How much should a veteran in one trade get in equity shareholding for helping a start-up establish a business in that particular trade?

1. I am a veteran in a particular sector. 2. I was working for someone, but, an opportunity has come my way to do it on my own. 3. Some savvy business leaders want me to work with them as partners and keep doing what I have done all these years. 4. Question is: (4a) If I set up everything, give my time, effort and trade secrets: how much equity within the company should I ask for without looking too greedy or entitled? (There are currently 3 other people involved) (4b) Currently, the startup (an LLC) has just been formed and only has one owner - the Agent who registered the company. Should I ask for shares upfront before committing or sharing any trade secrets? What risks remain if no shares are issued to me right now? (4c) My previous boss may not appreciate me going off on my own. How do I leave without angering him too much?


There are various 'models' that you can use to estimate how many shares/percentages your new partner should get. These include (a) his/her investment in time and/or money, (b) the current + potential value of the company, (c) the time and/or money that you as the original founder already put in and various other models. That said, at the end of the day, it's all about value and psychology (both side's feelings).

Bottom line:
1. It all really depends on how much value they are giving you (not only financial, sometimes even just moral support goes a long way). Some founder's 'should' get 5%, some should get 50% or more.
2. Ask the potential partner how much shares they want (BEFORE you name a number).
3. Have an open conversation with them in regards to each of your expectations.
4. Use a vesting (or preferably reverse vesting) mechanism - meaning that the founder receives his shares gradually, based on the time that goes by (during which he fulfills his obligations) and/or milestones reached.
5. If you want a mathematical method: calculate the value of each 1% of the shares (based on the last investment round), check how much an average CPO earns per month/year, and then you can calculate what % he/she should get for the 2-3 years they should put in.

4b. Happy to explain on a call as I would have to write another 10 lines to answer this. Very briefly though, the risk would be you not getting your shares, but if you draft a founder's agreement, you can avoid this.

4c. Tell him how much you respect him, the business and the time you worked there. Tell him that you are leaving for personal reasons. Do not tell him about the startup. Check that you don't have a non-compete class in your employment agreement.

Good luck

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Answered 3 years ago

Unfortunately, the answer is it depends. There are no fixed rules for assigning equity between you your 3 team mates.

You haven't said whether you will be working full time on this from the start, same for your colleagues and the roles each person will be doing so I will assume you are in my ranser.

Assuming they will be your cofounders each supporting with a key part of the business, taking the same risk by joining at the same time and sharing the load equitably then the answer is sharing 4 ways might make the most sense.

Split equity evenly and be done with it.

However, this isn’t the approach most startups use, because generally each founder/cofounder will contribute a different amount of money and/or time.

More than 50% of the time founders end up calling upon the law when it comes to equity distribution issues if things haven't been set-up fairly from the start.

The main cause behind these disputes is interpersonal conflicts because of questions about fairness. But it doesn't have to be this way.

If a 4-way split isn't the right option you may want to consider a method called the “dynamic split”or “slicing the pie” ( where instead of focusing on the unknown future, you determine your split based on what each co-founder is willing to invest now.

Good luck!

Answered 3 years ago

Building the product may be the easy part of your startup challenge. Level of responsibility and time allocated. Co-founders only able to work part-time, with responsibility and major income sources elsewhere, don’t carry the same risk as others with more operational responsibility. Less dependence or startup success, or more cash compensation, generally means less equity assigned. Investors may not be called co-founders, but they always get equity, commensurate with their share of the total costs anticipated, or share of the current valuation. The challenge is for real co-founders to keep their equity percentage above 50 percent, or they effectively lose control of operational decisions. If none of these five items is a clear differentiator in your case, a logical approach would be to assign each an equal weight of 20 percent of the total, and partition the total equity based on each co-founder’s correlation to each variable. A friend or family investor thus might get 20 percent of the equity, even with no business activity contribution. Even with an agreed initial equity split, it’s smart to have founder’s stock actually issued or vested over a period of at least two years, on a month-by-month basis. That way, if one of the partners disappears, or their role changes, a portion of the equity can be re-captured and reallocated to the other members. In all cases, roles and titles should be clear, but not necessarily tied to any given percent of equity. In other words, the CEO need not be top equity owner, but should be the one with the most business skill and experience.
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Answered 3 years ago

4a) determine your opportunity costs and add an amount that you feel fair - what you going will be fair and reasonable.

4b) suggest a mix of shares and monthly salary before committing to anything. As for trade secrets, if you can release them bit by bit over a period of time, say 1 to 2 years.

4c) as long as you never sign any non-disclosure or non-compete agreement with your boss, there is nothing to worry about. Why you do not want to make your boss angry? Is there something or relationship matter that lead you worrying making him angry?

Anywhere, wish you good luck!

Answered 3 years ago

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