more-arw search

Q&A Forum

What's the best stock allocation for founders of a sporting goods product company?

Scott Page's Profile

The company is very small and will likely contract out the manufacture of its only product which has multiple configurations.  Sales will likely be through Dick's Sporting Goods, Sports Authority, Play It Again and possibly Wal-Mart, K-Mart and Target.  Celebrity endorsements are likely to help propel the marketing effort. 

The company has 3 founders: the CEO and inventor; VP Operations; VP Product Development.  They've drafted a CFO but his commitment is limited and has accepted 1%.

Friends and family have expressed interest in funding the company but are lacking the financial means to bring the product(s) to market estimated to be $2MM.  The objective is to defer dilution until a B-round should one be necessary.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Scott,

Giving my two cents as this has been open for awhile.

-Check out Founders Preferred Stock; it can be an interesting structure (invented by Orrick apparently). It lets you cash out some of your stock mid-way through. This is not entirely popular with venture investors (who like control over the preferreds), and there are other ways of cashing out (selling restricted shares to investors or third parties; putting your options into a shared-risk pool; etc) depending on your needs and risk profile.

-Anti-dilution triggers are also a potential sore point, but if they are well structured and communicated up front, they can work. These covenants often either cause an issuance of stock or options in the case of dilution. If they are capped, it is more digestible. I'm opposed to them for two fundamental reasons. 1) Tax liability. Ask a tax person "what happens if the Preferred A's come in at $1 per share and I issue 1m options to my VP Ops?" 2)When the preferreds come in they will take the anti-dilution into account in pricing the round, and you'll end up (in a perfect world) equally diluted, so you will have spent time and money on nothing.
-Anti-dilution investment rights are a little different; giving your F&F the right to invest at the A round price solves the problem...if they are willing to continue to invest, great! If not, they get diluted.

As an aside here; preventing dilution is a common theme, but a red herring. If you've got a $10m enterprise value (your "Pre") and investors offer you $5m for 1/3 of the stock (new preferred issuance), you end up owning $10M worth of your new $15M company (your "Post"). You have *not* been diluted, except with regards to rights to direct the company. On the latter, rights as owners, the new investors should have as much say as anyone...they did put up money after all.

My second cent...how much to give each of these employees? I really depends on experience, market, etc. If it is early and risky and they are experienced, and you believe they are in it for the long haul, north of 5% isn't unheard of (so I have heard). If they bring less to the table, there is less risk, etc, pushing down to 1% or below might be reasonable. You should allocate the shares with restrictions (vesting on options or sale of stock at par....the latter probably the best choice, and either with ROFR or repurchase rights or both) so that if they leave after a year, you haven't lost 5% of the company to a disgruntled ex-employee.

2519 views
Topics

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.