Director Success · Investments

Hi, I am setting up my first start up and need some advice with the structure with my Co - Founders.

Tom Abbott CEO and Founder or iynk

April 27th, 2017

There are three of us, I am the founder so to speak, it was my idea and I have worked on this for quite some time. The second guy is more of an expert in the industry and also is putting in the initial capital. He will not be too active on a day to day basis due to other commitments, so I have decide to make his a shareholder, rather than a director. The third guy is a close friend who is an excellent UX designer and has assisted with so many ideas I just know he could be the difference between success and failure. I have decided to make him a director. Is this structure correct, and when I issue shares, I was thinking of 40% to me and 30/30% for the other two. Would this impact the likelyhood of future investment or is this a sensible solution?

Dane Madsen Organizational and Operational Strategy Consultant

April 27th, 2017

You are conflating issues. Equity allocation and Board roles should be separate discussions. Your Board should be people that know something about corporate governance and business strategy to whom you are accountable as CEO (assuming that is also your role). There is personal risk in being a Board member (very important when cash is invested) all have to be aware of and accept and some of these risks vary state by state. Board members, for example, are often fully exposed to any wage and hour claims personally. Excluding the shareholder that has capital at risk in favor of a friend with UX skills does not make sense on the face. You should have all three of you be the initial Board. One of you needs to be Chairman, but you all need to know why a Board exists and how to document the Board proceedings. How you split the equity is a process of negotiation between all of you. All shares should have a vesting schedule except for those purchased with cash. You may want to use a SAFE format for that purchase.

John McMahon CEO at Starter Inc.

April 27th, 2017

You should use a cap table speeadsheet to visualize and negotiate the equity split not only with today's concerns in mind, but also planning for:

  • stock option pool
  • investors (seed and A round)
  • founders

Done properly you can project how to maintain 51% through your expansion phase and even plan to exit with a certain percentage.

cap table can also help with valuation.

It also firms your hand greatly in negotiations when you can show that your allocations are planned and not arbitrary... you can "blame the cap table" for limiting stock grants.

there are many templates online ... go grab one!

Chicke Fitzgerald 𝗘𝗻𝗴𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝗲𝘅𝗽𝗲𝗿𝘁 𝘄𝗶𝘁𝗵 𝗮 𝗳𝗼𝗰𝘂𝘀 𝗼𝗻 𝗴𝗶𝘃𝗶𝗻𝗴. 💡 I zig where others zag #͏z͏i͏g͏w͏i͏t͏h͏c͏h͏i͏c͏k͏e

April 27th, 2017

Tom, read Mike Moyers' Slicing Pie. Equity isn't a fixed thing, what matters is the value of the input and contribution of each person on an ongoing basis. I interviewed him on my podcast, His methodology is sound.

Don Hawley President at DLH Consulting

April 27th, 2017

I have started a number of companies and consult to early stage companies routinely. I am happy to set a call to chat, if you like.

Gopesh Modi Founder at Nvest Solutions

April 28th, 2017

The answer given to you by Dane Madsen is extremely valuable. I just wanted reemphasize a few points mentioned :

1) Board composition and shareholding are different discussions hence approach them separately.

2) While giving equity always have vesting period other than for the ones bought using cash. In fact at this stage, cash value of equity would be very low so you must have vesting period for equity so that it accrues when the value is delivered.

The person who is bringing in the capital (at reasonable valuation) can get the equity right away but the ones who are joining for skill shall get it over a period of time (could be 3-5 years). It is to ensure that people do not leave in between the venture and still get all the benefits of venture growth without much contribution.

Yiannis Ioannou

April 27th, 2017

You giving to much equity out, especially to the Director, I guess with will be also problem to investment later, Since early you stick with 51% that helps someone taking decisions especially at the beggining, and its your idea. If I was you I would be giving the director based on Milestones. like 10% now, 15% in Year and e.t.c. For the other part who put the money too, its more on the Calculations. hope this helps.