I’ve been involved in several startup projects lately. I the majority of them, one of the main reasons why founders and equity owners start to fight one another, is the moment in which someone thinks some equity needs to be shared with someone else, out side the current equity holders circle.
Well, nobody likes to give out equity and it’s hard to know when and tho whom such company/project holdings should be granted.
The option of giving out equity, is mostly driven by the fact the founders need money to make their idea come to life, money or an equivalent needed resource (advisers, tech people). When there is no money, you need to ask yourself one question.
Do i REAALLLY need it?.
They say that holding 100% of 0, is 0.. and they are right, if you will hold your equity holdings close to the chest and refuse to share no matter what, you’ll probably heading straight down the hill. But on the other hand, giving out equity for anyone who wants some, or giving unreasonable amounts for that matter, is same as bad.
You can’t do anything by yourself, you have to share your idea with some other people (unless you are really something special).
The first time you share your project equity with the other founders is simple and easy, most of the time the equity will be divided equally (and it doesn’t matter who brought the idea, it’s irrelevant) among the founders, stated in a partnership agreement later to be replaced by and incorporated entity legal documents.
Now when it gets to expanding the circle, there are two kinds of entrepreneurs that i can across with:
So how you make the decision?
- Hard – These guys are either possessed with a too-high-self-confidence and sure that they can make it to the finish line without sharing a 0.1% with anyone else except for the initial founder circle or people with a wise project-wide view of things and insists of not giving away equity until it’s absolutely necessary. He believe that any problem can be solved either by finding other forms of getting the required service/resource and will do whatever necessary in order to make things work out without having to release equity or unnecessary funds.
It’s hard to distinct between these two sides of the Hard Core entrepreneur, but if you have the second kind of person in your team, you are a winner.
- Soft – The soft entrepreneur is the the person who will be willing to give away anything for a little help. They will prefer to give away equity as much as possible like hot buns when it’s not necessary and not required.
- “Don’t care” – people who prefer not to take a stand, and will leave everything in the hands of other founder or all the others together. While this can be very useful when he goes your way, it’s a problem when he’s not.
I don’t believe in workplace democracy
, not all the time. Sharing equity should be unanimously passed if it is taken in a vote matter
, or by a single responsible position holder (CEO
Each one of the initial founders holds his share for a reason, he earned by contibuting to the success of the project and therefore should not be downsized unless he agrees.
You are not giving out equity to whoever comes your path, this list of people you should consider giving equaty to in exchage to their services.
- External CEO – You know how to program and design, but you don’t know nothing about the business world and need someone else to guide your project to success. An external CEO is a good solution for that as long as he really understands what your idea is all about, what rarely happen.
Nobody knows your product better than you or your fellow founders for my opinion, but if you need a CEO, grant out about 10-12%.
- Venture Capital Firm – The start-up Messiah, will generally have their own demands but it will move around 20%-60%.
- Strategic Investment – Someone who has the capabilities to bring your product to your desired market, audience and exposure. Depends on what he can give you, the appropriate share for such a service is 13-17%.
- Angel – A small financial investment that it’s entire purpose is to get things running. 10%-15% is enough, but note that if it’s a first financial investment, it’s also sets your company value. (10% for 25K, brings your company to a 250,000 value, and your share grows as well.
- Tech Services – If you are going for a tech related project, such as a website or a software, make sure the other founders can supply as much as possible from the project’s technical requirements, if you didn’t (bad) and still need these services, grant about 0.2% for a programmer and 3%-4% for a team leader.
Kinds of people that should never get an equity share are: lawyers, advisers, sales persons and such.
Keep in mind that anything that can wait, should wait and the Internet is a pretty big place for you to find what this people will probably charge 100$ an hour to tell you.
When you do need a lawyer or counseling, pay the money and that’s it, no equity for counseling.
Last thing, keep in mind that there are wolves out there, people who seek to only find young, naive entrepreneur to which they can sell any dreams they want.
Consider every offer, but make the most to avoid sharing if you can, and if you do, share as little as possible.