How to fairly split the equity pie

How to fairly split the equity pie

You’ve founded a company and you want to bring on some helpers and compensate them with equity. How much equity should you give them?

Most founders pull a number out of a hat when making this decision and hope for the best. This can lead to lots of problems, especially when you give different amounts to different people. Someone who gets less than someone else might feel undervalued and lose motivation. Hurt feelings and resentments can poison the company culture.

One of my clients recently told me about an approach to this issue called Slicing Pie. Slicing Pie works by tracking everyone’s contributions of time, money, resources, etc. and does not split the equity until a trigger event, such as raising money from investors, occurs. This means that the equity you receive reflects the actual contributions you made to the company.

I recently drafted a legal agreement for Slicing Pie. The way it works is that all early company helpers receive an equal amount of equity, but the equity doesn’t vest (i.e. become truly owned by the shareholder) until a trigger event. The amount of equity that vests depends on how much time, money, and resources each helper ACTUALLY contributed before the trigger event.

This method of dividing equity makes so much more sense because everyone understands up front what they need to do to earn more equity – there is nothing arbitrary or unfair about it. It also serves as a great motivator for contribution.

To your success!

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You’ve founded a company and you want to bring on some helpers and compensate them with equity. How much equity should you give them?

Most founders pull a number out of a hat when making this decision and hope for the best. This can lead to lots of problems, especially when you give different amounts to different people. Someone who gets less than someone else might feel undervalued and lose motivation. Hurt feelings and resentments can poison the company culture.

One of my clients recently told me about an approach to this issue called Slicing Pie. Slicing Pie works by tracking everyone’s contributions of time, money, resources, etc. and does not split the equity until a trigger event, such as raising money from investors, occurs. This means that the equity you receive reflects the actual contributions you made to the company.

I recently drafted a legal agreement for Slicing Pie. The way it works is that all early company helpers receive an equal amount of equity, but the equity doesn’t vest (i.e. become truly owned by the shareholder) until a trigger event. The amount of equity that vests depends on how much time, money, and resources each helper ACTUALLY contributed before the trigger event.

This method of dividing equity makes so much more sense because everyone understands up front what they need to do to earn more equity – there is nothing arbitrary or unfair about it. It also serves as a great motivator for contribution.

To your success!

What does it mean to Raise the Right Money from the Right Investors?

What does it mean to Raise the Right Money from the Right Investors?

I was at a great event last week called Food Funded. Kate Danaher of RSF Social Finance was speaking on a panel and said that she meets too many entrepreneurs who tell her that they have certain goals for their business but they have already raised money from investors in a way that is completely inconsistent with their goals.

A few years ago, I started telling entrepreneurs that they need to raise the Right Money from the Right Investors because I was seeing something similar to what Kate was talking about.

The Right Money means that the type of investment you are offering is designed so that your investors‘ interests and expectations are aligned with yours. For example, if you offer equity and never plan to pay any dividends, your investors are likely to expect you to sell the business as quickly as possible so they can get paid. If you don’t want to be pressured to sell the business before you’re ready, you should offer something different!

The Right Investors means that your investors share your goals and values, as well as your vision for the future of your business. They won’t pressure you to take things in a direction that doesn’t feel right to you.

Unfortunately, there are still far too many entrepreneurs that (usually inadvertently) take on the wrong money from the wrong investors.

If you are thinking about raising money for your business, I would love to talk to you about your strategy. My Women Raising the Right Money from the Right Investors mastermind program summer cohort is starting soon. If you’d like to learn more, click here.

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The Fastest Path to Cash for Your Business

The Fastest Path to Cash for Your Business

I have been working with entrepreneurs to raise capital for over 10 years.  This is the cheapest, fastest (legal) way to raise money from investors that I’ve found (and it only became available a couple of months ago)!

Step 1: Decide what you want to offer

There are many different types of investment instruments you can offer.

If you offer something simple, you don’t necessarily need to hire a lawyer to create your offering.

For example, you can download a simple promissory note which commits you to pay your investors a set interest rate (I recommend an annual payment, rather than monthly or quarterly, to make life easier) and pay back the principal on the maturity date which you should select based on your reasonable projection of when you will be able to afford to make that payment.

Step 2: Begin public offering under Rule 506(c)

Rule 506(c) allows you to publicly advertise your offering however you want.  Before anyone invests, however, you have to make sure they are accredited.

Under Rule 506(c)

  • There is no maximum raise amount
  • All investors must be accredited
  • You can do public advertising (email blasts, announcements at public events, social media, press releases, etc.)
  • You must file Form D with the SEC within 15 days after the first sale of securities
  • You must complete notice filings and pay fees in all states from which investments are made – this is where you might need to get help from a lawyer! Or you can call the relevant states for instructions

You can start reaching out to potential investors IMMEDIATELY under Rule 506(c) because there are no filing requirements until AFTER you have actually raised money.

You are not required to use any particular method to verify that all investors are accredited, but the SEC has deemed certain methods to be acceptable.

Step 3: Launch investment crowdfunding campaign on a JOBS Act Title III platform

To be able to launch under Title III, you need to make sure your financials meet the requirements for financials under Title III.  Once you have that in place, you just need to create your profile on the crowdfunding platform site.

Before launching under Title III, it is important to understand all of the requirements that go along with it such as ongoing reporting obligations that require you to post your company financials on your web site for anyone to see.

If you’d like to explore the options for raising capital for your business, apply for a strategy session.

Or attend our two-day training for women entrepreneurs, Fund and Fuel Your Dreams.

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The JOBS Act 101

The JOBS Act 101

Back in 2010, I was running the Community Supported Enterprise (CSE) Program at the nonprofit Sustainable Economies Law Center (SELC).

I had co-founded SELC with another attorney, Janelle Orsi, to help changemakers navigate the rules that could get in their way as they try to create a healthy, just, and sustainable economy.

That summer the CSE program had some great law student interns.  We decided to focus on changing the securities laws – the laws that govern how enterprises can raise capital from investors.

The interns drafted and I signed a petition for rulemaking to the Securities and Exchange Commission.  Our request was simple: exempt from any regulatory requirements an offering of an investment opportunity in which no investor could invest more than $100.  We figured that if the most that anyone could possibly lose was $100, requiring the enterprise to jump through a bunch of regulatory hoops was unnecessary.

The American Sustainable Business Council was an early supporter of the idea and they helped to promote it.  Amazingly enough, the idea started to spread and the White House endorsed the idea of an exemption from securities law requirements for investment crowdfunding.

On April 5, 2012, President Obama signed the JOBS Act.  It had changed quite a bit from our original proposal, but it did create several new exemptions for different types of investment crowdfunding.

Below is a summary of the new tools in the tool box created under the JOBS Act.  Note that even before the JOBS Act passed, investment crowdfunding was legal and had been legal for decades (see this post for more details on the pre- versus post-JOBS Act options).  However, the JOBS Act added some new legal compliance options for enterprises that want to be able to advertise their investment opportunities to everyone.

Title II of the JOBS Act – Rule 506(c)

This exemption allows a company to publicly advertise an investment opportunity and there is no cap on the amount that can be invested by each investor or the total amount raised.  However, under this Rule, all the investors must be accredited, which generally means individuals with at least $1 million in net worth (excluding their primary residence) or $200,000 in annual income.

Title IV of the JOBS Act – Regulation A+

This exemption allows a company to raise up to $50 million and ANYONE can invest – not just accredited investors.  The offering can be publicly advertised in all 50 states.  The downside is that the company must have audited financials and must complete a filing process with the Securities and Exchange Commission that can take approximately four months and costs $75-$125,000 in legal fees.  Once a company has raised money under Regulation A+, it can file to become a public company and its securities can be freely traded on an exchange.

Title III of the JOBS Act – Crowdfunding Exemption

This is the part of the JOBS Act that took the longest to go into effect – it took over four years for the Securities and Exchange Commission to complete the detailed rules governing how this exemption could be used and for the crowdfunding platforms authorized under the law to go through the registration process.

Starting on May 16, 2016, this part of the JOBS Act finally became available.  Here are the basic requirements:

  • You can raise up to $1 million per year
  • There is a per investor cap on the amount that can be invested: 5% of the lesser of the investor’s annual income or net worth (or 10% if the investor’s net worth and annual income are greater than $100,000)
  • Offerings must be conducted through a registered intermediary – you are not allowed to talk about the offering outside of the registered online crowdfunding portal
  • You can accept investors from all 50 states
  • If you’re raising more than $100,000, you have to get reviewed financials from a CPA
  • Your financials are public and must be available on your web site

These three new tools obviously all have their pros and cons as all capital raising strategies do.  It’s important to understand all of the options before choosing your strategy.

For a comparison chart of various crowdfunding options, click here.

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