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3/2017!DRAFT!TLA!Capitalization!Table!Considerations! ! Page!1 ! of!5 !!
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Capitalization*Tables*and*Operating*Agreements*
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What!is!a!capitalization!table?!!
A!capitalization!table!(cap!table)!identifies!shareholders!and!their!percentage!equity!ownership!in!the!
company.!!!A!cap!table!will!also!reflect!change!in!ownership!and!value!over!time,!and!may!include!shares!
for!future!emp lo yee s.!!!For!example,!as!investors!or!key!partners!join!the!team,!the !perc en tage !of!
ownership!will!change!–!but!typically,!com pan y!valuation!increases,!so!the!value!of!that!percentage!is!
much!greater.!There!is!no!one!right!way!to!create!a!cap!table;!each!is!unique!and!reflects!the!nature!of!
the!compa ny .!!The!wrong!way!–!NOT!creating!a!founders!agreement!and!cap!table!or!waiting!until!later.!!
If!you’re!g o in g !to !a rg u e !about!it,!better!do!it!now!when!you!don’t!have!investors!or,!worse,!em p l o y e e s!
(“Mom !an d!da d!a re!figh ting!a ga in”). !
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The!cap!table!and!associated!founder’s!ownership!is!an!area!many!startups!don't!think!about,!especially!
if!the!foun d e rs !ar e!fir st!t ime!entrep re n e ur s.!!F o u nd e rs !ty pica lly!divide!the!compa ny!with!shares!of!
ownership!(or!stock)!and!then!return!to!developing!the!technology.!!W hat!if!a!founder!decides!to!leave!
the!compa ny !or!becomes!a!problem?!!Life!happens,!so!be!ready.!
• have!a!great!honest!relationship!with!your!team!
• completely!discuss!everything!as!clearly!and!honestly!as!you!can!
• put!your!agreements!in!plain!terms!
• at!some!point!you!can!and!should!make!things!legal!and!official!
• bottom!line!-!you!need!partners!you!can!trust!-!no!amount!of!legalese!will!make!things!work.!!
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Three!stages!in!a!company’s!life:!
-!Founding.!!The!co mp any!has! ca sh!from!the!founders!a nd !yo u!get!no!money!out!of!the!company.!!The!
company!will!probably!fail,!you!will!lose!all!the!money!you!put!in,!you!have!lost!salary ,!an d !y o u!h a v e!t o!
find!a!new!job .!
-!Startup.!!The!co m p a n y!h a s!m o n e y,!fro m!investors !or!fr om!sales,!and!y ou!regularly!get!some!of!that!
money,!though!you r!s a la ry !is !lo wer!tha n !th e !market .!!There!is!still!a!50%!chance!the!compa ny !will!fail!
and!you!have!to!find!a!new!job.!!In!addition,!you’ve!lost!the!difference!between!your!startup!salary!and!
BigCo!salary.!
-!Real*company.!!You!get!a!market!rate!salary!an d!it’s!unlikely!the!com p an y!will!fail.!!If!it!does!fail,!you r!
downside!is!limited!to!unemployment.!
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If!you!are!working!for!a!new!company!that!cannot!pay!you,!you’re!a!founder.!!If!you!have!a!salary!on!
your!first!day,!you’re!an!e mploye e .!
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Different!company!structures!handle!equity!shares!differently!and!therefore!cap!tables!vary.!TLA!looks!
to!the!business!lea d!to !dete rm ine !the!be st!co m pa ny !structu re!an d!ca n!p rov ide!ge ne ral!guid an ce!an d!
attorney!referrals.!
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University!warrants!
UA!is!unable!to!hold!equity!in!a!startup!com p an y.!Th e re fo re !the !U A !tak e s!w a rra nt s,!w h ich !p ro vid e!the!
university!with!the!ability!to!purchase!stock!in!the!company!in!the!future!at!a!fixed!price.!The!warrant!
percentage!will!vary,!and!reflects!the!research!value!invested!by!the!UA!into!the!IP!prior!to!license.!This!
is!a!com mon!prac tic e!a mong!un iv er sitie s !an d !re fle ct s!t h e!v alu e !o f!th e !IP ;!if!yo u !h a ve !q u es tio n s !ab o u t!U A!
warrants!or!licensing,!please!contact!TLA.!
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Equity!distribution!for!a!university!spinout!
Should!inventors!retain!100%!of!the!startu p!e qu ity?!!Keep!in!mind!that!while!the!research!lead ing!up !to!
this!invention!m ay!h ave !requ ired !years !of!ha rd!w ork ,!this!is!only!the !beg innin g!for!a!co m p an y.!Building!a!
successful!and!financially-viable!company!requires:!
• company!formation!with!appropriate!corporate!governance,!!
• advisors!and/or!Board!of!Directors;!!
• team!form ation ;!!
• customer!validation;!
• competition!analysis!and!market!opportunity;!!
• a!plan!to!transform!the!invention!into!a!sellable!product;!
• ongoing!product!development;!
• support;!!
• IP!prote ct io n ;!!
• plan!for!regulatory!requ irem en ts;!!
• operations!and/or!manufacturing!plan;!!
• financial!forecas ts,!valu atio n,!cap ital!ne ed ,!use !of!fun ds !and !relev an t!strate gy;!!
• ongoing!sales!and!marketing!strategies.!
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And!so!on,!depending!on!the!nature!of!the!company,!produc t,!and!industry.!!
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The!best!successes!come!when!someone!from!the!inventing!team!is!able!to!serve!as!the!technology!
champion!for!the!startup,!partnered!with!a!business!cofounder!who!has!relevant!industry!and!startup!
experience.!UA!inventors!have!the!unique!opportunity!to!continue!their!research!on!campus!while!
taking!a!second ary !role!in!the !startu p!co m pa ny ,!so!findin g!an d!en gag ing!a!stro ng !bu siness !cofo un de r!is!
critical!to!the!success!of!the!startup!company.!TLA!works!with!inventors!to!determine!the!best!approach!
and!engage!appropriate!mento rs,!ad visors !and !bu sine ss!pa rtne rs.!
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In!man y !cases,!the !cofound ers!will!split!ownership!equally;!this!is!a!quick!and!simple!method!for!creating!
a!cap!table!but!may!not!necessarily!reflect!the!future!contributions!each!cofounder!makes!to!the!
success!of!the!company,!nor!does !it !in c lu d e !p ossible!o wnersh ip !f o r!n e w!emp lo y e e s.!Here’s!an!example!
of!a!straightforward!equal!distribution.!For!the!sake !o f!th is!ex a m p le ,!UA !is!a ss ign ed !8 % !w a rra n ts:!
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Another!common!practice!is!the!contribution!or!scorecard!method;!this!allows!the!team!to!value!both!
current!and!future!contributions!each!cofounder!m a y!bring!to!the!company!in!key!areas,!like:!ability!to!
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3/2017!DRAFT!TLA!Capitalization!Table!Considerations! ! Page!3 ! of!5 !!
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successfully!execute!the!business!and!financial!plans;!industry!and!startup!expertise;!initial!invention;!
and!ongoing!product!development.!This!is!a!good!opportunity!to!begin!the!discussion!and!understand!
each!cofounder’s!interests!and!expectations.!!Also,!consider!who!is!working!full!time!versus!part!time.!!If!
you!are!working!more,!you’re!also!risking!more!if!the!company!fails!
Part-time!cofoun de rs!m ay!b e!a!m inu s!to!so m eo ne !con side ring!an !inve stm en t.!!!!
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Here!is!an!example!based!on!your!market!salary,!and!direct!contribution,!and!includes!pre-!and!post-!
investment!ow ne rship!(aka!pre-/po st-!money):!
!
Yrs!
Partner!
2!yr!
wage!
Market!
wage!
Sweat!
investm e n t!
Direct!
investm e n t!
Intangib le !
Pre!
Angel!
Post!
Angel!
2!
1!
$10k!
$93k!
$166k!
$10k!
!
12%!
11%!
2!
2!
$30k!
$98k!
$136k!
0!
!
9%!
8%!
2!
3!
0!
$83k!
$166k!
$5k!
!
12%!
10%!
2!
4!
$22k!
$77k!
$110k!
$5k!
!
8%!
7%!
1!
CEO!tbh!
0!
$250k!
$250k!
0!
!
17%!
15%!
1!
Sales!tbh!
0!
$180k!
$180k!
0!
!
12%!
11%!
5!
New!tbh!
employees!
!
$90k!
$450k!
0!
!
30%!
27%!
!
Total!
!
!
!
$20k!
!
100%!
90%!
!
!
!
!
!
!
!
!
!
Investo r!Sh ares!
!
Angel!1!
!
!
!
$10k!
!
!
5%!
!
Angel!2!
!
!
!
$10k!
!
!
5%!
!
New!total!
!
!
!
!
!
!
100%!
!
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TLA!can!facilitate!a!discussion!as!needed.!Following!the!example!below,!the!cofounders!rated!their!own!
contributions!to!the!startup!success!in!four!areas!outlined!to!the!right!of!the!chart:!initial!invention,!
ongoing!product!development,!business!plan!execution!and!startup!expertise.!Their!equity!position!in!
the!compa ny !wa s!ad juste d!ba sed !on !that!co n tributio n:!
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Looking!at!other!startup!companies!in!the!same!industry!may!offer!guidelines!on!how!to!distribute!
equity,!and!is!helpful!when!thinking!about!compensation!for!specific!roles!like!software!engineers!or!
future!executive!hires.!In!a!C-Corp,!the!cap!table!may!include!an!equity!option!pool!–!equity!side!aside!
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3/2017!DRAFT!TLA!Capitalization!Table!Considerations! ! Page!4 ! of!5 !!
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for!future!hires.!Follo w ing !belo w !is!a!common!t able!used!currently!in!the!Bay!Area!for!software /IT!
companies!for!future!hires:!!
(TABLE*NEEDS*UPDATING)**
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Role*
Founder*positions*
(undiluted) *
Non-founder*hired*
positions*(diluted)*
!!
Low!
High!
Low!
High!
CEO!
20%!
51%!
5.0%!
10.0%!
COO!
10%!!
25%!
2.0%!
5.0%!
VP!
5%!!
15%!
1.0%!
2.0%!
Board!Member/advisor!
!0.5%!
!3%!
0.5%!
1.0%!
Director!
2%!!
10%!!
0.4%!
1.25%!
Manager!
1%!!
5%!!
0.2%!
0.3%!
Lead!engineer!
0.5%!!
3%!!
0.5%!
1.0%!
Experienced!engineer!(5+!years)!
0.25%!!
2%!!
0.3%!
0.7%!
Junior!Engine er !
0.1%!!
1%!!
0.2%!
0.3%!
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Other!cap!table!questions!
Cap!tables!will!vary!from!LLC!to!C-Corp!as!will!language,!and!number!of!shares!will!be!determined!based!
on!different!factors.!A!big!consideration!is!valuation,!and!there!are!many!methods!to!consider.!The!
Angel!Capital!Association!provides!exceptional!examples!and!insights,!including!the!most!common!
current!method!called!Scorecard!–!this!method!compares!the!company!to!typical!angel-funded!startups!
and!adjusts!the!valuation!based!on!regional!activity,!and!then!on!key!success!factors!for!the!company!
including !management!team!(30%);!size!of!opportunity!(25%);!product/technology!(15%);!comp e titive!
environment!(10%);!and!marketing/sales!partnerships!(10%).!
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Often!startup!companies!will!begin!with!one!or!a!combination!of!the!methods!outlined!above,!and!then!
readjust!the!cap !tab le!w ith!the !first!outsid e!eq u ity!inve stm en t!activity .!
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Some!additional!thoughts!about!founder’s!agreem ents!and!shares!of!the!company!for!founders.!
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• These!shares!are!made!subject!to!a!"right!of!repurchase!in!favor!of!the!company”!
• Restrictions!"lift"!over!time,!meaning!that!as!time!goes!on,!fewer!shares!are!subject!to!this!
repurchase !agree m e nt.!(exa m p le!get!1 000 !sha res!-!250!per!year!lift)!
• The!advantages!favor!the!founders.!!!
o Allow !th e!o wner!to!vo t e!t h eir!s h a res !without!restriction!if!the!founder!is!still!with!the!
company.!!!
o Holding!period!for!tax!purposes!begins!at!the!company's!founding,!not!at!option!
exercise.!!!
• Include !accelerators!in!the!event!of!a!liquidation!or!sale!of!the!company!to!protect!fo un de rs!in!
the!case!of!chan ge !in!role!or!lea de rship.!!Y ou !ca n !in clu d e!a cc e lera to rs!s o!immed iate ly!p rio r!to !a n!
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3/2017!DRAFT!TLA!Capitalization!Table!Considerations! ! Page!5 ! of!5 !!
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acquisition!or!liquidation,!or!upon!termination!immediately!preceding!such!an!event,!all!(or!
some)!of!the!restrictions!disappear.!!
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ABOUT!Tech!Launch!Arizona!
The!UA!created!Tech!Launch!Arizona!(TLA)!to!move!inventions,!technologies!and!intellectual!property!from!the!
laborator y!o u t!in to !t h e!marketplac e.!T h e !TL A !V en t u re!D e v elo p ment!team !is!c o mmitted!to !th e!d e ve lo p ment,!
preparation!and!success!of!new!ventures!that!license!and!commercialize!these!assets.!
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If!you!hav e!a n y !q u e stio n s !a b o u t!th e !s tartup!process,!please!contact!your!MIR!or!license!manager.!
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Other!resources:!
Valuation!and!how!to!calculate!with!examples:!
https://en.wikipedia.org/wiki/Pre-money_valuation!