870
Employee’s Time
No Employer Facilities
Not Related to Employer’s Business
Doesn’t Result from Work Performed for Employer
47
48. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The Exit
48
Taking Money
Off the Table
Earnouts and
Contingencies
Acqui-Hires
49. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Taking Money Off the Table
1. Investor buys preferred shares from company and common shares from
founders
2. Alternatively, investor buys preferred from company and redeems common
from founder
3. Founders common priced at above market
4. Tax issues for founder
49
Target
Target
Shareholders
PEG
Cash
Cash
Target
Shares
50. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Series FF Stock
1. Common stock that is convertible to preferred on financing
2. Converts to common on IPO or at holder’s election
3. Pricing issues
4. Tax issues for founder
5. Later investors may not accept it
50
Target
Target
Shareholders
PEG
Cash
Cash
FF
Shares
FF stock
51. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Earnouts and Contingencies
Purchase price based on performance (earnouts) should be baked into
formation documents
Can structure for capital gains tax instead of ordinary income
51
52. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Successful Exits
IPO
Sale or Acquisition
SPAC
52
53. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
280G Parachute Payments
20% excise tax and loss of deduction on Excess Parachute Payment
• “Excess Parachute Payment” means the amount by which the Parachute Payment exceeds the Base
Amount
• “Parachute Payment” means a payment, the present value of which, exceeds three times the Base
Amount
• “Base Amount” means the average annual compensation for past 5 years
• Must be paid to a disqualified individual (meaning employee, officer, shareholder, or highly
compensated individual)
• As compensation, AND
• Contingent on a change in control (50% change ownership or effective control, or ownership change
in a substantial portion of the company’s assets)
Reduce Excess for reasonable compensation
Exclude reasonable compensation for future services
Exception for small business corporation and non publicly traded corporation
that has 75% uninterested shareholder approval
Withholding requirement
53
54. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
280G Parachute Payments – other issues
Non-Publicly Traded Stock
Approval of 75% of shareholders after adequate disclosure
Vote determines the right of the shareholder to the payment
Ignore shares held by persons receiving the payment
Reduction for Excess (299% of payments)
Reduction for Reasonable Compensation
Reduction for Future Services
54
55. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Unsuccessful Exits
Zombie Companies
In re Trados Inc. Shareholder Litigation
Bankruptcy or Insolvency Reorganizations
Fire Sales
Management carveouts
Fiduciary duties: shareholders, optionees, preferred and creditors?
55
56. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Other Unsuccessful Exit Issues
Tax Liability
Personal Liability
Tax
Employment
Fiduciary Claims
Securities Law Claims
Contractual
Pierce the veil and creditor claims
Serial Entrepreneurs and failed companies
56
57. AUSTIN
600 Congress Avenue
Suite 1300
Austin, TX 78701
United States of America
T +1 512.867.8400
F +1 512.867.8470
CHARLOTTE
101 S. Tryon Street
Suite 2550
Charlotte, NC 28280
United States of America
T +1 980.771.8200
F +1 980.771.8201
CHICAGO
180 N. LaSalle Street
Suite 2215
Chicago, IL 60601
United States of America
T +1 312.216.1620
F +1 312.216.1621
DALLAS
2323 Victory Avenue
Suite 700
Dallas, TX 75219
United States of America
T +1 214.651.5000
F +1 214.651.5940
DALLAS - NORTH
2505 North Plano Road
Suite 4000
Richardson, TX 75082
United States of America
T +1 972.739.6900
F +1 972.680.7551
DENVER
1050 17th Street
Suite 1800
Denver, CO 80265
United States of America
T +1 303.382.6200
F +1 303.382.6210
FORT WORTH
301 Commerce Street
Suite 2600
Fort Worth, TX 76102
United States of America
T +1 817.347.6600
F +1 817.347.6650
HOUSTON
1221 McKinney Street
Suite 4000
Houston, TX 77010
United States of America
T +1 713.547.2000
F +1 713.547.2600
LONDON
1 New Fetter Lane
London, EC4A 1AN
United Kingdom
T +44 (020) 8734 2800
F +44 (020) 8734 2820
MEXICO CITY
Torre Esmeralda I, Blvd.
Manuel Ávila Camacho #40
Despacho 1601
Col. Lomas de Chapultepec,
DF 11000
Mexico City, Mexico
T +52.55.5249.1800
F +52.55.5249.1801
NEW YORK
30 Rockefeller Plaza
26th Floor
New York, NY 10112
United States of America
T +1 212.659.7300
F +1 212.918.8989
ORANGE COUNTY
600 Anton Boulevard
Suite 700
Costa Mesa, CA 92626
United States of America
T +1 949.202.3000
F +1 949.202.3001
PALO ALTO
525 University Avenue
Suite 400
Palo Alto, CA 94301
United States of America
T +1 650.687.8800
F +1 650.687.8801
SAN ANTONIO
112 East Pecan Street
Suite 1200
San Antonio, TX 78205
United States of America
T +1 210.978.7000
F +1 210.978.7450
SAN FRANCISCO
201 Spear Street
Suite 1700
San Francisco, CA 94105
United States of America
T +1 415.293.8900
F +1 415.293.8901
SHANGHAI
Shanghai International
Finance Center, Tower 2
Unit 3620, Level 36
8 Century Avenue, Pudong
Shanghai 200120, P.R. China
T +86.21.6062.6179
F +86.21.6062.6347
THE WOODLANDS
10001 Woodloch Forest Drive
Suite 200
The Woodlands, TX 77380
United States of America
T +1 713.547.2100
F +1 713.547.2101
WASHINGTON, D.C.
800 17th Street NW
Suite 500
Washington, D.C. 20006
United States of America
T +1 202.654.4500
F +1 202.654.4501
© 2020 Haynes and Boone, LLP
57
OUR OFFICES
Notes de l'éditeur Money = customers, advances, investors, OPM, IRA, mortgages. People = Team, facebooks. Technology = patents, know how, brand, goodwill