Throughout this guide numerous mini-infographics illustrate the key concepts founders need to know and show the relationships between stock option grants, vesting timelines, exercise timing, and associated tax implications.
In detail, this Founder’s Pocket Guidewalks entrepreneurs though the following elements:
Startup Equity Compensation Basics: Sharing Equity with Your Team
The first section of this guide is structured to help founders build a base of understanding about the numerous definitions and terminology related to startup equity compensation and stock options. Topics covered include:
· A brief refresher on startup equity in preparation for delving into the details of stock options and other forms of equity compensation.
· A quick review of how startup equity ownership is shared between the various stakeholder of a startup including the founders, investors, and employees.
· The fundamental mechanics of how startup stock options work, including option grants, exercising, vesting, and selling of stock shares.
· A detailed review of equity compensation terminology and definitions, such as vesting, strike price, fair market value, and spread.
· An explanation of each of the most common types of equity compensation including Restricted Stock, Incentive Stock Options, Non-Qualified Stock Options, and Restricted Stock Units.
Equity Compensation Types in Detail
The next section of this guide reviews each of the most common types of equity compensation, including detailed components such as tax implications, vesting and exercise parameters, and other IRS rules governing the ownership of each equity type. The following equity compensation types are covered:
· Restricted Stock (RS)
· Incentive Stock Options (ISOs)
· Early Exercise Incentive Stock Options (EE-ISOs)
· Nonstatutory Stock Options (NSOs)
· Early Exercise Nonstatutory Stock Options (EE-NSOs)
· Restricted Stock Units (RSU)
Establishing Your Startup’s Equity Plan
In the final part of this guide we dig deeper into the key areas founders need to consider when developing an equity plan for their startup, with specific focus on the following issues:
· When to implement a formal equity incentive plan
· What factors to consider when deciding how large the equity compensation pool should be
· How to decide employee equity award amounts at the different stages of a startup’s lifecycle
· What general steps to take to establish a equity compensation plan for your startup
· What key information that must be communicated to employees about equity compensation awards
· Which step-by-step calculations are needed to truly understand equity ownership percentages and value
· How IRS and SEC rules impact private company equity compensation
· The Startup Valuation Explorer
· Expanded coverage of Valuation Methods
· Responding to investor questions about your valuation
· Understanding option pool impact on your valuation
For many early-stage entrepreneurs assigning a pre-money valuation to your startup is one of the more daunting tasks encountered during the fundraising quest. This guide provides a quick reference to all of the key topics around early-stage startup valuation and provides step-by-step examples for several valuation methods.
This Founder’s Pocket Guide helps startup founders learn:
• What a startup valuation is and when you need to start worrying about it.
• Key terms and definitions associated with valuation, such as pre-money, post-money, and dilution.
• How investors view the valuation task, and what their expectations are for early-stage companies.
• How the valuation fits with your target raise amount and resulting founder equity ownership.
• How to do the simple math for calculating valuation percentages.
• How to estimate your company valuation using several accepted methods.• What accounting valuation methods are and why they are not well suited for early-stage startups.
In detail, this Founder’s Pocket Guide helps startup founders learn:
• What convertible debt is and how it can be an important fundraising structure.
• Key terms and definitions associated with convertible debt, such as conversion triggers, valuation caps, and conversion discounts.
• Key advantages and disadvantages of using convertible debt as a funding structure.
• How investors view the convertible debt, and what their expectations are for early-stage investment deals.
• Simple math for calculating the impact of conversion discount rates and resulting equity ownership on conversion.
• Example convertible debt deals illustrating how convertible debt benefits both founders and investors alike.
Expanding on these key skills every startup founder should know, this Founder’s Pocket Guide helps you learn how to:
• Build your basic cap table step by step, including founder’s shares, option pools, angel investor rounds, and VC rounds.
• Decipher cap table specific lingo, such as fully-diluted shares outstanding, preferred shares vs. common shares, Series A, Series B, and so on.
• Establish a stock option pool in your cap table and understand the option pool effect on founder dilution.
• Understand the simple math behind cap table formulas and calculations, including calculating fully diluted shares outstanding, investor equity ownership percentages, and share price.