Rules Of Thumbs

• When incorporating a new venture, a good rule of thumb is to authorize (or issue) 10 million shares @ 1/10 of cent. 50% of these shares should be issued to the founders (with a vesting schedule). 10% should be set aside for future employees. The remaining 40% will go to future investors.

• Also, ALWAYS elect to “pay” taxes on any shares immediately, even if they will vest over time. This way you will not have to pay any income tax on the difference of the value of the shares at time of receipt and their market value at that time.

A good rule of thumb regarding equity ownership in your company is to institute a vesting schedule on stock grants. This has numerous benefits the two primary being:

1. Better terms than the vesting schedule a VC will impose on you…and they will impose a vesting schedule on you.
2. Helps eliminate problems and costs associated with individuals leaving the firm with equity before a liquidity event.

The rule of thumb for vesting time horizon is a 1 year cliff followed by straightline monthly vesting.

A good rule of thumb for a startup environment is to avoid “deferred” compensation. Any type of investor (bank, angel, friends and family, and especially venture capitalists) will view deferred compensation as a significant deterrant. Since deferred compensation has seniority over all other stakeholders, it adds a level of risk to their investment. A better way to compensate yourself is through paying yourself in equity through an earnout or vesting schedule.