How much equity should an advisor receive? (Startup Weekend Project)


2

First, I understand this question has been asked several times but I believe this case is a little bit different.

Myself and a group of people recently competed in a Startup Weekend event (54 business competition, for those that are not familiar). We did not win, but have decided to move forward with our idea. We have a team of 6, but only myself and another person will make this our full-time priority. I'm coming from a sales background with experience in front-end and am currently learning the backend. The other full-time person is a marketing/business/public speaker type. We have 4 other team members that consist of:

  • Design (lots of experience)
  • Entertainment lawyer (not our industry, but a lot of great experience, is currently partners with the marketing/business growth person below.)
  • Marketing/business growth (founded several other prior businesses and has a lot of connections)
  • Non tech business guy (owns our domain and came up with the original idea.)

All of which decided they want to play an 'advisor' role and are insisting on splitting the company equally. Their argument is 1) They can't calculate the value of their time already spent 2) Their hourly rate is higher compared to ours 3) They want controlling shares in case we decide to do something crazy.

We plan on raising ~100k in funding, which the marketing/business growth person will assist in. At that time, myself and the other full-time person will start to receive a salary. The salary will be minimal compared to what I'm use to earning, which is absolutely fine.

I feel this is a great opportunity to jump into the entrepreneurial world and am very grateful for everyones input and work thus far. However, splitting the company equally just doesn't seem fair. What are your thoughts? How should I approach this issue with them?

Thank you in advance!

Equity

asked Aug 15 '13 at 03:53
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Ri89
11 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • With that many people involved, it seems it'll be hard to turn this project into a viable and growing startup, even if the business concept itself is sound. Too much politics is going to slow you down. – Frenchie 7 years ago
  • Possible duplicate - read [How to Divide Up Your Company's Equity](http://www.brightjourney.com/q/divide-companys-equity) last point - equity based on actual contribution. Consider that an advisor is just a contributor. – Jim Galley 7 years ago

2 Answers


0

Six people splitting the company equally sounds quite unfair. There is a way to calculate this all out (I got tired of repeating my answer on here, so blogged about it).

To summarize, you have 'founder shares': for future contributions which vest over time (typically 4-10+ years depending on hours worked), and 'equivalent to cash' shares for labor contributed that you would normally pay cash for.

It sounds like the guy who owns the domain and design guy should get 'equivalent to cash' shares valued at whatever valuation you raise the 100K at. Figure out fair market value (what you would pay) for the design services and domain, and pay in shares to vest immediately.

The marketing/business growth guy should absolutely get founder shares. Use the foundrs.com calculator to figure out the split between the three of you ... and note the difference in vesting. It will be 4 year vesting for you guys, 10+ years vesting for him depending on how many hours he spends per week on the company. It sounds like you want to encourage him to come in fulltime ASAP, and this will give a structure to encourage him. As for the lawyer, figure out which bucket he falls into.

As for their three arguments:

  • can't calculate value of time already spent: this isn't normally compensated, since people are all expected to do a little work before you start; you could work it out for all six of you, though, and compensate it with 'equivalent to cash' shares at the $100K cash in valuation if it really matters; or alternatively set aside 5-10% of the founder shares to compensate this pre-work (you can't say you are more than 10% done, can you?), and attach 4 year vesting to it for staying around part time (this will incent their help)
  • their hourly rate is higher compared to yours: you can sort this out through vesting speeds of founder's stock or by giving them 'equivalent to cash' stock ... note that within a couple of years you should expect to pay all people involved in the company, including them, if they are really contributing time (at a suitable discount to their market rate comparable to the discount you are receiving)
  • they want control: they don't need controlling shares to have control on the board: write a shareholder's agreement which splits up votes disproportionally to shareholding, so that, e.g., you have 2 votes, they have 2 votes, and a mutually agreed third party has the deciding vote
answered Aug 15 '13 at 09:30
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Kamal Hassan
1,285 points

0

From my experience by participating in a winning Team of a Startup Weekend Program I must say that it is essential that all 6-team members can get along within a reasonable degree of conflict. First comes the team and then the validity of a given idea. Startup Accelerators and investors alike put greater importance of the profile of the founders than on the idea itself. Assuming that all 6-memebers can get along and can contribute significantly to the project, then it is vital to evaluate each member contribution in working time cost. Inevitably, that means you can not have equal share in the company.

In regards, to the 4-memmbers that want an advisor role:

  1. Their time spend already can be calculated (raffle) even though it should have been agreed beforehand.
  2. Their rate will depend on what the market pays for their particular profile and no matter if its higher than yours, the time devoted to the project will determine their total value (opportunity cost).
  3. Controlling shares is not the only way to make sure you don't do something crazy.

If you do decide to have the other 4-members as advisors I recommend you to read the following article from techcrunch http://techcrunch.com/2011/09/22/free-startup-docs-how-much-equity-should-advisors-get/. It provides some guidelines and links you will find useful in order to negotiate.

answered Aug 19 '13 at 06:50
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Niko S
1 point

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