“Experience is a good school, but the fees are high.”
— Heinrich Heine
It is the lesson of the true cost of recruiting the wrong founding team in a startup. You fill a role out of desperation, or even worse, recruit a friend or family who will do for now but never was quite the right fit. There are moments of convenience and other times, rationalization, for hiring people you trust, forgetting to foresee roles and consequences. Hiring at the top of a pyramid, the bottom grows over the years even when founders leave. And then the recruit in turn takes the organization down the garden path, hiring more of the wrong people, perpetuating one error to final destruction. The good old adage for entrepreneur CEOs – hire the very best for your life depends on it – we have heard it all, many times. And again, to do it in reality, even the brave will falter.
How does an entrepreneur divide equity among co founders?
Should I divide the equity in my startup equally?
How do you do it?
- Connecting a World Changer / George Page - February 17, 2012
- Roar of the Cloud - September 22, 2010
- IIT Kanpur Golden Jubilee Initiative: The Next50 Global Innovation Challenge - March 5, 2010
Equity is a very ‘subjective’ question, that is very difficult to answer objectively., One thing I completely agree is no one can ever out in words the importance of getting the right team in place.
That said, my personal way of spreading equity is identifying and defining clearly what contribution that individual can make right now and in future (This is little tricky because in the beginning everything seem’s critical, then I question myself “would I give the same equity for this activity one year/ two years down the lane??”). There was a time when HTML programmers were getting large equities in company, today even a pure dotcom business model just employ’s programmers and invests heavily in architects, reason I mentioned this is it is very important for us (entrapreneurs) to identify all the critical requirements before you start talking with people. Questions like;
How important is sales&marketing now?
How important is a technical architect/ CTO now?
How important is an advisor/ mentor now?
How imporatant is an operational head now?
How important is domain knowledge now?
etc etc etc
Important part of each question is ‘How Important’ and ‘now’. This largely defines how many shares (%age) that you need to shell out to get a person who can contribute that piece.
I am a firm believer in advisors and mentors for the simple reason that we need not make the same mistakes people made in the past. But let’s face it guys, we get lot of people who want to come in advisory role’s, mentors etc etc during startup phases and everyone wants a piece of the startup, be very very careful and establish their long-term commitment to your venture. I do have advisors to my startup, but none of them have equity in the company but I gave them equitable equity i.e. all the contribution they make will be valued and appropriately they can opt for % of equity OR cash as compensation. Today I have an advisory board without shelling any equity.
psst:. If they are giving you ‘advise’, you are adding significant value to their resume’s by valuating them high as an ‘advisor to startup’
My personal conviction: Investors & People (read it as team) who are rolling up their sleeves, working with me on the ground in growing my venture deserve to own part of my company, irrespective of role they are performing.
My two cents contribution !
I need your suggestions. In the past I have solely developed several successful websites that I later sold for a good profit. I sold these to develop an idea I have had for the past 5 years. I strongly believe in the success of this idea but I don’t think I can go it alone. I do not need funding but rather a different perspective on future growth of the company (I’m like a boat builder. I have the ability to design and build the sailboat, but I have no experience in sailing the boat.)
This is where the tricky part comes in. I have a friend that I work really good with , accomplishing great things just exchanging ideas. He has a financial background which would be a great asset to this company. At the same time, I don’t want to hand over too much ownership because this is my dream idea and I don’t want to lose control. But again, I feel if we are to sail this boat around the world, I need to partner up.
How much ownership do I offer up?
Thanks,
David
Amazing question, been there done that from both side of the coin, in fact all three sides
1. From a co-founder
2. A founder
3. A mentor/advisor
4. afterthought – i.e part of the incoming team
…and it all comes down to what you want, all these numbers mean nothing if that startup does not succeed, however they mean a lot when it does :-), the problem is the person who is giving believes it will, and the person who is getting is always cautious.
I agree with one reader 0.75 even as a peon does not make sense, when you throw numbers like that around, u are simply showing your arrogance, and not a real understanding of a business, if a company has no funding and just an idea 0.75 means jack. If a company has funding, from a known VC,. and has customers, then 0.75 has value. soooooo what do you do.
From the entrepreneur point of view
——————————
1. See what you want, and how crucial this person is to the company. If he will make it work, if with him this company goes from a idea to a success and he has past experience, I would get up from the chair and ask him to sit down and give him what he wants. Note: His past experience does not mean this will also be a success, BUT your chances are far higher.
2. If all you want is someone to help you, since you have an idea, but have no clue about what to do, but your ego will not let you get up, and give him a equal share, then I would seriously take an inward look at yourself, and ask how you will build it, there are lots of people with great ideas which never go anywhere…we all need help, and help costs.
From the other side
—————-
1. Startups have no value, period, if someone can tell me otherwise I am all ears, a startup has no value to anyone, if it did, it would have customers, and funding. Now if funding has been provided many people will try to use that to value the company, i.e my dad gave me £1000 for 10%, hence company is woth £10K, hence you get 1 % cause your salary is x, and we are discounting it by y…rubbish, seriously all rubbish. Valuations cannot be set on a startup (I know the VC’s here will disagree…they have to :-))
2. If a startup has no value how do you know what stake to ask for, I have a simple rule, ask for what you are happy with simple. To me numbers under 5% are not even worth looking at, simple reason if you put your blood sweat and tears into the project, why should you get £50 million when tbhe other person gets £950million, you have to get in the same ballpark a return. (Obviously if you have no risk…please note risk is not just about cash invested, as a experienced startup guy you have a opportunity cost also, which is not just salary lost, but also equity in another startup you could help)
3. So you gotta look at 10% and above,this is where it gets meaningful. then of course you need to look at anti-dilution
4. Someone above mentioned options….again how can you put a value on options unless you know what percentage of equity is being kept for options. example
1 option = 1 share
you get 10 options, now when you exercise, there are 100 shares, hence you now own 10% simple, and at 1Rs per share your shares are now worth 10rs, great you are rich…but but but, what happens if during this period someone comes in with money, and 100 shares total becomes 1000 shares, but you still have 10 options, now the value of each share is 0.1Rs, your shares are now worth 1Rs…you are poor, but everyone else has the same money.
Also with options what happens if you leave, what is the vesting period, usually you have 90days after you leave, what happens if you leave company is not listed, what will you do, remember you need to pay for the shares…yes pay for them, eg if you get option at 1Rs each and have 1alkh options , you need to pay 1lakh Rs to convert them into shares, now if shares are not listed to whom will you sell the shares to, if you do not convert they will expire…options suck, unless they are structured properly.
Also what happens if a merger happens what happens to your options.
As the owner you want the best deal for you, as the one who is getting the stock you want a good deal, problem is no one knows what things will be worth and when, hence numbers are futile, but with 10%+ the chances are you will make a reasonable amount,
Also realise you cannot equate amount of work done to options/equity etc. Some people say you spend 50% of your time, hence we give you 5% instead of 10%…again rubbish, some people can do in 4 hrs what it takes others 8 hrs, its on output not hrs or time. Problem is in a startup you dont know what the outcome should be.
I say if you dont get what you want dont do it, both parties will be bitter, and the startup will not succeed, on the other hand to those who give equity, if it works its only fair that all people in the team drive a merc.
Since on the topic, get employment contracts done, I mean what happens if you bust a gut, and then some merger happens and they get rid of you…what happens to the options, what about equity, get a term sheet drawn up, I dont know of any lawyers in India who have expertise in this, if anyone does let me know I have a company looking for one.
I was recently offered
a) 3 % of a company which had no funding and no product
b) options to be discussed later
c) no salary
d) 1 % if they get funding
e) i did get to work remotely
I got up and ran, could not believe it, founders who have arrogance are not worth working with anyone, and a measure of arrogance comes from what they think there idea is worth, without getting it verified…having said that I’m not giving nething away in my startup 🙂 …call me arrogant 🙂
Iqbal
I am an India based entrepreneur who started a company about 6 months ago so I went through a similar “team building” exercise that is being discussed in this thread. After going through the same conflicting thoughts (partnering with friends vs. professionals), my first preference now is to bring a professional to the team (of course if the friend is a professional as well then that’s great).
An analgous example that helped me come to this conclusion is evaluating who would I like to perform a major surgery on me. Would it be a friend who I trust or a surgeon who is an expert (but with little trust since I don’t have the past relationship)? The answer is quite obviously the surgeon, ie. the professional.
Hope this helps.