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Dividing Startup Equity

TBJ Investments, LLC
TBJ Investments, LLC

Timothy Jones provides advice on dividing startup equity based on his experience as a founding CEO, early employee, university spinout, VC, and limited partner who has viewed over 1000 deals. He recommends that equity belongs to the role not the person, everyone should vest over time, it generally takes seven long years to know if a startup will succeed or fail, and the Pareto principle suggests founders and early employees will typically end up with 20% ownership while investors own 80% after multiple funding rounds. He also stresses the importance of leaving room in the stock pool to recruit future hires and maintaining tax efficiency.

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Dividing Startup Equity Timothy Jones, TBJ Investments
Background 7X Startups 3x Founding CEO 2X Early Employee IPO 2X University Spinout 2 Years as VC 22 Years as VC Limited Partner 1000+ deals viewed TONS of mistakes
It is better to own a slice of a watermelon, than the whole of a grape - Richard Brock, Founder of Brock Control Systems
A Few Things Learned Along The Way Equity belongs to the role, not to the person Everyone vests Seven Long Years Pareto Principle of Ownership; 80/20 Leave room in the stock pool to recruit your future hires Rule of 10 Alignment of incentives => success in the long run Tax ef鍖ciency is more important than you think The IPO as a beginning
Equity Belongs to the Role, not the Person Common Mistake: Assigning too much equity to early employees based on join date, not: Span of control Level of responsibility Impact factor at stage of growth Better Approach: Outline how much equity is needed over the life of the company Assign and stage equity by the role and the stage The 鍖rst sales rep is not = later stage VP of sales Equity is never owned, only rented The longer the rental, the greater the reward If early employees grow with the company, they receive equity grants at the new levels Fairness isnt a normal distribution Fair should be viewed in the eyes of whats good for the company, not an equal distribution of equity Providing maximum equity to a few people driving value creation is fairness
Everyone Vests Regardless of level, everyone vests in their stock grants over time. EVERYONE My POV: Four-year vesting schedule with one-year cliff is standard Five-year vesting schedule with two-year cliff is better Why vesting? People lose interest, momentum or run out of talent When that happens, they should leave with what theyve accrued through performance Not what they acquired at founding by buying stock outright Equity owned by the departed distorts the cap table, and makes the company hard to 鍖nance and recruit Even 10% owned by a departed early employee can be detrimental Circulating docs with each funding round becomes a paper chase This applies to founders, employees, advisors, board members. EVERYONE
Seven Long Years Ignore the vesting schedule; it always takes at least seven years to either: Know its not working Know that it IS working Get to the point of maturity where the venture is stable It might take less, it might take more, but buckle in for at least seven From an equity perspective: Assume full vesting of the initial package Have a plan to re-up/issue additional grants to keep early employees engaged
Pareto Principle of Ownership After multiple rounds of Angel and VC funding (From Seed through Series A-D), expect: 80% of the company to be owned by investors 20% by management and key employees The less $ you raise, the better the ownership ratio Sybase vs. Oracle Veeva Know this going in to adjust expectations: Founders and C-Level Hires: 2-5% VPs: .5-1.5% Directors: .25-.5% What you read on Techcrunch is the exception, not the rule
Dividing Startup Equity
Dividing Startup Equity
Dividing Startup Equity
Leave Room in the Pool Leave 10-15% of the equity in a stock pool in the beginning, untouched and unallocated Fuel that allows you to recruit in VPs/C-level hires who enable scale With every round of 鍖nancing, replenish the pool if possible Founders dilute, not the VCs Outside capital is the fuel that enables you to fund the company Inside Equity is the fuel that enables you to incentivize people needed to build the venture Put clawback/repurchase options in vesting agreements to replenish the pool
Rule of 10 Never run out of equity before the next round of 鍖nancing Second only to running out of cash is running out of distributable equity when you need to make key hires A good method is the Rule of 10 Each level is 1/10 the number of shares of the level most directly above CEO receives 1,000,000 shares VP receives 100,0000 Director receives 10,000 Manager receives 1000 Back of envelope calculation to maintain a margin of safety in equity allocation
Alignment of Incentives => Success in Long Run The best companies provide equity-based incentives for high performance Equity Incentives for performance align corporate goals with individual performance Developers with non-linear productivity/creation Sales people delivering elephant deals or revenue generating partnerships Equity awards need to be very visible, very public when performance-derived Developers driving Ferraris Incentivize everyone to increase their ownership potential => creates a more valuable company Equity awards to non-founding employees do wonders for motivation and morale Oracle Secretaries
Tax E鍖ciency Is More Important Than You Think The Long Term Capital Gain shot clock is your friend Founders should exploit 83(b) Election ASAP after founding QSBS Election under Section 1202 is another founder/investor bene鍖t
The IPO as a Beginning The day you go public is pretty anticlimactic Everyone becomes a stock analyst Rule 144 and lockup periods The Little Old Lady with 1 share Pro Tip: More wealth is created AFTER the IPO in the best companies Google, Amazon, etc. => Build for the truly long term; Do I want to own this two decades from now?
Resources High Tech Startup, John Nesheim Engineering Your Startup, John Nesheim Family Fortunes, Bill Bonner Early Exits, Basil Peters
Thanks for your time! Contact: tbj@tbjinvestmentsllc.com https://www.linkedin.com/in/timothybernardjones/ https://angel.co/p/timbeejones

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Dividing Startup Equity

  • 1. Dividing Startup Equity Timothy Jones, TBJ Investments
  • 2. Background 7X Startups 3x Founding CEO 2X Early Employee IPO 2X University Spinout 2 Years as VC 22 Years as VC Limited Partner 1000+ deals viewed TONS of mistakes
  • 3. It is better to own a slice of a watermelon, than the whole of a grape - Richard Brock, Founder of Brock Control Systems
  • 4. A Few Things Learned Along The Way Equity belongs to the role, not to the person Everyone vests Seven Long Years Pareto Principle of Ownership; 80/20 Leave room in the stock pool to recruit your future hires Rule of 10 Alignment of incentives => success in the long run Tax ef鍖ciency is more important than you think The IPO as a beginning
  • 5. Equity Belongs to the Role, not the Person Common Mistake: Assigning too much equity to early employees based on join date, not: Span of control Level of responsibility Impact factor at stage of growth Better Approach: Outline how much equity is needed over the life of the company Assign and stage equity by the role and the stage The 鍖rst sales rep is not = later stage VP of sales Equity is never owned, only rented The longer the rental, the greater the reward If early employees grow with the company, they receive equity grants at the new levels Fairness isnt a normal distribution Fair should be viewed in the eyes of whats good for the company, not an equal distribution of equity Providing maximum equity to a few people driving value creation is fairness
  • 6. Everyone Vests Regardless of level, everyone vests in their stock grants over time. EVERYONE My POV: Four-year vesting schedule with one-year cliff is standard Five-year vesting schedule with two-year cliff is better Why vesting? People lose interest, momentum or run out of talent When that happens, they should leave with what theyve accrued through performance Not what they acquired at founding by buying stock outright Equity owned by the departed distorts the cap table, and makes the company hard to 鍖nance and recruit Even 10% owned by a departed early employee can be detrimental Circulating docs with each funding round becomes a paper chase This applies to founders, employees, advisors, board members. EVERYONE
  • 7. Seven Long Years Ignore the vesting schedule; it always takes at least seven years to either: Know its not working Know that it IS working Get to the point of maturity where the venture is stable It might take less, it might take more, but buckle in for at least seven From an equity perspective: Assume full vesting of the initial package Have a plan to re-up/issue additional grants to keep early employees engaged
  • 8. Pareto Principle of Ownership After multiple rounds of Angel and VC funding (From Seed through Series A-D), expect: 80% of the company to be owned by investors 20% by management and key employees The less $ you raise, the better the ownership ratio Sybase vs. Oracle Veeva Know this going in to adjust expectations: Founders and C-Level Hires: 2-5% VPs: .5-1.5% Directors: .25-.5% What you read on Techcrunch is the exception, not the rule
  • 12. Leave Room in the Pool Leave 10-15% of the equity in a stock pool in the beginning, untouched and unallocated Fuel that allows you to recruit in VPs/C-level hires who enable scale With every round of 鍖nancing, replenish the pool if possible Founders dilute, not the VCs Outside capital is the fuel that enables you to fund the company Inside Equity is the fuel that enables you to incentivize people needed to build the venture Put clawback/repurchase options in vesting agreements to replenish the pool
  • 13. Rule of 10 Never run out of equity before the next round of 鍖nancing Second only to running out of cash is running out of distributable equity when you need to make key hires A good method is the Rule of 10 Each level is 1/10 the number of shares of the level most directly above CEO receives 1,000,000 shares VP receives 100,0000 Director receives 10,000 Manager receives 1000 Back of envelope calculation to maintain a margin of safety in equity allocation
  • 14. Alignment of Incentives => Success in Long Run The best companies provide equity-based incentives for high performance Equity Incentives for performance align corporate goals with individual performance Developers with non-linear productivity/creation Sales people delivering elephant deals or revenue generating partnerships Equity awards need to be very visible, very public when performance-derived Developers driving Ferraris Incentivize everyone to increase their ownership potential => creates a more valuable company Equity awards to non-founding employees do wonders for motivation and morale Oracle Secretaries
  • 15. Tax E鍖ciency Is More Important Than You Think The Long Term Capital Gain shot clock is your friend Founders should exploit 83(b) Election ASAP after founding QSBS Election under Section 1202 is another founder/investor bene鍖t
  • 16. The IPO as a Beginning The day you go public is pretty anticlimactic Everyone becomes a stock analyst Rule 144 and lockup periods The Little Old Lady with 1 share Pro Tip: More wealth is created AFTER the IPO in the best companies Google, Amazon, etc. => Build for the truly long term; Do I want to own this two decades from now?
  • 17. Resources High Tech Startup, John Nesheim Engineering Your Startup, John Nesheim Family Fortunes, Bill Bonner Early Exits, Basil Peters
  • 18. Thanks for your time! Contact: tbj@tbjinvestmentsllc.com https://www.linkedin.com/in/timothybernardjones/ https://angel.co/p/timbeejones