Equity split and keeping control of an early startup LLC in the long term


1

The CEO of an early stage LLC plans to keep control of the company in the long term. To achieve this, he plans on keeping at least 51% of the equity. The company has 6 founders in total.

While it is fair for him to retain control, it doesn't feel right to have only 49% of the equity be distributed among the other 5 founders and the equity pool.

This question is more about how standard it is than about how to keep control. The related question Maintaining LLC control with less than 50% ownership has great answers on how to keep control.

  • Is it common practice for the conceiver and CEO to keep that amount of equity?
  • How would you approach the CEO on a different split of the equity?

Co-Founder LLC Equity

asked Feb 11 '12 at 04:31
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Anon User
62 points

2 Answers


2

This is probably obvious, but I think "it depends". I've worked with a guy who basically provided all the money (substantial) and paid everyone better than market salaries to get started. He also offered some equity because it was still a risk (it was a startup after all), but he certainly retained > 50% equity.

On the other hand, if it was simply the CEO's idea and everyone came together to build the business as a team (i.e., think: people are generally working for "free" or below market, all contributing sweat equity, etc.), then I think it's unreasonable for CEO to keep > 50% (I'm not sure why anyone would buy into that).

Lastly, if the CEO already built part of the business (e.g., got the technology started, maybe has a few customers, etc.) and has taken a lot of risk out of the equation, then maybe it is reasonable to keep > 50%.

Sorry to be so vague, but without knowing more about the situation it's hard to say whether it's reasonable or not. Good luck.

answered Feb 11 '12 at 05:51
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Ktr
53 points
  • Thanks for your contribution, ktr. The CEO had the idea and is the guy on the target industry. He has connections. The other 5 founders are working "for free" for sweat equity, doing design, marketing, programming, finances. – Anon User 8 years ago
  • Also, there is no real product yet and there are no customers (obviously). – Anon User 8 years ago
  • Yes, so in that case I think it is unreasonable for him to expect maintaining > 50% equity. At this point, there is only an idea - and as they say, an idea is worthless without execution. Good luck! – Ktr 8 years ago

-1

I would say in general it is not common. BUT, to use one highly publicized recent case, Mark Zuckerberg, post-IPO will have a controlling share of the company (>50% voting shares). And consider that he is one guy, with >5000 employees, and investors that have put in several hundred million dollars compared to his $0. Sometimes you're just that good.

I will however note that an LLC is different than a C Corp. LLC's do not have shares of stock, their ownership is expressed in percentages or 'membership units'. Typically but not always, percentages are divided (especially early on) by the amount of capital committed to the company or the capital-equivalent of labor at prevailing wages. Additionally, whoever did the heavy lifting or was the mover and shaker in turning the idea into a company ppl consider themselves an employee of, often does take a bigger share (sometimes much bigger). Also, as noted by ktr above, if your CEO was there first, and everyone else is late to the party, well...

Bottom line, what is the likely exit strategy? If the company could blowup like FaceBook, you'll likely be happy with even 1% ownership. If the CEO is likely to sell out to the first $10M waved in his face, 1% would net you $100K. What would you consider a "win" in the end? Rather than talking directly to the CEO about ownership share, I'd be talking about his perceived exit strategy -- which stated or not, he's certainly considered. If he considers $10M, $20M, $50M whatever, a target or likely exit, what percentage of that would YOU be happy with -- regardless of his cut? If it takes 5 years to build a $50M company, would you want $500K, $5M, or something in between? The answer to that is the real answer to your question. Stop comparing who has what and focus on what YOUR exit is. If it's not good, try to hike it up, or bail. Life is short.

Cheers.

answered Feb 12 '12 at 19:21
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Austin Gaijin
29 points
  • The person who downvoted this, please, care to share the reason? – Anon User 8 years ago

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