EQUITY MATH

| May 2024

Stock Option Plans

| Equity Math - Stock Option Plans

​

Upon incorporation, stock option plans are established�with founders and early stage investors.

• Vesting vs. grants
• Milestones and deliverables

​

Vesting period can be 2, 3, or 4 years

Acceleration?

• Change of control
• Termination without cause

​

We recommend that one founder has a larger share of equity (even 0.1%-0.5%).

This ensures there is no stalling of company decisions due to an equal vote.

Founders Equity

| Equity Math - Founders Equity

​

Every company starts off in a good place where founders love each other

• Expect the worst
• What is the best way to divide ownership?

​

​

The Grunt Fund Method

• Work and/or money contributed
• Fair startup equity calculator

​

Keep in mind that VCs will often update your ownership structure as a condition of providing funding

​

Startup Company Equity Model�The Expanding Pie

| Equity Math - Startup Company Equity Model

1 . Formation of Company

• Founders A, B and C each purchase 2,000,000 shares of Common Stock at a purchase price of $.001 per share.

​

| Equity Math - Startup Company Equity Model

2 . Hiring of CEO and Establishment of Option Plan

• The Company hires a CEO who purchases 2,000,000 shares of Common Stock $.01 per share.
• Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan and reserves 2,000,000 shares of Common Stock for issuance under this plan.
• The pre-financing valuation is $60,000 and the post-financing ownership structure and valuation are depicted in the following table and pie chart.

| Equity Math - Startup Company Equity Model

3 . Seed Round

• The Company needs capital to complete product development.
• Accordingly, the Company completes a $1,000,000 venture capital financing at a purchase price of $0.10 per share Pre-financing valuation of $1,000,000 (10,000,000 shares with a value of $0.10 per share).
• The shares sold in the financing are typical, venture capital Series A Preferred Stock with each share of Series A Preferred Stock being convertible into one share of Common Stock.

| Equity Math - Startup Company Equity Model

4 . Series B Preferred Stock Financing

• An additional $5,000,000 will be required to complete development plus sales and marketing.
• Accordingly, the Company undertakes a $ 5,000,000 Series B Preferred Stock financing at a price of $0.50 per share, representing a pre-financing valuation of 10,000,000 (20,000,000 shares with a value of $0.50 per share).

​

5 . Initial Public Offering

• The Company decides to undertake an initial public offering.
• As a result of the offering, the shares of Series A and Series B Preferred Stock held by the venture capital investors will be automatically converted into Common Stock at the conversion rate of 1 share of Common Stock for each share of Preferred Stock, and all shares sold in the offering will be Common Stock.
• A total of 10,000,000 are to be sold by the Company. The shares will be sold at a price of $2.50 per share, representing a pre-financing valuation of $75,000,000 (30,000,000 shares with a value of $2.50 per share).

| Equity Math - Startup Company Equity Model