How to divide equity among 6 founders when you desire to also get VC funding


1

I am looking to create a company with 6 founders. Reason being...I need them all and they are all genius. Because they are all already highly compensated at great companies, equity will be my only option given cash would not be attractive to them...only the idea.

1) UI/UX guy
2) Lead Programmer
3) Marketing expert
4) Security and transaction specialist
5) Me-CEO and visionary...
6) CTO- and major connector to VCs and industry leaders

I also plan to raise VC funding in 6 months time....given we get somewhere. sooooooooooooo

1) how should I split equity given we are all equally important and invested time wise & $.
2) How much equity should we save for VCs?
3) How do I sweeten the deal for everyone given there are so many?
4) is there ever a situation where there are too many founders?
5) also..I plan to do a three year vesting period with the right to buy back..in case you were wondering.
6) My goal is the obvious 100 million sale. Given that is the number...how shall I do equity knowing i will be taking investors?

Your feedback is greatly appreciated.

Dustin

Co-Founder Equity Founders Agreement Joint Venture Fundraising

asked Dec 22 '11 at 10:02
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Dustin
11 points
  • Why the down vote and why the mark to close? Can you please give Dustin some feedback so he and others can learn. – Robin Vessey 8 years ago

4 Answers


1

You don't save any for the VCs, you just let them dilute it.

Read what Joel said, it is good advice. Modify it to fit your situation.

answered Dec 22 '11 at 11:19
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Paul Cezanne
649 points

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not an expert It sounds like everyone is pretty much equally important. You should first decide, depending on the time and value of each person, what you are willing to give up and what they will accept. I would maintain a majority share (even by 1%) if I were you to maintain control of the direction of the company. I would also suggest vesting the full shares for your partners over a period of time to protect against someone bailing out before they hold up their end of the arrangement or before you complete your product. Determine the ratio of value for your partners. From there, keep in mind that as you pull in investors, shares can, and probably will, be in the form of dilution. So, if you split up 100% of the company between the partners, those shares will be reduced equally as more shares are created for investors. I would, however, keep a small percentage of shares in case you need to hire anyone else on equity.

answered Dec 22 '11 at 11:38
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Manuel Alarcon
188 points

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By definition of your question equity should clearly be split evenly.

given we are all equally important and invested time wise & $.

Either this statement is true or it's time to come to terms with the fact that, as they say, some people are more equal than others and must be compensated accordingly.

  1. You must compensate to the level necessary that everyone feels adequately compensated. (duh right)
  2. You need to consider the actual value they bring to the company.

Here's a related answer of mine that can help with valuation of founders:

How to negotiate as a technical co-founder?

answered Dec 22 '11 at 11:53
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Umassthrower
458 points

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Let's say you incorporate a new company. You each issue yourselves 1 million shares each at the time of incorporation and all agree to you buy-back vesting schedule. The total number of shares issued is 6 million shares. Let's say you raise $3 million for a VC and he wants 40% of your company. That would mean that he'd have to get 4 million shares so that your 6 million shares plus his 4 million share makes for 10 million shares total and he owns 40% while all 6 of you own 10% each.

In other words, the number of shares you each issue yourselves now doesn't really matter. You don't "save" shares, you just issue new ones. The only thing that somewhat matters is the number of authorized shares. When you incorporate, the state might allow you to issue up to 20 million shares for instance. If you each issue yourselves 3 million shares at the incorporation (18 million issued) then you only have 2 million shares left to issue later before you have to ask to increase the number of authorized shares. Any good lawyer will help you avoid this mistake.

answered Dec 22 '11 at 16:15
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Frenchie
4,166 points

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