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Month: September 2020

Stock Incentive Plan: A guide for first-time startups

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Startups usually begin with a small group of founders, and they may not hire employees for months or even years after forming. So you might think a stock incentive plan — usually considered a motivational tool for employees —  is something a startup can wait to set up until the venture is ready to hire.  In reality, a stock incentive plan is a powerful tool founders can use to incentivize employees, advisors and contractors, so a startup should adopt a stock incentive plan as soon as it is formed.  What is a Stock Incentive Plan?  Cash-poor startups with no revenue don’t have the means to pay employees attractive salaries, but they can make up for the lack of cash by  paying for services with its shares. You will be surprised by how many people are willing to work for equity because of the allure of the prospect of a big payoff down the road when the startup sells or goes public.  A stock incentive plan, or stock option plan, creates a method to dole out shares as compensation as soon as the advisor, employee, or contractor starts providing services. Also, you can keep these persons engaged with time-based vesting, so … Read more

What is a Cap Table? Why is It Important?

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“I’m an entrepreneur because I like working with spreadsheets,” said very few startup founders ever. But all founders need to embrace at least one spreadsheet: their company’s cap table.  A cap table – formally, a capitalization table – seems simple on a basic level: it’s the current record (usually in Excel form) of equity ownership in a company. A cap table lists all the persons who currently own shares, warrants, options, convertible notes, or SAFEs of a company, and the value of that equity, adding up to the total market value of the company.    In practice, cap tables can get complex quickly. Once a company moves past the early stages and adopts a stock incentive plan or takes on different investment instruments such as convertible notes and SAFEs, the founders will begin facing dilution, which means their ownership percentage in the company will begin to change as the company’s shareholders increase. These different factors layered with variables such as individual vesting schedules, means that the job of answering the question of “who owns what?” when considering the company’s ownership is no longer a simple calculation.   As a founder or co-founder you do not want just any cap table solution, but … Read more

What is a Startup?

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When you hear “startup,” what comes to mind?  Maybe you think of new high-tech ideas being deployed on apps and companies poised to be the next Facebook, LinkedIn, or Uber. Or maybe you think of startups more along historical lines, with tales of technology giants who started in garages, such as Apple in the 1970s (although that story may be more myth than fact).  What about socks? Founded in 2009, sock and underwear maker Stance “saw a category that had been ignored, taken for granted, looked over, and dismissed,” as the firm’s website says. Stance, based in Orange County, Calif., has gone on to raise $116 million in venture capital over five funding rounds, including investments from Menlo Ventures and August Capital.  But socks, dating back to ancient Greece, are decidedly low tech. So can we call Stance a startup?  What Exactly Is a Startup?   “Startup” is an informal term, and while it does conjure images of new technology and famous Silicon Valley brands, a company can be a startup and have nothing to do with tech or the Bay Area.  In the very simplest terms, a startup is a young company. Usually, however, “startup” implies a number of other … Read more

What Is a Venture Capitalist?

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It’s a familiar story: a venture capital firm invests in a small technology startup that goes on to see huge growth and an eventual sale to a large tech company like Facebook or a successful IPO, giving the venture capital firm a massive return on its initial investment.  Although that may sound like a scenario exclusive to dot-com booms and startups in the 21st Century, it’s also the story of American Research and Development Corp. and its 1957 investment in Digital Equipment Corp. (DEC), which arose in the Boston area, not Silicon Valley. Led by Georges Doriot, often called ”the father of venture capital,” ARDC’s $70,000 investment in DEC grew to $355 million — 500 times ARDC’s initial investment — when DEC held its initial public offering in 1968. (For a great biography of Georges Doriot, please read Creative Capital: Georges Doriot and the Birth of Venture Capital, by Spencer E. Ante.) Although they’ve been around a while, the lore of venture capitalists (or VCs) is most strongly tied to the startup culture that first emerged from Silicon Valley in the late 1990s and continues to this day. You may have heard heady tales of fantastic riches (and disastrous dot-com … Read more

StartupProgram.com Academy: Legal and Economic Education for Entrepreneurs

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You’re an entrepreneur and founder of a new startup, with a great idea and the beginnings of a great team. You have a vision for your future – maybe it includes a big exit by going public with an IPO or being purchased by a tech giant. Your plans definitely include securing angel and venture-capital financing to help realize your dream.  But in order to make those dreams a reality, you’ll need something more: the knowledge and plans to build your startup’s legal and economic engine. You may know your tech, product and customers inside and out;  but having the same depth of understanding of the economics and legal structure of your startup is just as critical to its success.  That’s why we created StartupProgram.com Academy, a comprehensive, interactive online video lecture series that teaches you how to launch your startup properly, as well as truly understand your equity position so that you’re ready to win when negotiating with venture capitalists. Venture Economics and Law for Entrepreneurs The curriculum, presented as a series of video lectures with accompanying quizzes and reference materials, is composed of three courses:  Venture Economics 101: Tightly integrated with the StartupProgram.com cap table, this series gives … Read more

Introducing the StartupProgram.com Cap Table

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More than any other tool, your cap table is essential to planning the formation of your business and charting its financial future. StartupProgram.com’s cap table – we call it the Debt Equity Model – is laser-focused on providing founders of venture-backed companies the best possible insight into their future finances. Cap Table Basics A capitalization table, traditionally a spreadsheet, sets forth each person’s stock ownership and ownership percentage in a company.  A pro forma cap table models the effect of selling stock or convertible notes and SAFEs on share price, dilution to the existing stockholders, and the potential outcomes for the investors in a sale of the business. Consulting your cap table and running pro forma scenarios for each financing is critical when negotiating with venture capitalists and other investors — without thoroughly understanding the impact of investment on your cap table during your negotiations creates a risk of handing over too much control of your company to your investors and reducing the founder’s and current stockholder payoff when you sell your business or go public (IPO). What’s more, venture capitalists will want to review your cap table to understand your company’s equity distribution before investing in your company. In … Read more

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