Establishing shared ownership


3

What is a reasonable software start-up ownership share between founders when one is more senior, putting in some of his own money and able to raise angel money from friends, while the other two are less experienced but have domain expertise and putting in sweat equity? All would be getting founders shares and are equally contributing to the start-up prior to incorporating.

Co-Founder Founder Equity Shares

asked Sep 28 '11 at 15:45
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Sasha
16 points
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3 Answers


1

It comes down to what can all of you agree to be a fair split between you? Seed money is important but then, maybe more so is the skills being contributed ...

There are no hard and fast rules, my advice is usually bring it down to a common factor you can scale between you.

  • Use the wages the sweat equity people would get externally in 1-2 years as your measure. Lets say $100K each for a year to make the Math easy.
  • If they contribute time for free then their "equity earning" should be around 3x the normal earning (this 3x is changable). Thus 1 year sweat equity is worth $300K in shares.
  • If your investing money then your taking a risk so the amount of money you invest is worth say 4x ... thus you invest $100K your investment is worth $400K and each of theirs is worth $300K ... thus you have $1M in "investment" between you and you have your percentage splits.

As you start to earn money people will need to start being paid "something" for their effort and so they can live ... the difference between your agreed amount of $100K and the amount you can afford eg. $20K gets the multiplier effect and can either become shareholding at the 3x rate OR can be seen as a loan to the company which is paid back as the company improves.

answered Sep 28 '11 at 16:06
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Robin Vessey
8,394 points
  • Thanks Robin for the information. – Sasha 9 years ago

1

You might also want to try this calculator: http://foundrs.com/calculator/index.php

answered Oct 3 '11 at 12:10
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Joseph Fung
1,542 points
  • Thanks Joseph for the link. – Sasha 9 years ago
  • No problem. Hope it helped. – Joseph Fung 9 years ago

0

One of the biggest things is to keep everyone happy. People often feel that they are more valuable than the 'other guy' - no matter who the other guy is. We tend to value our work and skills higher than others because we understand it better.

First, you should thoroughly read this: Forming a new software startup, how do I allocate ownership fairly? - don't forget to read the comments, there is lots of good stuff there.

Putting in money is certainly worth something as are connections which help you to get funding.

It's not really clear what you mean by more senior. You mean more technically skilled? You mean older? Given the nature of software, older doesn't always mean more valuable (though it absolutely can mean that).

I'd say you'd generally do best by splitting it three ways with an extra bit for the one contributing the cash.

Robin's point about measuring the cash investment vs. the market value of the skills of the people contributing time. That certainly sounds reasonable to me. Another option is to consider some kind of debt arrangement - obviously this only works once there is a company. Still, don't forget to consider the option of debt over equity (remember, if the company goes under, debts get settled before shareholders get anything at all).

Good luck!

answered Sep 28 '11 at 18:31
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John
1,194 points
  • Thanks John, I will read the other post. By senior I mean they have more years of experience and have done a successful start-up with a high profile exit. They would be the CEO, looking to retaining the majority stake, while the other founder is leading engineering and the third is leading product/UX. – Sasha 9 years ago

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