21. Equity and Inequity Flashcards
What is equity?
The value of the shares issued by the company.
When is equity given?
- When you found it
- When someone joins it
- When someone invests
Observation
The amount of equity given should be proportional to the risk taken,
You never want a tie. If you must split “evenly” do it 50.001 vs 49.999.
If you can tie, you can be blocked from making any decision.
Observation
People are added to the company in waves or layers.
founders, first employees, etc.
each wave is larger than the last. later waves take less risk.
Technique
Allocate shares such that each wave gets the same amount of shares and that the total of all waves of hiring is equal to the founder shares.
Important
Always vest shares (yes, founders too!)
typical schedule 4 years: 25% after 1st year then 2% each month
share should be allocated but not immediately distributed
never trade away your equity b/c we don’t know what the shares are worth.
Question to ask yourself when considering investment
If expenses remain constant and growth doesn’t change, can you reach profitability on the funds you have left?
W: runway (in weeks)
S: spending (per week) fixed
R: revenue (per week), growing
C: Capital
G: growth, fixed
can you reach profitability on the funds you have left?
https://growth.tlb.org/
A VC bets on the future. They expect a % return
% return = ($ exit / $ invested) ^ 1/n - 1
% return depends on the stage
What is preferred stock
A different “class” than common.
Has additional rights such as:
- liquidation
- pro-rata (buy into subsequent rounds)
- voting (vote on company matters)
- participation (payback + common)
- dividends (regular priority payments)
What is a convertable note
- a loan, interest <= 8%
- investment+interest converts equity conditionally
- discounted, capped, and collared
- some rights (pro-rata, eta)
- notes don’t vote!
