If I were structuring a tech startup that met a few parameters (1. more than 1 founder; 2. intending on raising several rounds of VC; 3. intendingn a rather quick 4 to 5 year exit or less), here’s how I would structure it:
The Basics:
Incorporation structure:
- Entity Choice: Corporation (in some few circumstances an LLC works, but those are very specific).
- State of Incorporation: Delaware or Nevada. There are some reasons to do local, but you better have a good one.
- Authorized Number of Shares: At least 1,000,000, but 10,000,000 is a good number
- Type of Shares: Common Stock and Founders Stock - Common Stock for general purposes and growth. Founders stock for board control.
- Par Value of Common: as low as I can make it, usually $0.0001
- Initial Amount of Stock Issued to Founders: This depends on your corporate governance strategy. A lot of people like to authorize more shares with investment. I prefer to transfer already authorized shares. Leave 10% - 20% for an employee stock options pool, expect your first $1MM to take the largest chunk of stock per value, so leave 30% for investors, issue the rest to the founders.
- Founders Equity Split: This depends on the team, but sort it out before you invest money.....not after. Additionally, reward people based upon the roles they fill...aka if you are sales, reward not just in stock, but in money from the sales. If you are management or tech, reward them appropriately for hitting company or dev targets. Do not think of compensation and equity splits linearly. People have different roles and different contributions. Likewise, stock splits should not just be flat lined.
- Vest Founders Shares?: Yes, yes and yes. At least 4 years with a 1 year cliff...2 year cliffs aren't unheard of. I also like to see performance/time factors for the vesting schedule rather than just time, as sometimes relationships make it tough to part with friends
