What's a reasonable amount of equity to retain when you're the key founder?


10

I'm working with two other partners to get a SaaS startup off the ground. I worked on this thing slowly, mostly on my own, for about two years before approaching my partners. As a background, I knew both of them personally before this started, although both were more of acquaintances than best friends.

Today, the breakdown of work is like this:

  • Partner A has been working really hard and has good domain expertise. He's impressed me tremendously by taking on new things and figuring stuff out as he goes. He's been a huge asset, sacrificing time and energy.
  • Partner B has been working less hard, is much less assertive and aggressive, but is very knowledgeable in his area of expertise. He assures us that this his contribution will increase in the future as we get rolling. I worry that he doesn't understand how much work is in store for him.
  • As for me, I had the idea and know the entire application inside and out since I wrote everything. I'm also driving this thing forward coming up with strategies on how to sell and market ourselves and our product. Both partners freely admit that if I got hit by a train, the startup would likely die. I'm completely obsessed with this, giving up a lot of things to make sure it succeeds. I've also invested about $5K.

We're at the point where we're dividing up company equity. We have a vesting schedule in place, which is meant to protect us from someone walking away after six months. But my question is:

What is a reasonable amount of equity to retain for myself?

If these guys get something like 35/15, that leaves 50% for myself. Is that too low? I feel that I'd like to give up a larger percentage if the work is split equally. They've started to take on more and more work, which is encouraging, and expected. Would going below 51% not be smart?

I feel that if I had a better sense of what I deserve, it'd be easier to offer them percentages.

Bootstrapped Co-Founder Equity Founders

asked Dec 23 '09 at 18:21
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Brianz
223 points
  • My concern is the statement "He assures us that this his contribution will increase". I'm not sure I've ever seen this happen. People are the way they. More compensation or stock might spur a short term increase in effort but not a long term one. – Dane 9 years ago
  • +1 on Dane. Trust your gut. – Jason 9 years ago

11 Answers


7

Since you started this two years ago and alone, I believe going below 51% is not a good choice. When tough decisions come and they both disagree with you, the stock distribution will not help settling the issue.

Next time you start a business you've been cooking yourself, remember to approach your potential partners with a specific proposal in mind. A simple example would be "I'm looking for a partner that takes care of X and Y, getting 20% now plus another 10% along two years.".

On your specific situation, I'd propose 55% for you, 25% for partner A, 10% for partner B, 10% of stock pool that can go to B according to specific goals, and for retaining key technical people in the future.

Going further into this, I believe your partner B might not be needed for now. If he's not a partner yet, maybe you can offer 1% as an advisor and leave the partnership discussion for the future.

Get in touch if you think of a good alternative for this, I like to exercise different scenarios.

Best,

-- Yuri
Founder @aceleradora

answered Dec 23 '09 at 22:42
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Yuri Gitahy
71 points

7

I would ignore your $5k investment. It's not that much money and clouds the issue a bit.

A lot depends on what degree of investment/sacrifice people are going to make. If one or the other is working at far below market value, I'd factor that in. I like to think not about how much equity I want to retain, but how much equity it will take to attract the people I want (whether as partners or employees).

I worry a bit about the prospective founder that is not working as hard or doesn't seem as fully committed. Startups are a tough business and even deep industry expertise won't amount to much if someone's not emotionally invested and spending a lot of time.

If I were you, I'd have a direct and candid discussion with them and see if you can come up with some semi-objective way to figure this out. Just the exercise of having this conversation is usually healthy.

And, though it's hard to put concrete numbers out there, I'd lean towards something more like 60/25/15 or 60/20/20.

answered Dec 24 '09 at 18:47
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Dharmesh Shah
2,860 points
  • Curious, what does the zero dollar investment say about the other two partners? – Jeff O 9 years ago

4

As the original idea guy, you should clearly get more. You also want to maintain control over the idea until you need to get outside investment. I also assume that you are the CEO of this venture, since it was your original idea and that warrants more as well.

Take a look at it this way. You have spent two years getting it off the ground, it was your idea. You put your own money into it. You worked at it and got it to a point where two people want to make it happen with you. That's a big deal.

These two partners just started and are contributing at various levels. That should be rewarded as well but in proportion to your investment of money and time.

My gut says 60%, 30% and 10% (for founders stock), without knowing anything about your company. Remember, when you take additional investment, your control over the company will diminish as you give up more equity. So having a significant amount of shares up front does allow you to maintain some control.

As for the stock pool for later rounds, that's a different story. Usually, employees split between a pool of roughly 20% of the round. The splits really depend on the role each one plays.

answered Dec 24 '09 at 00:13
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Jarie Bolander
11,421 points

3

You need to remember that if you look for outside funding, the percentage of the company that you own will go down each time someone puts money into the business. So if you own 51% today, and then someone invests $100,000 in your business, you may be down to 25%, putting you in a very weak position for future negotiations, never mind your total inability to make executive decisions. You need to think about this now (which you obviously are).

I would say that you should not give up more than 40% at most (retaining 60%), and ideally, you should hold on to more. Not knowing the specifics of what your business is makes it difficult to judge what would be fair, but to give you an example, I've made a deal where someone similar to your Partner A was given 15% vested, and the person similar to Partner B was given 5% vested, with an additional 5% if his role picked up and he rose to the challenge.

To think about it another way, what is your company worth today, and how much value does each partner bring into the deal? That should help you figure out the numbers.

One last point - there is one more way for you to retain control, and that's via seats on the Board of Directors (you are incorporated, right?). You can specifically state that there are 5 seats on the board, and you hold 4 of them, with Partner A holding the remainder. Or some other arrangement. But you can ensure this way that you retain your ability to make decisions far beyond what your actual ownership would entitle you to. If I recall correctly, Mark Zuckerberg of Facebook only owns something like 5% of the site, but he holds the majority of the board seats, giving him control of how the site develops.

answered Dec 24 '09 at 02:01
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Elie
4,692 points
  • +1 on your answer generally, but -1 about the board seats. Stock always trumps the board, and the board composition can change any time, specifically if you get funding. The "board" is essentially irrelevant when it comes to true control. – Jason 9 years ago
  • Depending on the arrangement, it doesn't have to be that way. You can make an agreement to lock the board seats, that is, that part of the investment agreement (which is going to be with your largest shareholders) is that they cannot take away your board seats. That being said, owning more is better, but once you start accepting investments, your portion will dilute over time, so look to the alternatives from day one (not that you should therefore be free with your stock, of course). – Elie 9 years ago

2

Something to consider: run the numbers in terms of what % you want to own through future rounds of funding. Here's a nice tool to help you out with that process.

Equity Ownership Simulator

answered Dec 24 '09 at 02:16
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Joseph Fung
1,542 points
  • +1 for the great link. I have been looking for something like this for a while. – Jarie Bolander 9 years ago

2

You should be having this discussion with them, not us. There really isn't enough information to go on.

Some comments and questions:

You all need to vest on the same schedule.

Are you all doing this part time?

$5k is not much money. (especially over 2 years)

2 years is a long time. If you haven't gotten anything releasable in that time I question the value of those years. (especially as it relates to your equity compared to theirs)

I hesitate to give any suggestions based on the limited information, but if I were in your shoes I would talk to them about your concerns and offer the following:

  • 33% equity each
  • some preferred stock with some set of voting preferences similar to what VCs or Angels get for SOME (not all) board decisions
  • you get the majority of board votes
  • 2 to 4 year vesting with a 6 month or 12 month cliff

EDIT

You really need to agree among yourselves. Using this board as "proof" or other datapoint for your partners is not really a good way to force an agreement.

Again, with all of you part time and if you say after 2 years and still lots more work is to be done, what real value was the prior work? You have to be honest about it. If it really represents a majority, then they should be willing to agree.

answered Dec 24 '09 at 05:44
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Tim J
8,346 points
  • We have had this conversation, but we're not done, and I was looking for other perspectives from people who have been there. And yes, we're all doing this part time. This is not going to be the next Facebook, so funding isn't in our sights in the near to medium term. Ideally this business would provide us all with a nice lifestyle, but we'll keep our day jobs until revenue begins to flow in. – Brianz 9 years ago
  • Then I really don't see the point at all about equity division. If you make it big, you all win big. If it is just a decent full time job, then again, it really doesn't matter. If it never makes money it doesn't matter. I see no reason not to go 1/3 each. – Tim J 9 years ago
  • Tim makes a good point about if this is a lifestyle business or might need outside funding. I think we have to separate the founders stock from the options moving forward. Founders stock does not vest. You just get it when you organize the company. Stock options are a different story and should have a vesting schedule. – Jarie Bolander 9 years ago
  • Partner A seems to be deserving, but B seems like he is hedging his bet on this venture and isn't making a commitment equal to 1/3. – Jeff O 9 years ago
  • Well, at 2 years into it and not complete and doing it part-time it seems to me that none have made a serious commitment... thus they are all pretty much on equal footing. It really all comes down to getting consensus from the partners, not from people on some internet site. – Tim J 9 years ago

2

I'd approach this a different way. If you feel like these 2 others are "true" partners, then I'd want to send a strong signal that we're all in this together. I'd consider going 1/3, 1/3, 1/3 which will send a real message that they are "real" partners. Your vesting should be 2 years ahead of your partners, however. So you "currently" own more. If they're not "true" partners, then just realize that a) that's the signal you're sending to them, and b) you're in charge, so you can set the percentages to whatever you think is right.

I'd add that if they turn out to not be "true" partners, putting in equal work over time, etc then you should not continue vesting them (e.g fire them). So make that clear up front.

answered Dec 24 '09 at 05:23
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David Cohen
79 points
  • I was going to vote up until you suggested his vesting is different than the others... – Tim J 9 years ago
  • I think the vesting should be different, he has already demonstrated his commitment. 2yrs may be a little much, but vesting difference is still a good idea. – Joseph Fung 9 years ago
  • Interestingly enough, we've talked and agreed that I would get a 1 year head start on the vesting. – Brianz 9 years ago
  • I see - vesting from the day a person started working on the project. That is fine, but I would have figured you want to vest from the date of the agreement. It really makes no difference what you contributed before - the goal is to provide security for the company in the future. I am not sure that "vesting" for a part time endeavor makes any sense at all. – Tim J 9 years ago
  • I won't vote you down because it's a reasonable idea, but I don't like this strategy at all. The 2 years is more than "vesting" -- it's HIS COMPANY. 1/3 split doesn't reflect that. Vesting into your own company also doesn't make sense. The way he describes the other contribution doesn't sound like an even split to me. – Jason 9 years ago
  • I'm a newbie here but I'm trying to respond to Jason. Vesting into your own company is done all the time. As are head starts. Consider the vast majority of VC backed companies - founders have to sign up for vesting of their own common stock. I don't have enough data on the situation which is why I presented this as simply an option to consider. But when you say it's HIS COMPANY - that's the entire rub. His "partners" will always be under HIM and never equal. I think people forget that it's the size of the pie that matters, not the percentage of it. – David Cohen 9 years ago
  • I understand Dave's approach, and the differentiated vesting may be a nice ideia. Even so, from what I understand from brianz, he's not inclined towards equal shares. – Yuri Gitahy 9 years ago

1

Two things to remember when making the decision on percentage split:

1- Incentives drive behavior. If you own the vast majority of shares you will by default be the most motivated to succeed…but it plays both ways...don't expect your co-founders to necessarily go-to-the-wall when hard times arrive…it might not be worth it to them financially to put in all on the line for a small percentage of a company.

2- Times change. You may have made the most sacrifice to date and should own the most equity today....but look 3 years down the road...will the state of the company "really" be the result of those 3 years of working together or of your current work to-date. Vesting will help manage this, but I'd make sure there's a big enough piece of the pie down the road for all co-founders to be sufficiently motivated.
I was lucky with one of my startups...it was a perfect 50/50 split and never had outside investors...the commitment and sacrifice was equally shared...and the exit was equally shared. It worked beautifully.

answered Dec 29 '09 at 05:51
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Chris Dansie
491 points

0

There are lots of good answers and suggestions here, so I won't rehash them all. However, I would like to offer three specific tidbits to consider that I don't think that anybody specifically stated yet:

  • If you are running the company and the intent is that this is YOUR company, with your partners getting equity as incentive and a piece of the action (but you maintain as the leader) then it is important that you do not extend out more than 49% of the equity. Period. This is the only way you can ensure control, assuming that is important to you and it would not be smart to do otherwise no matter how much trust there is. Also, remember to plan for future possible equity distributions to others here. Realistically, you'll probably want to be at or above 60% or more.
  • Instead of throwing around somewhat arbitrary percentages, a good way to determine shares is to actually value the company now and thereby establish a share price. You have got the company to a certain point. It is worth something non-trivial and you effectively own 100%. Now assign a value to the expected new contributions of you and the new partners considering what they will actually be paid and what percentage is going to come in the form of equity and use this to drive the "fair" distribution of equity for this next stage of the company. The valuation numbers themselves is perhaps where this analysis gets somewhat arbitrary, but the key part of this is that your to date contributions and the resulting share value presumed for that will be properly accounted for when partitioning out equity to others. In other words, establishing and price and therefore a value to the equity is really the fairest way to make a distribution of equity to the new partners.
  • Kudos on the vesting of equity part you stated. This is extremely important, but be careful of the tax implications of exactly what structural mechanism you use. You REALLY don't want the vesting of the stock to become taxable!

The book Engineering Your Startup: A Guide for the High-Tech Entrepreneur covers these topics really well and has many good suggestions on the mechanisms and approaches for equity shares and compensation, etc.

answered Dec 25 '09 at 02:59
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Tall Jeff
1,406 points

0

While I am not a big fan of using the term "Opportunity Cost" in your case the your opportunity cost over the last two years should be factored in as your investment into the idea/the product. For example if you think the time/value of developing the product for someone else over the last two years could have generated an income of 50-100K, then considering the fact that you have put in that time into the business, you have indirectly made an investment into the business for that amount.

Assuming a reasonable cost would have been $2500 per month over the last 24 months that would be $60k + your $5k investment. Hence putting your current investment at $65K.

While this opens up a lot of more questions, clubbing it with the other advise given, it is certainly justified for you to retain at least 51% of the equity.

answered Dec 29 '09 at 01:56
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Dheer Gupta
191 points

0

Salman Khan has some great tutorial videos on his web page regarding Venture Capital and Capital Markets. Watching these videos gave me better intuition on the affect of rounds of raising capital has on a company’s ownership structure. These are some of the concepts the above answers are discussing.
http://www.khanacademy.org/

answered Dec 30 '09 at 06:48
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Jed Regan
266 points

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