Adding Founders and Valuation

I highly recommend Founder\'s Dilemmas by Noam Wasserman<http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneur...>to all of you. My first couple startups, my cofounders and I approached
these sorts of questions as though we were the only ones to have ever been
in that situation. Founder\'s Dilemmas lays out very clearly the decision
you\'re actually making, the options you have, and then reveals what other
startups have done in the past: 20% did this -- this happened; 30% did
another thing -- this happened; and so forth.

Highly recommend it! With the knowledge and framework of that book, you
will be in a much better position to make these sorts of decisions. If
you\'d been looking for a specific answer, I\'m not sure a third party would
ever be able to provide one. (outside legal avenues of course, but that\'s
when you\'re picking up the pieces -- hopefully not there, mate!)

May be interesting also to google "Founders pie calculator". There are a
number of them online.

On Wed, Sep 12, 2012 at 12:26 PM, ericrogness <ericrogn...@hotmail.com>wrote:

Compensation questions are always tough, because they are so specific to the company and the person being hired.

A late addition post-product founder could be worth 2% or could be worth 50% equity depending on who they are and what they bring to the team.

If they play a major role in attracting funders, they are valuable. If they are a post-founder employee they could could be worth .5% to 10%.

Here are some questions to ask when thinking about the right amount of equity for the person:

- How much value does the addition of the person add to the team (are they a prominent entrepreneur or executive? do they bring customers or make funding much easier?)
- How does the addition of the person changes the risk profile of the company? (Does the company need this person to eliminate obstacles?
- Will they be paid? (If yes, equity is typically much less)
- How does their background compare to the background of the existing founders? (If the new person is significantly more or less skilled or experienced, that matters in the equation).

In my opinion, quantifying sweat equity isn\'t nearly as important as quantifying impact when it comes to a startup -- did the person\'s work build the product? Make the company viable? Get the company revenue? Raise money? Build a star team? Those are the things that tend to outline the share of stock. . . .

I hope that helps a little,

Paul

_ _
Paul J. D\'Arcy
p...@darcy.net
@paul_j_darcy
www.scienceofrevenue.com

On Sep 12, 2012, at 11:00 AM, dangelow <dange...@gmail.com> wrote:

I found http://answers.onstartups.com/questions/6949/forming-a-new-software-s... very helpful when I was researching this topic a few months back. This particular piece was referred by many other posts too.

Best,
-Jeevan

From: ericrogness
Sent: Wednesday, September 12, 2012 9:26 AM
To: founderdating@googlegroups.com
Subject: [FD Members] Re: Adding Founders and Valuation

I highly recommend Founder\'s Dilemmas by Noam Wasserman to all of you. My first couple startups, my cofounders and I approached these sorts of questions as though we were the only ones to have ever been in that situation. Founder\'s Dilemmas lays out very clearly the decision you\'re actually making, the options you have, and then reveals what other startups have done in the past: 20% did this -- this happened; 30% did another thing -- this happened; and so forth.

Highly recommend it! With the knowledge and framework of that book, you will be in a much better position to make these sorts of decisions. If you\'d been looking for a specific answer, I\'m not sure a third party would ever be able to provide one. (outside legal avenues of course, but that\'s when you\'re picking up the pieces -- hopefully not there, mate!)

I started to get clarity on how to answer this question for myself when
someone framed it this way:

You\'ve built a lot of value in X months. You\'ve got a prototype version of
the software. People are using it. You\'re generating revenue. They\'re even
renewing! It\'s clear that there is a viable business opportunity. The
vision is big. The opportunity is huge. The timing is right.

Yes. There\'s a lot of value created to date, but 90% of the value is still
left to build during the course of the next few years.

So ask yourself how will you should compensate someone who is going to help
you build that 90% of the value relative to the risk they\'re taking on pre
funding. Maybe also consider the amount of compensation necessary to keep
them invested for the next few years to build that value.

I second Eric\'s suggestion. The Founder\'s Dilemma<http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneur...> is
an essential book which will help you address the important questions. Once
you have answered those the actual numbers should be easy to come up with.