Tim Draper walks through how startups divide shares when taking investment. He uses a concrete example: 1.5M shares split 150k to 1.35M, then explains employee option pools (10-20%), 4-year vesting with a 1-year cliff, and double-trigger acceleration clauses that protect founders if the company is acquired.
Chapters
So we now have a capitalization of 1.5 million shares, and I own 150, and you own 1.35.
1.35.
Okay, but then I say, wait a second, I don't want to give you the full 1.35, or I'm not happy with this yet. I want another 10% to To go to future employees of your business. So we want to build that in. So in effect, that is a negotiated term. And I might say, I want 20% for future employees. And you say, well, look, I think I can do it with 15% or whatever. So let's say we end up with 10% for future employees. So another 150,000 shares, they come out of you because we're still in negotiation here. And you might say, well, wait a second, if I'm going to do that, I want to up the valuation or whatever. Things can change during the negotiation, but let's say they didn't. And then you are now at 1.2 million shares, 150,000 are now mine, and 150,000 go to future employees. Those have been allocated. But they have not been issued to any of the employees. And they will come in a certain form, you'll see what we do with employees, which is sometimes quite different from founders and sometimes exactly the same. So it's a certain amount of preferred stock and then we just say what's the grand total and then how much buys how much of the company, that's easy. Okay, this is what happens with your shares And the employee shares may be different. So we sit there and we say, okay, well wait a second. You got to work on this thing for a while for you to— we're going to have you earn these shares over time. You get them if you sell the business, you get them, go ahead. Well, wait a second. No, that isn't true either. There's a program for that. So what happens here is the common stock vests 25% at the end of the first year of full-time employment, and at the rate of 1/48th per month thereafter. So you are getting your shares, you have them, they're there, you just have to keep working for the company in order to keep them, in order to get them to vest. Vest is the term there.
For 4 years.
For 4 years. You get a quarter of them, so you were at 1.2, right? So you'll get 300,000 of them on the end of the first year. Now if you've already been working at the company for 3 years, you might say, well look, you got to vest half of it now. But if you've just started and it's raw startup, this is probably fair that you earn your shares over time because at As an investor, if you leave, I'm going, well, what am I supposed to do? He's not working there anymore, and he's left, and I have no shares left to give anybody. And it's actually probably in your interest to have some shares available for somebody else to come in and take them. After a time, some of this, it's interesting, all of it can be renegotiated People have figured out ways to renegotiate it if things aren't going the way everybody had planned them. So you can get— and then 1/48th per month thereafter with respect to stock granted prior to an IPO. Should be no accelerated vesting of the common stock in the event that the company is acquired or merged. So that's a negotiated point. You might say, well, look, If after 3 years I sell this thing, you're making a ton of money, I want at least 1-year acceleration or I want the acceleration halfway to wherever I am. You guys get that? So if you want that accelerated and a lot of this happens during mergers where when a company gets merged with another company, it turns out the CEO The CFO always gets fired because you never need 2 CFOs managing the money, right? So there's always something— there's something called a double trigger, which means if we're merged and I get fired, then all my stock comes back to me. Or if we're merged and I get fired, I get at least half of the remaining stock vested back to me.
What if you didn't get it all, then when would you get it, just over time if you weren't even working for the company anymore?
No, you'd just lose the rest.
Lose it?
Yeah, because you're no longer working with the company. That's why they have that double trigger for people who are going to get fired. It just goes into the treasury of the company. It isn't an individual, the company. So the rest of the stock is undiluted.
That looks unfair. If you're a super person and was able to sell your business the first year, you get only 25% of your share.
Right. So you can— this is something to negotiate. You say, well, wait a second. If I'm super and I've made all this money, Now, you can negotiate that going in and you can also negotiate it going out, sometimes. Generally, it leaves a bad taste in their mouth if you negotiate it going out, but it can actually happen, particularly if you're in a position of power. Sometimes you're not. Sometimes you're selling the company, but you are not in a position of strength when you're selling the company. So it's good to nail this stuff down. At the beginning.
