Notes

Valuing the Equity of a Startup
Foundations Equity is the principal venture capital company unit of TSX Venture Exchange, a trading forum that caters to global venture capital companies. Foundations Equity is managed by the founders of TSX Venture Exchange. All new members are required to hold an equity position in one or more of the companies listed on TSX Venture Exchange. The company also organizes strategic meetings to review and update strategies and management information.

TSX Venture Exchange identifies six main areas of focus for its founder members: venture capital, private placements, real estate, derivatives, and first-line and mid-line investors. Because most investors participate in one or more of these areas, it is important to know what you are doing if you wish to be part of this team. If you are serious about becoming a TSX member and want to participate in all of the above areas, you must know how and when to sell your stake should the need arise. Here is how Foundations Equity works.

As a general rule, TSX will not compensate its founding members unless they sell their stakes. If you have been a founding member and have successfully sold your shares, you will receive an award from TSX to pay your bills and invest in other companies. Your earnings will be subject to applicable income tax laws. If you are unable to continue to operate your account, you must give up all rights to profit and be paid out of your own funds.

The most common scenario in which Foundations Equity investors are able to be paid out of their own funds is if they are forced out of business or sell a majority of their shares. There are several scenarios under which this can happen, including involuntary termination, bankruptcy, and the death of the company's founder. In all cases, a percentage (typically 50%) of the company's founders' shares will be turned over to the TSX Trustee in exchange for an interest in the company. If the company does not make an exit plan, the TSX will continue to pay the remaining funds to the founding members. If a company is successful and continues to operate for at least two years, most investors will receive a distribution of at least 75% of the company's shares.

If you are invested in a company that has more than one co-founder, you may also be entitled to share in the company's common stock and/or the company's preferred stock. If you participate in a TSX Preferred Stock Offer, you will be paid a fee in addition to your distribution of common stock. The fees vary from offering to offering and depending on the type of offer you agree to accept. The fee is separate from your distributions.

If you decide to sell all or part of your distribution or do not want to vest all of your unvested shares, you may elect to receive dividends in addition to your distribution of common stock. Dividends are tax-diluted payments that are received by the shareholder and applied directly to the shareholders' equity in the business. Most dividends are reported by the corporation's book-keeping system as a recurring item in the profit and loss account. However, some companies operate without record-keeping and only report the income from dividends.

To determine the distribution of equity as it applies to you, evaluate the value of your contribution as it relates to your level of equity. If you have no partnership interests, restricted shares, or other securities in the business, you will receive the same equity as the owners of the company. In this scenario, the value of your equity is equal to the price per share (the cost) times your equity partners' combined net worth. If you do have interests or equity in the startup, the value of your distribution is determined by the value of each of the investments you have in the startup - i.e., your partnership interests plus the value of the corresponding shares in the startup. You will receive an equal portion of both the partnership's and the startup's equity. Your startup investment is then included in the founders equity.

Once you have determined your founders equity, discuss this with your potential investors. It is important for you and your investors to understand that your roles are entirely separate. The valuation of your startup is determined by your investment in the startup and not by your relationship with the other co-founders or the current management team. Also, prior to signing startups with investors, make sure they know you will be receiving a distribution as part of your role in the startup. This gives you the flexibility to move forward based on your investment decisions without having to worry about whether or not you will receive a distribution as part of your equity in the company.
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