Monthly Archives: September 2012

Stock Option Plan Rule of Thumb No. 3

Advisor and Director Share Schedule from The Startup Garage

Stock Option Plan Rule of Thumb No. 3

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Subject Director And Advisor Shares To A Two-Year Vesting Schedule

Directors assume general corporate law fiduciary duties and potential liability from the very first day they serve on a company’s board. For this reason, independent directors expect to be compensated beginning day one. Highly sought after advisors expect similar rewards. Gradually vesting a director’s and advisor’s options align their compensation with their actual service while protecting the company in the event that they are prematurely removed from the board. In this circumstance, vesting only allows a short-lived director or advisor to receive the fraction of the option package that corresponds with the director’s or officer’s actual term of service.

Subjecting a director’s shares to a two-year vesting schedule also creates added performance incentive. By default, corporate directors are normally on a one-year term of service. Using a two-year vesting schedule encourages a director to perform well so that he or she is retained for a second term. Moreover, the two-year vesting schedule—as opposed to the four-year schedule typical of employee options—is preferred for directors because it magnifies the incentives for these influential individuals.  Options issued to advisors are typically treated the same, so long as the advisor is not otherwise being compensated by the company.

Vesting should be accelerated in the event of a change of control. Many directors and advisors will not serve on a board if this provision is not included. If the board determines that it is in the best interests of the shareholders to sell the company, the directors and advisors should not be restricted from sharing in the value of the acquisition merely because their shares have not yet vested.

Check back Monday, October 1, for Rule of Thumb No. 4: Set a Lenient Post-Termination Exercise Period When Possible.

 

Whether you have a question about Stock Options No. 3, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 2

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 2

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Issue Options According To Value Added And Risk Taken

Options are often issued as a reward, either for services rendered or risk assumed by the recipient. Thus, the number of shares and ownership percentage covered by the award to a director or advisor should depend on the value added and risk assumed.

It can be difficult to assess the intangible value of certain directors or advisors, and although a high profile individual is generally awarded a larger option package, the industry credibility and networking opportunities a director or advisor offers are not easily appraised.

However, one can approach this problem from a different angle. Instead of searching for the right percentage, an alternative is to focus on the expected payout. Most true outside directors are looking for an opportunity to make a million dollars over a five year period. Therefore, instead of thinking about the number of shares or percentage ownership, start with the end figure and issue accordingly. As far as advisors are concerned, the same technique is used with a lower payout.

Compensation also depends on the prospects of the company, how far along the company is, and the track record of the founders. This all goes to the company’s likelihood of success—the higher the likelihood of success, the less risk there is to compensate for.

In any event, a director’s take typically falls between one-half of a percent and two percent, and an advisor’s between one quarter of a percent and one percent. In each case, the company’s needs and the qualities of the prospective director or advisor drive the analysis.

Check back Wednesday, September 26, for Rule of Thumb No.3: Subject Director And Advisor Shares To A Two-Year Vesting Schedule.

 

Whether you have a question about Stock Option No. 2, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Video Friday: Entrepreneurial ADD

Entrepreneurship ADD Video from The Startup Garage

Video Friday: Entrepreneurial ADD

Happy Friday!  In our final Friday video, Tyler Jensen discusses how to deal with entrepreneurial ADD.  Enjoy!

If the link isn’t working, check out the video at:  http://www.youtube.com/watch?v=QC4TUpj8BNY&feature=player_embedded

View our archived videos on our YouTube channel at http://www.youtube.com/user/thestartupgarage?feature=watch.
 

Whether you have a question about Entrepreneurial ADD, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 1

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 1

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan

Equity incentives are a major form of compensation for most emerging growth and technology companies. Without them, most start-ups cannot afford critical labor, let alone a board of directors or advisors. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. The exact percentage is often determined on a case-by case basis. The final figure will depend on the client’s situation, including the number of employees of the company and the amount of capital that it hopes to eventually raise.

Whatever the percentage, it pays to plan ahead. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.

Check back next Monday, September 24, for Rule of Thumb No. 2: Issue Options According To Value Added And Risk Taken.

 

Whether you have a question about Equity Incentives, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Equity Options to Attract Directors and Advisors

Equity Options to Attract Advisors and Directors from The Startup Garage

Equity Options to Attract Directors and Advisors

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  William Eigner’s bio is available at http://www.procopio.com/attorneys/william-w-eigner and his LinkedIn is available at http://www.linkedin.com/profile/view?id=616218&trk=tab_pro.

A properly selected Board of Directors and Board of Advisors can be an invaluable asset to an emerging company. Building these boards is an early opportunity for a start-up company to gain credibility, industry contacts, experienced counseling and even access to cash. However, the right board members do not always come easily, and although some companies may have their pick of top industry players, many start-ups struggle to recruit board members that are the right fit for their company.

Nearly every start-up has limited cash. This does not, however, have to limit their ability to recruit directors and advisors. A stock option or other equity incentive plan can allow a start-up company to offer prospective independent directors and advisors a financial upside beyond what the company’s cash account can currently afford. Additionally, option-based compensation creates powerful incentives for directors and advisors to work diligently to help drive company growth and success. A stock option plan should be established early, and if administered properly, it can become a company’s top board recruitment tool.

In counseling hundreds of emerging companies through this process, rules of thumb emerge that help provide guideposts for entrepreneurial companies. In the following five-part blog series, built from a series of interviews with attorneys who counsel start-ups in their issuance of stock options, will discuss five of these rules of thumb.

Check back on Wednesday, September 19, for Rule of Thumb No.1: Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan.

 

Whether you have a question about Equity Options that Attract, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Video Friday: Tyler’s Experience With Selling His First Company

Tyler Jensen on Selling His First Company from The Startup Garage

Video Friday: Tyler’s Experience With Selling His First Company

TGIF!  Watch our latest video where Tyler Jensen explains the highs and lows he went through in the process of selling his first company, Vavi.

If the link isn’t working, check out the video at: http://www.youtube.com/watch?v=fbuD9gD7TDI&feature=player_embedded

View our archived videos on our YouTube channel at http://www.youtube.com/user/thestartupgarage?feature=watch.

 

Whether you have a question about Selling your First Company, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Non-Profit Revenue Sources: Donations

Donations to Non-Profits from The Startup Garage

Non-Profit Revenue Sources: Donations

Target the Best Potential Donors

  • Know where to begin your donor search.  It is more cost-effective to strategize who will be most likely to make a donation and target those potential donors rather than spend the time and effort to cast your net as far and wide as possible.  Start with the board of directors and their contacts, since they already share a passion and drive for the pursuit of the mission.

Know Why People Donate

  • Maybe it’s because they share in your commitment to the non-profit’s vision.  Maybe they want a tax write off if you have qualified as a 501(c)(3).  Maybe they want the PR benefit of being able to call themselves a donor to your organization.  No matter what the reason may be, it is important you are paying careful attention to why your donors choose to donate.  It’s a great way to effectively target them for future donations.

Stay Organized

  • Putting prospective donor information into some sort of system will be incredibly helpful in streamlining your efforts to secure donations.  This way you can have an effective system for knowing how much, when, and why a donor chose to help your organization.
  • If you plan on having a membership option for your donors, make sure you have a system in place that tracks their membership details.

How to Ask for a Donation

  • For in-person and phone requests, it is critical that you train your staff and volunteers on how to ask for a donation.  You can identify who are your strongest donation solicitors.  Make sure they are prepared to handle rejection and can interact with a potential donor in a conversation.  Ask for a donation in a specific amount (or suggest several specific amounts) rather than just asking for any donation – it’s better to propose amounts as options rather than “yes” or “no” as options.
  • For e-mail and paper requests, bear in mind that these two forms of contact are usually numerous and easy to disregard amongst the rest of the “junk mail”.  E-mails are inexpensive, but if not done carefully, can alienate your prospective donor.  Make sure to include your organization in the subject line, include a link to your organization’s web page, and encourage the potential donor to forward the e-mail along.  You should also provide options to unsubscribe as well as hide the e-mail address from the rest of the recipients on the list.  You can save on postage if you obtain a non-profit discount on bulk mail.  Your mailing should include a letter asking for a specific donation, a brochure about the organization and a response card for the donor to return.

 

Whether you have a question about Non-Profit Revenue Sources, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Non-Profit Revenue Sources: Grants

Grants for Non Profits from The Startup Garage

Non-Profit Revenue Sources: Grants

Sources of Grants

  • Unlike donations from private individuals, grants come from foundations, government agencies, private businesses and other groups.  As these groups have access to larger accounts, the grants they give out are usually much larger than individual donations.
  • Many grants are only available to 501(c)(3) tax-exempt organizations.
  • Grant givers are often looking for an organization that meets the giver’s criteria in terms of the activities and projects conducted by the recipient.  It is important that you look for grants that specify criteria you can meet in order to have the best shot at winning the grant.

Writing Grant Proposals

  • Many grant givers have specific application procedures and deadlines, so make sure you are up to date.  Many grant applications have two rounds to screen for appropriate recipients and save the non-profit the time necessary to prepare a full grant proposal.  The full proposal, if you are invited to submit one, includes a cover letter, cover sheet, description of the organization, a needs assessment, program goals and objectives, financial information, a conclusion and any appendices or attachments as necessary.

Corporate Sponsorships

  • Approaching local businesses, banks or institutions for corporate sponsorship can also generate a large amount of revenue for the non-profit.  Most corporate sponsors want some kind of recognition – such as their name and logo on a banner or t-shirt – for their contribution.  However, you are only allowed to “acknowledge” your sponsor, not provide them with advertising.  Providing them with advertising can count as unrelated business income (UBI) and be subject to tax or losing your 501(c)(3) exemption status.  Consulting with an attorney may be helpful if you are not sure whether your form of recognition is acknowledgement or advertising.  If you do provide recognition with a commercial value (advertising) than the donor can only deduct the difference in value between the donation and the item of commercial value provided the item exceeds $75 in value.

*The information contained in this post is provided for informational purposes only, and should not be construed as legal advice on any subject matter.  You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this post contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this site.
 

Whether you have a question about Non-Profit Grant Sources, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Video Friday: How Vavi Was Born

VAVI Founding Tyler Jensen with The Startup Garage

Video Friday: How Vavi Was Born

It’s Friday!  Please watch this video as Tyler Jensen explains how San Diego’s Vavi Sport and Social Club was born.  This is a good one- enjoy!

If the link isn’t working, check out the video at: http://www.youtube.com/watch?v=OyTurnLhf2I&feature=player_embedded

View our archived videos on our YouTube channel at http://www.youtube.com/user/thestartupgarage?feature=watch.

 

Whether you have a question about How Vavi was Born, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Non-Profit Revenue Sources: Fundraising

Non-Profit Idea and Steps from The Startup Garage

Non-Profit Revenue Sources: Fundraising

Importance of Relationships

  • No matter what the amount you are trying to raise, you must have a good connection with your donors.  Especially if the donor is contributing for the first time – a thank you note can go a long way to ensuring continued donations in the future.

Convince Your Potential Donor

  • Be specific and build a compelling case for why you need this donation.  Your potential donors have many options for where to donate – if they donate at all – and you must convince them that you are the best recipient of their financial support.

Don’t Forget the Bigger Picture

  • But keep the organization’s bigger picture in mind.  You can’t always hide your expenses as a compassionate need – maybe you just need office supplies.  A good fundraiser is also able to bring in funds for the overhead expenses of operating.

Make a Fundraising Budget

  • Unfortunately, some of the money you raise is turned around to spend on future fundraising efforts.  Fundraising can add up quickly so make sure you set a budget that is realistic for the amount of money you are wishing to bring in.  Look for ways to cut costs or to get time, space or materials donated to assist with the fundraising effort.

Consider Membership Opportunities

  • You can collect dues from members of your organization if you have a program that gives them something in return.  It could be a token gift or the right to participate in an exclusive group such as a list serve or a planning committee.  But you must somehow involve your members for them to feel connected to the organization and continue to provide membership dues, which are a source of revenue.

 

Whether you have a question about Non-Profit sources for Fundraising, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!