Questions

Is Non-Dillution Stock a good method to compensate a key technical partner on early stage startup?

I'm developing the product and i have a key technical guy working with me. I've 100% ownership and he's asking me 25% of the company or 7.5% non-dillution stock and 7.5% common stock. What's the best deal for me? And what kind of issues i can have dealing with VCs having the 7.5% "golden share"?

3answers

Really depends on how many rounds of funding you think you'll need. Most startup founders have their equity diluted anywhere from 15%-33% after 2-3 rounds of funding. If he is a key partner, then 25% is fair and a better deal for you. VCs hate preferred shares being issued because it just complicates the math and flexibility in the future.


Answered 4 years ago

Since you are in the early stage, I am going to assume that you will be looking for multiple fund raising rounds.

I would say that non-dilutive stock is almost never a good deal for either the grantor or the receiver. From the company's perspective, it makes VC funding much more complicated, especially if you have many parties funding you in future rounds. The math is complicated, but there is also much uncertainty (from all sides -- your side, the partners side, and an investors side) about who will have the largest share of the company in an extreme upside scenario.

From the receiver's side, non-dilutive shares can be quite troublesome if there is an IPO or other liquidity or sale in the future. They are tougher to value and can cause future deals to fall apart. I don't know your individual situation, but the 25% of common stock sounds like a better deal to me, as you and your partner will at least be in the same boat together (even if you own more of the company).


Answered 4 years ago

In the early stages, usually the founders have a split in equity stake in the company depending on the arrangement and agreement between the founding members. What you can do to make things attractive is make him a CO-Founder and CTO, with say 20% equity, dilution in the normal ratio tween you and him (ie Ration 1:5). I don't like bringing on investors or shareholders with no dilution as it may hurt your chance of bringing on new investors. Even worse by the time you reach Round B, your own equity shares will be diluted several times and you may find yourself no longer the majority shareholder. Find other ways to make the deal attractive to the CTO. Make him feel he is a part of the founding team.


Answered 4 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2020 Startups.com LLC. All rights reserved.