(4 votes, average: 3.75 out of 5)
Loading ...I recently read one article about compensation in early stage ventures. One of my friends is planning to invest in a startup where he is one the four partners of which two of them will be running the show while the other two will be just investors. The proposed equity structure is 25 percent each for the pure-investors in return for 35 percent investment (each) while the two guys who would run the show are putting in 15 percent of the money for a 25% stake (each). This means they are getting 10% extra as sweat equity. Interestingly, both of these folks would work for full salary in the new company (no salary cut).
Is this a good arrangement? In my view the managing promoters don’t deserve any sweat equity upfront as they are working for full salary. I would say that all four should have equity proportional to their percentage investment.
My friend wants to know what would be the best equity structure for this company with 2 working and 2 non-working promoters assuming that the working promoters take market compensation.
I have gone through many such occasion where I be as a mediator since I also had undergone two such startups early on my carreer. Following is my comments and for every one doing so.
Equity Investment
Sleeping 50%(25+25) 80% (40+40)
Working 50%(25+25) 20%(10+10)
But no salaries for the working two partners. In case the salary required to be put on then:
Equity Investment
Sleeping 70%(35+35) 80%(35+35)
Working 30%(15+15) 20%(15+15)
Best luck to the team.
Hi all,
I have a similar arrangement in my startup.
Its my idea and I’m responsible for execution.
My friend is the investor. The arrangement is as follows:
1. I put in 20% of what he funds. So my effective financial contribution is 20/120=16.67%.
2. The money is to be brought in 5 stages, 1/5 at each stage. Investor has to compulsorily fund first 2 stages. He has the option for the later 3 stages. ( Arrangement to minimise investor’s risk)
3. I have qualifications, professional work-ex and have lot at stake in terms of reputation risk and getting back to a salaried job in case the venture fails. My friend has a traditional wholesale business which he can easily go back to.
4. I work full time and friend works part time.
5. The share is me:75%. My friend 25%. This is the proportion b/w me and my friend. this proportion will b maintained even after future dilutions thru’ esops or other investors.
The only drawback of the above structure I’m grappling with is the share premium issue. Since my friend brings more share of money than shares issued to him, it results in a huge amount of share premium.
regards
BB