Questions

What is the best way to split equity for three founders?

I founded a company but have brought on an industrial designer and engineer on board as co-founders. They both bring unique skill sets and will put in the sweat equity, I am the CEO and will work in more the business intelligence side of things alongside PM duties. I have some hesitation giving them a large amount of ownership, as that would dilute my own. They deserve credit for their contribution, but to have my own shares dwindle into the 30-40's percentage of ownership gives me concern. Looking to vest month to month over a period of 2 or 3 years. Thoughts are welcome..

4answers

You are thinking about it wrong.

Don't think of your organization as a pie. Think of it as a house.

When you add an extension (say a new kitchen) to your house, the value of your new kitchen now accounts for a larger *percentage* of your house, more than it did before.

But something else also happens. Your house is now worth a lot more.

I highly recommend you watch the series on raising money for a startup by the Khan Academy - http://robt.co/1u1wCsx


Answered 5 years ago

I agree with Jordan. I think the perspective that you are taking on this issue is not the best.

I do a lot of work with startups and i have run across the attitude many times where the founder is willing to dilute his or her ownership.

I guess the simplest analogy is this: is it better to have a small piece of something large, or 100% of nothing?

If the people that you have are integral to the success of the business and they are the "right" people for the job, give them a generous portion of the ownership, otherwise they will not be motivated to make the business successful.

This is one of those areas where you need to be very careful, because if they feel shortchanged you have given away ownership and not received equal value in exchange, this is a bad situation.


Answered 5 years ago

It is possible for a company to issue different classes of shares with different voting and economic rights. You could structure the equity for the new management to have restricted voting rights and for their returns to cut in only once your shares have delivered a certain level of returns.


Answered 5 years ago

You asked this question a while ago, I just noticed it. I hope it's not too late to convince you that the best way to split equity for three founders is to use a dynamic equity split that will allocate equity based on the actual contributions of the three founders while allowing for the possibility that their individual contributions will be different and may vary over time and you might lose some and add others. If you do a fixed split (like the one you are contemplating) it will not be fair and every time something changes you will have to renegotiate and amend your shareholder agreement.

Your main concern shouldn't be your personal holdings. Your main concern should be to get what you deserve and to make sure that everyone else does too. Contrary to popular belief, there is a way to get this perfectly right.

Most companies make the mistake of doing fixed equity splits at the outset of the venture. This is because most founders and advisers are unfamiliar with the benefits of a dynamic equity program and the ease of implementation.

A dynamic program takes into account the actual contributions of the various participants and allocates equity on the relative risk each participant takes.

In my book on this topic, Slicing Pie, I convert all contributions of time, money, ideas, relationships, supplies, equipment and anything else into a fictional unit called "slices". Every contribution can be converted using a conversion calculation that uses fair market value and a risk factor.

Once converted, it is easy to use slices to determine shares. You simply divide the slices contributed by one person by all the slices and you have an exact %. It is perfectly fair. It changes over time to make sure that everyone gets what they deserve all the time.

There is a recovery framework too, which dictates how equity is recovered from individuals in the event of separation from the company. In some cases they lose equity, in some cases there is a buyout. The model will tell you exactly what the buyout should be too.

Every other model is less fair. However, people at startups are taken advantage of so often they might not even notice (at first). When they do notice, relationships begin to deteriorate fast.

Like I mentioned earlier, I wrote a book on this topic and you can have a copy if you contact me through SlicingPie.com


Answered 5 years ago

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