How do divide up equity if I'm providing the idea, mentoring and a smalll amount of funding


2

I have what I think is a really good idea for a product/business. I don't have time to develop it so I'm thinking of sharing the idea with some entrepreneurship students at a local university.

I realize the idea itself has little value alone. However, I can bring "to the table" :

  • 17 years of experience running a software company.
  • A close family member of mine is very knowledgeable about (and highly respected in) the market for this idea.
  • I can provide funding for hosting etc. (but that should not be too expensive).

Obviously, we can have whatever arrangement that everyone agrees to.
But I'd like suggestions.

I want to keep this simple b/c we don't even know how (or if) successful this will be.
I'd love some way to have an option to renegotiate at a later point once we see how it's doing and/or if how much effort we need to put into it changes.

Maybe one idea is that I get X% to start. After we assess the business potential I have the option of providing $FundingInjection to get another y%.
And/or Maybe I get right of first refusal for their first round (or two) of funding. (Or ability to match that valuation and buy up to Z%.

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asked Apr 4 '13 at 13:09
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Clay Nichols
737 points

2 Answers


4

There is a very simple, very fair way to divide up the equity that will not only tell you exactly how much you and each of the students deserve, but also provide protection if someone decides to bail out.

Taking a fixed amount (say 50%) for yourself and giving a fixed amount to the students removes your ability to stay flexible. This is called a fixed equity split and it causes problems. For instance, what happens if the students flake out? They own half your company. Yes, you can sign some legal documents with options, etc, but you will have no idea if 50% is the right number.

A dynamic equity split, on the other hand, allocates equity based on the relative value of the various contributions made by you and the students. Contributions include time, money, relationships, ideas, etc. Each input has a value relative to other inputs. Your time as a software expert with 17 years of experience, is worth more than the time of a college student. Specifically, you have a very different opportunity cost. Your dollar, however, is worth the same as their dollar.

Over time the model adjusts to reflect the changes in your contributions. Hence the name "dynamic"

I have prepared a list of how to calculate the relative value of the different components. You can find it here: http://www.slicingpie.com/wp-content/uploads/2012/10/Slicing-Pie-Grunt-Fund-Cheat-Sheet.pdf I have also created a spreadsheet that can help you keep track. You can find it here: http://www.slicingpie.com/the-grunt-fund-calculator/ "Keeping things simple" really means "keeping things fair". If you really want to keep it simple, don't take on partners!

answered Apr 11 '13 at 06:02
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Mike Moyer
284 points

0

If you really "want to keep this simple", just give yourself 50% and divide the rest equally among the students. If you want them to learn and be motivated, give them a proper share. If it takes off, you own half of something good. If not, why worry.

Depending how many students there are, you may consider a lower number for yourself, maybe 30% or 40%. If there are too many students, it will be meaningless, but for a small group of say five, they'd have 10% each, which is meaningful.

I think this is a great idea.

answered Apr 4 '13 at 16:19
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Steve Jones
3,239 points

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