Talk at Venture for America, Providence, RI, June 25, 2014

1. @tdavidson
Employees + Equity
Crash Course
@tdavidson
taylordavidson.com

2. @tdavidson
VC
B2B
Marketing and
advertising tech

3. @tdavidson
Employee Equity

4. @tdavidson
How do startups
raise money?

5. @tdavidson
Startups raise
venture capital by
selling part of the
company.

6. @tdavidson
“Raise $1 MM at $5
MM post-money
valuation”

7. @tdavidson
Expect to sell
10-30% in each
round of
fundraising *
* roughly

8. @tdavidson
Seed, A, B, C, D +

9. @tdavidson
Each round
creates it’s own
class of shares

10. @tdavidson
Founders and
Employees own
Common, Investors
buy Preferred

11. @tdavidson
Capitalization
Tables = who owns
what

12. @tdavidson
Cap table
http://foresight.is

13. @tdavidson
Cap table

14. @tdavidson
Option Pools
10-20% of
shares

15. @tdavidson
Why grant
options?

16. @tdavidson
Options 101
- The right to buy stocks at a
predetermined price, or strike price
- Strike price set at fair market
value
- Have to be exercised

17. @tdavidson
Align risk and reward
Reward long-term value creation
and thinking
Encourage employees to think
about holistic success
http://firstround.com/article/the-right-way-to-grant-
equity-to-your-employees

18. @tdavidson
Why not
stock?

19. @tdavidson
How much?

20. @tdavidson
If i is the average outcome for
the company with the addition
of some new person, then
they're worth n such that i = 1/(1
- n). Which means n = (i - 1)/i.
http://paulgraham.com/equity.html

21. @tdavidson
For example, suppose you're just
two founders and you want to hire
an additional hacker who's so good
you feel he'll increase the average
outcome of the whole company by
20%. n = (1.2 - 1)/1.2 = .167. So
you'll break even if you trade 16.7%
of the company for him.
http://paulgraham.com/equity.html

22. @tdavidson
Save 20% for
employees
- Sam Altman, Y Combinator
http://blog.samaltman.com/employee-equity

23. @tdavidson
“As an extremely rough stab at actual
numbers, I think a company ought to
be giving at least 10% in total to the
first 10 employees, 5% to the next 20,
and 5% to the next 50. In practice, the
optimal numbers may be much higher.”
- Sam Altman, Y Combinator
http://blog.samaltman.com/employee-equity

24. @tdavidson
Why?

25. @tdavidson
CEO: 5-10%
C-Level Exec: 1-3%
VP, Director: 0.5-2%
Manager: 0.25-1.00%
Board Directors: 0.5%
- Rob Grossman
http://rob.by/2013/negotiating-your-startup-job-offer/

26. @tdavidson
“The only thing that matters in terms of your
equity when you join a startup is what
percent of the company they are giving you.
If management tells you the number of
shares and not the total shares outstanding
so you can’t compute the percent you own –
don’t join the company! They are dishonest
and are tricking you and will trick you again
many times.”
– Chris Dixon
http://cdixon.org/2009/08/28/the-one-number-you-
should-know-about-your-equity-grant/

27. @tdavidson
Benchmarks?
angel.co/jobs
ackwire.com
wealthfront.com

28. @tdavidson
Options are part of a
total compensation
plan (salary, benefits,
options)

29. @tdavidson
https://blog.wealthfront.com/stock-options-package-
valuation/

30. @tdavidson
“Your offer is only
as good as your
negotiation”

31. @tdavidson
Vesting

32. @tdavidson
Four year cliff
25% after 1 year
Monthly / Quarterly after

33. @tdavidson
Back weighted
10% after 1 year
20% after 2 years
30% after 3 years
40% after 4 years

34. @tdavidson
> 4 years
Longer vesting should bring
larger overall grants

35. @tdavidson
Refresher /
Evergreen
New grants during the 4
years
http://firstround.com/article/the-right-way-to-grant-
equity-to-your-employees

36. @tdavidson
Technical
considerations
https://blog.wealthfront.com/stock-options-package-
valuation/

37. @tdavidson
Reporting % on
fully diluted
shares?
https://blog.wealthfront.com/stock-options-package-
valuation/

38. @tdavidson
What happens to
vested shares if
leave before fully
vested
https://blog.wealthfront.com/stock-options-package-
valuation/

39. @tdavidson
Early vesting on
acquisition
https://blog.wealthfront.com/stock-options-package-
valuation/

40. @tdavidson
How are
options priced?
https://blog.wealthfront.com/stock-options-package-
valuation/

41. @tdavidson
Early exercise of
options?
https://blog.wealthfront.com/stock-options-package-
valuation/

42. @tdavidson
When was last
409a appraisal?
https://blog.wealthfront.com/stock-options-package-
valuation/

43. @tdavidson
What was last
funding
valuation?
https://blog.wealthfront.com/stock-options-package-
valuation/

44. @tdavidson
When is next
funding round?
https://blog.wealthfront.com/stock-options-package-
valuation/

45. @tdavidson
How to evaluate a
startup employer

46. @tdavidson
Which is better?
a) .01% as employee #100
b) 5% as employee #3

47. @tdavidson
- Do I trust this team?
- Do I believe the product will succeed?
- Is this the right company?
- How much has company raised and on what terms?
- How much runway the company has and when they’ll
need to raise again?
- What is my percentage ownership?
- What is the market rate salary and equity comp?
- Is there an exit strategy?
- What is the estimated valuation at exit?
- How long is my vesting schedule?
- What are the tax implications?

48. @tdavidson
You’ve been hired:
now what?

49. @tdavidson
New funding
rounds = Dilution

50. @tdavidson
Dilution?
Issue more shares, own
smaller %
But (hopefully) at larger price
per share

51. @tdavidson
Acquisition or IPO

52. @tdavidson
All exits not created
equal
http://rob.by/2013/negotiating-your-startup-job-offer/

53. @tdavidson
Consider:
Preferred / Common
Liquidation Preference
Valuations

54. @tdavidson
Raised $18 MM
Sold for $20 MM
$2 MM to distribute?
http://rob.by/2013/negotiating-your-startup-job-offer/

55. @tdavidson
Details matter
Taxes matter
Timing matters
Legal matters

56. @tdavidson
It’s your
responsibility.

57. @tdavidson
Buffer: Open Equity
http://open.bufferapp.com/buffer-open-equity-formula/

58. @tdavidson
Case study: Buffer
http://open.bufferapp.com/buffer-open-equity-formula/

59. @tdavidson
Case study: Buffer
http://open.bufferapp.com/buffer-open-equity-formula/

60. @tdavidson
Additional Resources
• AngelList: http://angel.co/jobs
• CrunchBase: http://crunchbase.com
• Visualization of dilution: http://visual.ly/visualizing-dilution
• Fed Wilson’s Cap Table Template: http://avc.com/2011/09/mba-mondays-cap-tables/
• Mark Suster Cap Table and Valuation:
http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-
valuation-differently-from-founders/
• Anonymous Startup Salaries: http://www.ackwire.com/
• Wealthfront: https://www.wealthfront.com/tools/startup-salary-equity-compensation
• Buffer: http://open.bufferapp.com/buffer-open-equity-formula/
• Salary Negotiation: Make More Money, Be More Valued by Patrick McKenzie:
http://www.kalzumeus.com/2012/01/23/salary-negotiation/
• Best practices on financial modeling: http://foresight.is/best-practices
• An Introduction To Stock & Options by David Weekly:
• Book:
http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-
Entrepreneur-or-Startup-Employee
• Video:
http://blog.dweek.ly/introduction-to-stock-options-startup-founder-entrepreneur-
employee/