Startup Equity Split Guide
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Startup Equity - Startup summer camp, 2014 at Kouvula, Finland.
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Startup Equity Split Guide
- 1. PANKAJ SAHARAN Startup Equity 1 Startup Summer Camp 2014, Kouvula, Finland
- 2. • An Indian “happily” living in Finland since 2006! ! • Co-founder & CEO, Founder Solutions! ! • Member of Board, HankenES & LaureaES! ! • Master degrees from Aalto University & Metropolia UAS! ! • Former VP, Sales & Business Development, World Fashion Apartments, Finland! ! • Former CTO, Joukkoenkeli Oy, Finland! ! • Multiple years of cross-domain experience in big companies like Nokia in technical & project management roles. About Me
- 3. Founder
- 4. Founder • One of the originators of a startup! ! • A person who puts up the most risk! ! • Carries the weight of startup idea on his or her shoulders! ! • Gets a share of founder equity ! ! • Typically, works for no salary at least before the first outside investment round. “FOUNDERS ARE INDIVIDUALS WHO CREATE, EXECUTE, AND INVEST IN IDEAS TO TURN THEM INTO STARTUPS” - Noam Wasserman, Harvard Professor
- 6. Co-Founder(s) • Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot. ! ! • Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams. ! ! Reference: Startup Genome Report, 2011! !
- 7. Co-Founder(s) • Choosing the right co-founders is one of the most important decisions that the founder(s) have to make, especially during the early stages of the startup.! ! • The founding team has a direct impact on the success or failure of a startup in the long run.! ! • It has been believed that founders carry the potential value of the startup.! ! ! ! ! Note: It is important to realise that an idea is not necessarily owned by one founder!
- 8. Equity
- 9. Equity • Ownership interest of the company that is held by various parties (including founders).! ! • The value of shares issued by the company.! ! • Initially, founders typically own 100% of the company.! ! !
- 11. Startup Founder I want a solution for fair! equity split between my startup co-founders. >65% of startups fail due to founder issues!
- 12. Fairness, and the perception of fairness, is much more valuable than owning a large stake.! ! ! TRUST is key! Founder Equity Division
- 13. Founder Equity Division 50-50 or 1/n equity split is almost NEVER right! ! ! FAIR does not mean EQUAL and vice versa
- 14. Founder Equity Division Usually done on a napkin!!
- 15. Founder Equity Division Default elements in equity splitting
- 16. Idea ! ! • A startup idea is a weighted sum of the initial ideas brought by each co-founder.! ! • In the early stages, ideas are worth nothing more than one’s ability to execute on them.! ! • Over emphasis of initial idea in equity split is not optimal but if it could be translated to some tangle e.g. an IP, the value should be factored in.! ! • A small premium might be taken into account though it’s still argued by many.! ! ! !
- 17. Consequences of unfair equity split
- 18. Performance Less stable startup performance Valuation Lower pre-money company valuations Investment Loss of confidence among investors Expensive Harder & more expensive to solve with time Consequences of unfair equity split
- 19. Consequences of unfair equity split Example 1: “It was the stupidest handshake to make” https://www.youtube.com/watch?v=TaR0hg3UsiU
- 20. Consequences of unfair equity split Example 2: Ockam co-founders & unequal equity split! ! ! • One co-founder had worked for the other one for seven years as a junior before they decided to start a company. ! ! • It was clear that their contributions to the startup wouldn’t be the same. ! ! • They did a great job of evaluating different scenarios of how much they would be involved with the startup (what if one of the founders wouldn’t quit his full-time job to work for the startup and so on) and identified different equity splits for every scenario. https://www.youtube.com/watch?v=TaR0hg3UsiU
- 21. Consequences of unfair equity split Example 3:! ! ! ! ! ! ! ! • At the beginning Facebook shares were split between them, with Zuckerberg owning 65%, Severin owning 30% and Moskovitz owning 5%.! ! ! !
- 22. How to do the equity-split? ! Our solutions: Founder Equity Solution (FES) & PieChopper
- 23. Fair Understand the best equity split for your founding team based on your current situation Powerful Discover the strengths of your founding team Strategic Turn uncomfortable equity negotiations into a strategic teamwork Basis of our equity-split model
- 24. Inspired from over a decade long research by Harvard Professor Noam Wasserman Recommendations get more precise and statistically grounded with usage Powerful, online, self-learning system Takes into account : » founders contributions » their prior entrepreneurial experience » expectations of future contributions » other key factors Founder Equity Solution - FES
- 26. Key takeaways ! ! ! • If you don’t want equity split issues to ruin your startup deal with them early.! ! • It’s better to find out early whether you are compatible with your co-founder. Equity talks are the best time to do that.! ! • When you deal with them, keep in mind that a 50/50 split is almost never a good solution. ! ! • Go through several scenarios of how your startup is likely to evolve. Decide how your equity split will be changing depending on the scenario.
- 27. Quick Exercise (15 mins) ! foundersolutions.com/fes
- 28. Vesting
- 29. Example (hypothetical) ! ! ! • Imagine there are three of you, you split your startup equity 45%-35%-20% and get to work. ! ! • In a month a founder with 35% looses interest in the project and leaves… taking 35% with him! ! ! • The other two work hard, get VC money, become famous and in 6 long years launch an IPO. ! ! • Of course, over those years 35% get diluted to, say, 7%, but that’s 7% of a billion dollar company – not bad for a month of work, heh?
- 30. Vesting! ! ! • Zipcar case did not have vesting included too.! ! • Zuckerberg didn’t know what vesting was at the point when he started the company, and it cost him billions of dollars because of his co-founder Eduardo Severin.! ! • Vesting means receiving the right (to the shares of equity).! ! • A promise that they will get their shares of equity as agreed only if they certain vesting conditions are met.! ! • Vesting conditions could be based on time, milestones or other combinations.! ! • Most common vesting period is 4 years i.e. 25% of shares vested per year from date of starting.
- 31. Valuation
- 34. Equity Dilution
- 38. Key takeaways! ! ! • If you don’t want equity split issues to ruin your startup deal with them early.! ! • It’s better to find out early whether you are compatible with your co-founder. Equity talks are the best time to do that.! ! • When you deal with them, keep in mind that a 50/50 split is almost never a good solution. ! ! • Go through several scenarios of how your startup is likely to evolve. Decide how your equity split will be changing depending on the scenario.! ! • Consider vesting as mandatory even if you do unequal equity split.! ! • Keep in mind the equity dilution for future investment rounds.! !
- 39. Food for thought ! ! ! • Consider if equity can and should be used to pay for outside services e.g. legal, marketing, accounting etc.! ! • How much equity should be set aside for advisory board and for the board of directors?! ! • There will be probably tax implications for founders depending on how the equity is granted. It is vital to get legal advice before issuing shares. Chose legal company that has experience in working with startup companies.! ! • Shareholder agreement is one key document that needs attention.! !
- 40. Quick update for Founder Solutions
- 41. ! Pankaj Saharan Co-founder & CEO ! Email: pankaj.saharan@foundersolutions.com ! Phone: +358 504 86 3323! Twitter: @pankajsaharan! http://fi.linkedin.com/in/pankajsaharan/! Skype: psaharan www.FounderSolutions.com! Thanks!