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Chapter 2. First Steps > Deciding Ownership Stakes - Pg. 14

First Steps 14 Issue the Ownership Stakes Once you have decided how the company will be owned and controlled, and know which entity makes the most sense for the business, the ownership stakes must be distributed to the founders, and the rules of owning those stakes must be established in an agreement. These rules are primarily occupied with the purchase and sale of ownership, addressing issues such as what happens when a founder becomes disabled, or wants to sell his stake to an outsider. You will get an overview of the legal issues and concerns surrounding each, and can see a sample restricted stock purchase agreement at the end of the chapter. The author would like to thank Jim Eberz of Meiselman, Denlea, Packman, and Eberz P.C. ( for his assistance with preparing this chapter. Deciding Ownership Stakes The three core questions in allocating ownership among a group of founders are · Who deserves what? · When should they get it? · Who has ultimate decision-making authority? Who Deserves What? Now is a good time to understand how each of your co-founders understands his individual role and contribution, as well as how he sees the contributions of others. To focus the discussion during negotiations, ask each party to answer the following questions: · What will each founder contribute up front? A respected name in the industry? Cash? Fund- raising experience and contacts? Property, real or intellectual? Other rights (such as an exclu- sive license to a property or a development contract)? · What will each founder contribute in the near future? More cash? Real or intellectual property (say, the development of an engine)? Sweat equity? Experience? A network? (These contribu- tions are always "discounted" slightly to reflect the bird in hand/two in the bush principle of future returns). · How should you value each of those contributions in light of the company's individual needs? In valuing the contributions, a useful index is to consider the opportunity cost of each donor. If a founder is donating cash, what return could he expect from other forms of investment? For someone donating experience, what is that experience worth on the job market? For one do- nating intellectual property, what would a license for that IP bring? · If you plan to share ownership with employees, or have yet to hire key personnel who will require some stake in the company, what share of the company needs to be set aside for future em- ployees? (Generally 10 to 20 percent--an experienced CEO alone will require 5 to 10 percent.) · Do you plan to raise capital in the future? How much, when, and in roughly how many rounds? Many, if not most, game developers fund their operations with retained earnings. However, some elect to fund expansion plans (development of new IP, breaking into new businesses) with out- side investment. Note NOTE Some developers elect to isolate new ventures, and even every game,with a separate business entity. Example: A development company,Devco, wants to develop an original IP called NewGame , but needs toraise $300,000 to fund a prototype. Rather than selling a piece ofDevco and all of its assets to investors in the NewGame property,Devco creates