Podcast
Questions and Answers
Which of the following is NOT typically addressed in the initial stages of structuring co-founder relationships?
Which of the following is NOT typically addressed in the initial stages of structuring co-founder relationships?
- Determining Core Values
- Negotiating Severance packages (correct)
- Defining the company Mission Statement
- Choosing co-founder(s)
A capitalization table (cap table) is a static document and only relevant at the inception of a company and does not change over time.
A capitalization table (cap table) is a static document and only relevant at the inception of a company and does not change over time.
False (B)
What is the primary purpose of vesting when dealing with founder's equity?
What is the primary purpose of vesting when dealing with founder's equity?
To ensure founders remain committed to the company by gradually granting them full ownership over time.
Filing a Form ______ election with the IRS allows founders to potentially reduce their tax burden on the future sale of stock by paying taxes on the fair market value at the time of grant.
Filing a Form ______ election with the IRS allows founders to potentially reduce their tax burden on the future sale of stock by paying taxes on the fair market value at the time of grant.
Match the document to its description:
Match the document to its description:
Why is it important to consider the impact of dilution when issuing new equity?
Why is it important to consider the impact of dilution when issuing new equity?
In version 1 of founder stock, with two founders starting a company and splitting the equity equally, that would give each founder 60% of the company.
In version 1 of founder stock, with two founders starting a company and splitting the equity equally, that would give each founder 60% of the company.
What are some key considerations when choosing a co-founder for a technology startup?
What are some key considerations when choosing a co-founder for a technology startup?
A deemed liquidation event is important because it helps determine who gets paid and how much upon the occurrence of the even, that is derived from the ______.
A deemed liquidation event is important because it helps determine who gets paid and how much upon the occurrence of the even, that is derived from the ______.
What is the primary difference between restricted stock and common stock options?
What is the primary difference between restricted stock and common stock options?
Flashcards
Capitalization Table
Capitalization Table
A document which tracks new issuances of stock and stock equivalents. It helps understand company ownership and who gets paid upon a 'deemed liquidation event'.
Equity Splits
Equity Splits
The division of company ownership among the founders.
Restricted Stock
Restricted Stock
Shares granted to founders that are subject to a vesting schedule. These give the company the right to repurchase the shares if the founder leaves before the vesting period is over.
Vesting
Vesting
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Certificate of Incorporation
Certificate of Incorporation
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Bylaws
Bylaws
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Founder Employment Agreement
Founder Employment Agreement
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Proprietary Rights Agreement
Proprietary Rights Agreement
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Why Have a Proprietary Rights Agreement?
Why Have a Proprietary Rights Agreement?
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Study Notes
- TMGTPS5125: The Law for Technology, Class 3 on February 4, 2025, covers Co-Founder Relationships and Capitalization with Mark Potkewitz.
- Today's agenda includes a recap of Class 2, discussion of co-founder relationships, capitalization, a walk-through of startup document templates, a breakout session (if time allows), Q&A, and assigned readings.
Co-Founder Relationships
- When choosing a co-founder consider: the "Good to Great" concept, the mission statement, core values, and skillset, network, symbiosis, etc.
- Structuring a co-founder partnership involves determining founders' equity, vesting, and discussing case studies like Zuckerberg/Saverin and Cruise Automation / YCombinator.
Contractual Terms for Co-Founders
- Address equity splits among co-founders.
- Consider restricted stock and why it's used instead of stock options, including Form 83(b) filings.
- Determine the timing of incorporation and initial stock issuance, which is important.
- Address vesting, determining if founder stock should be subject to vesting, vesting schedules, acceleration, and forfeiture.
Form Documents
- Key documents to consider are the Certificate of Incorporation, Bylaws, and Founder Employment Agreement.
- Founder Employment Agreements should cover compensation (base, bonus, and equity), vesting, severance, and other factors.
- Also address any proprietary rights.
Real-World Examples
- Facebook: Zuckerberg/Saverin
- Cruise Automation: Vogt/Guillory
Capitalization Tables
- Capitalization tables track new issuances of stock and stock equivalents like notes, options, and warrants.
- Cap tables determine who owns a company and how much each owner gets paid in a "deemed liquidation event."
Key Knowledge for Capitalization Tables
- Explain who owns a company.
- Discuss the impact of equity financing or other issuances on the cap table.
- Allocate payments in connection with a company sale.
- Understand basic math for pricing a new round.
- Understand dilution, which is the impact of new issuances on existing equity.
- Understand the impact of down-round pricing on the conversion terms of outstanding equity.
Capitalization Table Iterations
- Capitalization Table Version 1 includes Founder Stock.
- Capitalization Table Version 2 includes Founder Stock + Stock Options.
Version 1: Founder Stock Assumptions
- Two founders start a company.
- There is a single class of equity: all Common Stock.
- Founders split the equity equally.
- There is no option pool.
- Founder A owns 1,000,000 shares of Common Stock (50% of fully diluted shares)
- Founder B owns 1,000,000 shares of Common Stock (50% of fully diluted shares)
- Total shares: 2,000,000 (100% of fully diluted shares)
Version 2: Founder Stock + Options Assumptions
- Two founders start a company
- There is a single class of equity: all Common Stock
- Founders split the equity equally
- An employee option pool is authorized and fully allocated (20% fully-diluted)
- Founder A owns 1,000,000 shares of Common Stock (40% of fully diluted shares)
- Founder B owns 1,000,000 shares of Common Stock (40% of fully diluted shares)
- Employee S owns 500,000 shares of options (Common Stock) (20% of fully diluted shares)
- Total shares: 2,500,000 (100% of fully diluted shares)
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