Questions

I am screening few startups for funding. For a tech startup, what % stake should the the CEO or main guy hold, so he / she has skin in the game?

As part of a VC fund, I get screen lot of startups. One important criteria is % share holding by the founding promoters. Low promoter holding like 4 guys with 25% stake each does not give me the confidence to close the deal. I always like one guy with above 60% stake. Your thoughts please

3answers

Hi,
This is a huge question and one that I often get asked - from various aspects (investors, founders, service providers...).
General answer: there is no 'magic percentage' that a founder should hold - it all "depends" on the founders, on the investors, on the size of the investment, the industry and 10 other things. For example, the larger the share value, the lower amount of shares founder's are usually willing to have. Or if there are more founder's then each founder understands that they'll hold less shares. Or if it's an investor's market (wasn't until a few ago, now it is again - Corona virus...) then founder's know they will be expected to give up more. and more and more situations...so it depends.

As with any business deal, an investment is a negotiation, and you need to (1) know the market, (2) know the other side's interests/needs and (3) know what you want and what your BATNA/red line is.
If you read the other side well, you will know how many shares are enough for him to 'have skin in the game;
Also, in your example you need to remember 2 important things:
a. If there are 4 founders and you give one more %, then there will always be a feeling of inequality which will lead to problems.
b. On the other hand, If there is an equal division (25% each), this will lead to a deadlock in decision making.

If you really need a rule of thumb (even though there is NO one solution fits all), then it would be this: whatever the founder's ask for in their pitch, add 20%-30% to the shares that the investor gets or deduct 20%-30% from the amount requested. But again: I don't like this solution and it may create a win-lose feeling (win for investor-lose for founder's) which will eventually cause tensions. So if you're going to invest, but as well trust the team, and give them close to what they're asking unless the financial numbers don't justify it (a lot of first time entrepreneurs don't know how to do the numbers properly).

I teach negotiations, and do tens of them each week. Happy to help you with them, and happy to refer startups to you (if you tell me what stage you invests, amounts, fields etc).

I've successfully helped over 350 entrepreneurs, startups and businesses, and I would be happy to help you. After scheduling a call, please send me some background information so that I can prepare in advance - thus giving you maximum value for your money. Take a look at the great reviews I’ve received: https://clarity.fm/assafben-david


Answered 2 years ago

I would just like to add to what the other poster wrote by mentioning the importance of dilution in this process. My suggestion to you would be to create a multi-tiered share system with one class of voting shares and one class of non voting shares. From there, you would be able to set up one or two main people with a majority of the voting rights. If you’d like to discuss this in future detail, please feel free to ask a follow up and, of course, you are always welcome to schedule a call to further discuss your specific needs as well.


Answered 2 years ago

I would see the equal shares among the co-founders as a warning sign. Very rarely we see successful companies with such practice because eventually one co-founder, most commonly the founder and the CEO, begins to feel like he is not building HIS company any more and to realize that the other co-founders can be replaced for less shares or even for salaries.

No matter how many co-founders there are, I advocate the CEO to have at least:

a) 25% if he is not responsible for any specialization or function (marketing, tech, operation, etc.). The breakdown is 10% for the idea and 15% for his work as CEO.

b) 40% if he is responsible for a function beside managing the company. In this case, it is 10% idea, 15% for acting as the CEO and 15% for his other function.

I introduced an innovative way for equity split that spread in Egypt for the last year and people got comfortable using it.


Answered 2 years ago

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