Corporate Finance & Securities

Employee Equity Compensation Plan: How to Slice the Pie?

Startup founders will often wonder how much employee equity they should give.  While there is no bright line rule for how to allocate equity in your equity compensation plan, there are a number of factors to consider to craft the appropriate equity compensation plan for your startup.

Types of equity to grant

Equity can be broken up into common stock and preferred stock. It’s unusual for a startup to issue preferred stock to anyone but an investor in the company, so we’ll focus on common stock. Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the...

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Corporate Finance & Securities

The Low Down on Valuation Caps and Discounts in Convertible Notes

It is common for startups to raise early rounds of financing through convertible debt. Convertible debt, generally called a “convertible note,” typically converts into equity when the company raises another round of financing. In anticipation of the conversion, many investors will negotiate for valuation caps and discounts. In today’s post, I’ve highlighted the basics of valuation caps and discounts in convertible notes.

What is a Valuation Cap?

A valuation cap provides that the convertible note holders will convert their debt into equity at the lower of the valuation cap or the price in the subsequent round of financing. Without a valuation cap, the note holders would generally convert their debt into equity at the same price as the shares issued in the...

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Corporate Finance & Securities

The SAFE: Y Combinator’s New Security Seeks to Improve on Traditional Startup Financing Instruments

Y Combinator, a previous proponent of convertible debt, has unveiled a new type of investment security – the “simple agreement for future equity.” Or, as they’re abbreviating it, the SAFE. (I wouldn’t have advised calling it “SAFE,” as an investment in a startup is inherently risky. Despite the name, most investors should understand that just because it’s called SAFE does not make it a safe investment.)

Background

Security instruments are contracts by which companies exchange an interest in the company for consideration–usually cash used to finance the company. The SAFE is a contract that has some different features from traditional security instruments. To understand the SAFE, it’s helpful to have a grasp of the more traditional security instruments.

Common...

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Corporate Finance & Securities

Equity or Convertible Debt, What’s Right for Your Company?

Many of our clients that are looking to raise a seed-round financing have heard from friends or advisors that convertible debt is definitely the way to go. We often recommend equity rather than convertible debt, and we explain why below. Convertible equity (a twist on convertible debt), if done right, can be a good deal for both investors and entrepreneurs. The important thing is that everyone involved understands the difference between convertible debt (or convertible equity) and equity. It’s in that spirit that we authored this post.

Understanding the basics

Before you can understand the pros and cons, you need to make sure that you understand the basic features of convertible debt and equity.

Equity Investors get preferred stock. The preferred stock has all...

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