Stock

April 14, 2009 4:00 PM

How much of an equity stake in start-up should I ask for?

I am a co-founder of a technology start-up but not the inventor of the technology. I helped with the business plan, will write the patents and help look for VC.

How much of an equity stake in start-up should I ask for?
I want to have one part for helping to get things running and a second part for a 2-3 year work commitment.

What is a realistic and fair share? 10% plus 10% for the commitment?
This would be 20% of the company and after financing/ stock dilution (assuming the VC would take 50% for the first financing round) I would end up with 10%.

Any suggestions?

posted by yoyo_nyc to work & money (14 comments total)

First, if you give the VC 50% for the first round, you're nuts. Anywhere from 20% to 40% dilution is the norm for an early pre-rev, pre-hockey-stick-growth startup.

What's you roll in the company for the long-term? If you're not CEO, or the guy running sales or product then 10% post-dilution will be seen as an outrageous to VCs. There's a limited pool of equity that can be used to hire execs and team members and the more you have in a non-critical role, the less they can give a future kick-ass VP Sales to entice them to join.

Lastly, whatever equity you do get, assume a four-year vest. You might be able to convince the funders to give you 25% up front in vested options and then a three year vest for the remaining, but I wouldn't count on it unless the company was your idea.

Simply put, equity that is help by people not actively working on making the company a success is seen as a liability. If you're gone in two years and holding 20% of the original pie, you're a major hindrance to growth.
posted by bpm140 at 4:14 PM on April 14 [1 favorite has favorites]

20% __pre__ VC investment did not seem outrages for me. But what do you suggest?
posted by yoyo_nyc at 4:23 PM on April 14

10% will be an upper bound generally. Key early hires figure 2-10% but figure on also having some sort of option package plus when the VCs come in to be partially topped off w/ options to make up for some of the dilution (unlike the founders with the bulk of the ownership). Anything unreasonable on the high-end the VCs are just going to change anyway. Unreasonable on the low end you'll never get a chance to fix.
posted by jeb at 4:25 PM on April 14

FYI: I am one of the founders.
posted by yoyo_nyc at 4:26 PM on April 14

@jab

10% for being a founder AND the X years work commitment? If yeas, how would you split this number? 5+5?

Yoyo
posted by yoyo_nyc at 4:38 PM on April 14

"Founder" means almost nothing. What will your job description be for the next four years? That's why you are given equity.
posted by bpm140 at 4:39 PM on April 14

Is it just you two founders? How much non-sweat equity have each of you contributed? If each of you have sunk in actual $ that plays into it in part.

And a 2-3 work commitment? If you're one of the founders, you have an indefinite and potentially infinite commitment. If you're a key hire, then 10+10 sounds OK. If you're a true co-founder who will see this out to the end (unless you're forced out by VCs later, ha!) then it's at least 33%-50%.

But if the other guy has contributed all the hard equity then you're back to 20-something percent or whatever you want to split it based on money/sweat equity.

Ultimately it has nothing to do with fairness beyond what the two of you agree to. If it's just you two, say you want half. The only impact this has is your relationship until it gets to the point where there are board seats and board votes etc which is years away.

And, although I have a degree that covered this exact topic, the main thing it taught me is that there are no simple answers. There are lots of startup seminars you can go to that cover this issue. You probably have a lawyer; if not, go talk to one who deals with this kind of stuff. You probably know this, but do some research beyond AskMe.

Also, most VCs will want a majority stake. Well, some at least. Not that you should give it to them, but they'll want it and some won't do the deal without it. But that's a different issue.
posted by GuyZero at 4:41 PM on April 14

@ bpm140

CTO
posted by yoyo_nyc at 4:43 PM on April 14

@GuyZero

I guess we are looking at 1.5 mio first round. Which isn't much/near to nothing, considering the type of industry.
posted by yoyo_nyc at 4:45 PM on April 14

no, 10% at a wack. The thing is like, once you guys actually form the company, the granting process will be much more complicated. Like you can just be granted X% now of founders stock which will have preferential tax treatment for you, then get some sort of opt package that vests over X years but may have higher strike or be tied to performance milestones or something.

Yeah, agreed though that we need to know more about like, who did what when. Did this guy come to you with tons of work done on his amazing invention and you are helping him found the company, or are you like true cofounders? Like of the total work put in already, how much did you do?
posted by jeb at 5:00 PM on April 14

There are a lot of variables here, but it comes down to this. Are you and the other co-founder equals? I don't mean you're friends or even peers, but rather are you equally critical to the success of the company?

If the company would likely succeed with someone other than you in your role, but would almost certainly fail without the other founder, then you are not equals.

If you and the other co-founder are equals, then you and the other co-founder may have equal shares. For example, 50/50 of the shares not allocated for: a CEO hire, and your employee pool.

The variables include whether both of you are working full time on this, are both presumably making no salary or are at the same percent of your fair market value salary, whether either of you have contributed cash to get the company running, whether you joined the company at the same time, and so on.

If the other co-founder is bringing in major IP, then one way to figure it out is that you get X shares for your full-time effort, and the other co-founder gets X+Y, where Y is for the value of the IP, Assuming all other things are equal - you and the co-founder are putting in equal effort and are otherwise equally important to the success of the company, but of c

Worrying about post-VC dilution at this point is, IMO and without knowing more details, premature. Everyone gets diluted equally, presumably.

Long story short - if it's just the two of you and all other things are equal, then you start with equal shares. However, it is unlikely that all things are equal, and you may have as little as 1/50th of the other founder's shares and still be getting a fair deal.
posted by zippy at 7:46 PM on April 14

Zippy's post is dead on except i would add the addendum of "if you are equally critical to the success of your company now, did anyone's previous work add up to something of critical value to the success of the company now."
posted by jeb at 8:32 PM on April 14

Are you getting paid a competitive salary? (If so I'd say 0-2%). If not I'm offering co-founders in my current venture 5% vested over 4 years.
posted by bitdamaged at 10:10 PM on April 14

I am a co-founder of a technology start-up but not the inventor of the technology. I helped with the business plan, will write the patents and help look for VC.

These things are worth little more than whatever wage you're paid to do them. Unless you're bringing capital to the company (as either an investment or IP that's inherently worth something), your status as "co-founder" is worth very little.

If I were a potential major investor in your company, and saw that someone who is barely a key employee (sorry to be blunt, but you haven't convinced me otherwise) holds more than a couple percentage points, I'd walk away.
posted by mkultra at 10:13 AM on April 15