Startup equity split
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Luke Haddrick
Apr 6, 2018, 5:00:34 AM4/6/18
to Silicon Beach Australia
Hey Guys
I am in the early stages of setting up a SaaS company with 2 other partners. The dilemma I face is all too common, what should the split be? We haven't started selling the product yet, however we need to address this upfront now as you know.
Summary of the role of the 3 founders and the level of involvement:
Founder 1: CEO - owner of the idea, and will be responsible for day-to-day, pitching, bus-dev etc
Founder 2: Tech Director (CTO) who will manage the development requirements (time is scarce as working FT elsewhere)
Founder 3: Director - who will bring the network of contacts and has founded another creative agency (time is scarce as working on multiple other projects)
Question 1: Should costs for development and design of the website be split even through the other two partners are taking a chunk of equity each? As opposed to startup expenses being invested by each party i.e. development costs / design costs to be earn their equity stake.
Question 2. With respect to sweat involvement or grunt a flexible structure is needed where the amount vested can be adjusted over time.
How do I approach this?
Thanks
Luke
stevebuikhuizen
Apr 6, 2018, 7:43:30 PM4/6/18
to Silicon Beach Australia
This book will help: https://slicingpie.com
James Muraca
Apr 7, 2018, 11:52:44 AM4/7/18
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From experience, cutting up value of dev vs business vs marketing etc gets complicated. Especially if one person doesn't appreciate the effort of another area of expertise.
Split thirds for shares and costs, but vest after a year or some agreed milestone. If any one person is lagging, the other two should be free to call it out. Also as a token gesture opening a bank account (doesn't need to be a serious company one) and everyone putting in an equal amount of cash to draw down on for dev or business costs.
Keep it simple. You can debate on terms and effort and end up tearing apart a team before you start!
On Fri, Apr 6, 2018, 4:43 PM stevebuikhuizen <steve.bu...@gmail.com> wrote:
This book will help: https://slicingpie.com
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Kevin Baum
Apr 11, 2018, 8:05:12 AM4/11/18
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Hi Luke,
Co-Founder of a 4 year old SaaS company here.
Having had multiple experiences with Equity that led to conflict I would recommend the following:
- Always split equity evenly between founders (unless one is bringing defensible IP or $$ to the table. Ideas do not count. It's not about ideas, but execution). Roles change and become more and less important over time. Splitting it based on perceived value in the future is impossible to do.
- Everyone Vests - Typically 4 yr with a 1 yr cliff. I personally have dealt with and know several others who have dealt with founders leaving early and having dead-equity nightmares that decimated funding rounds.
- Nobody gets equity granted until they quit their job - people's circumstances change and you should not grant equity based on a promise. Part time is 1/10th as effective as full, and sweat equity should not be realised until someone goes full time.
Happy to chat more about some of my horror stories if you like.
Sincerely,
Kevin Baum
Kevin Baum / CEO/Co-founder
Ph: 0449 606 144
AgriWebb
http://agriwebb.com
Level 6, 227 Elizabeth Street, Sydney 2000
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Dean Collins
Apr 11, 2018, 9:09:19 AM4/11/18
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Pretty good advice apart from quitting your job part.
But agree with everything else.
Cheers
Dean
But agree with everything else.
Cheers
Dean
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Kevin Baum
Apr 11, 2018, 12:34:50 PM4/11/18
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Fair enough. Just my personal opinion. A quick anecdote to contextualise though:
- About 3 years ago an entrepreneur friend from Colorado started a business with 2 people from where he was working. They split equity 3 ways and worked on the side for over a year (past the cliff of their accelerated vesting).
- One of the three of them barely contributed during that time, citing how his work projects were far more onerous than expected and he just didn't have time to help out, but would certainly quit his job like the other 2 once they raised their seed round and begin pulling his weight.
- After a year, they raised that seed round. My friend and the second co-founder quit their jobs and began working full-time as planned.
- 6 months later (18 months in), despite very little contribution, the third co-founder decided that he was quitting McKinsey to pursue a career in politics and would not be working on the startup. Having already vested half of his shares, he was now dead equity totalling 1/6 of the company and refused to sell back that equity.
- It nearly killed the company, and lawyers had to get involved to sort it all out and it certainly ruined their friendship.
Sadly this is not isolated either, as I know of a nearly identical (but more easily resolved) situation with a former classmate.
I guess I would suggest that granting sweat equity before it has been earned can be problematic and that same thing can be accomplished by having the equity held by the company as a pool or some other mechanism and not granted until it has been truly earned.
And while I firmly believe in the power of working on something part time (perhaps I was too harsh before), I also feel that nearly every story of a side gig turned successful startup has to involve a "moving from part-time to full-time" stage.
Cheers,
Sincerely,
Kevin Baum
Kevin Baum / CEO/Co-founder
Ph: 0449 606 144
AgriWebb
http://agriwebb.com
Level 6, 227 Elizabeth Street, Sydney 2000
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Kevin Baum
Apr 11, 2018, 12:39:08 PM4/11/18
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(Forgot to mention. Obviously same exception for those who bring IP or cash)
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Ash Angell
Apr 11, 2018, 4:20:47 PM4/11/18
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Same as everything else that has been, said except to add:
Remember NOT all shares are created equally. Getting the company properly setup is important and you can have different class of shares with different rules as they pertain to your company. For example, just because someone has 1/3 share (for example) doesn't mean you have to give them 1/3 of the vote. Many people in the startups initial days for get this. How much voting power a shareholder has, can be completely independent from the value of those shares.
Im not saying you should NEVER give out class A shares - especially since many people may value voting control more than the value of the shares int he early days anyway, but don't forget that this is another tool at your disposal to help equalise the value of shares as you split them.
Ash Angell
Luke Haddrick
Apr 11, 2018, 11:57:36 PM4/11/18
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Thanks for all the responses so far!
One other question is how to split equity when 2/3 founders wont be leaving their day jobs. Only 1 founder will be putting in the sweat or grunt to generate the revenue by booking meetings/pitching etc (aside from the social/search/display generated leads).
How much should the remaining founders get? 1 of them is investing the development resources to build the site, and the other will invest the design resources.
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Brandon
Apr 12, 2018, 11:15:07 PM4/12/18
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This is certainly one of the tougher challenges in a start-up after hiring and retaining talent.
IMO, equal equity makes sense if everyone are in full-time. But there are times when say one of the partner only comes in full-time after say 6 months. As long as the vesting schedule ensures no shares are given before the 1-year cliff mark, much isn't loss and you would have found out if one of the partners (including yourself) may not be fully committed in the start-up.
In the event when it isn't equal splitting, the partners should be mature enough to discuss why (perhaps 2 person took the risk full time for a year and so the 3rd person who is part-time didn't risk it all from the get-go). The ego may way equal split but at the end of the day everyone has to agree on the split and then also agree never to second guess again. Perhaps even write down the reasons why.
I recall seeing this equity calculator. It can be a guide for you to create your own equity calculator also:
So when you document and allocate the equity accordingly, then anyone who second guesses in the future should revisit this document. Perhaps even better if it is printed out and everyone signed it as proof that they read it and agree to the allocation schedule.
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