Founder equity

How much founder equity to give? - special case

Trevor Collins Crowdfunding Entrepreneur & Co-Founder of 100 Danish

October 3rd, 2013

The current startup I am building came to me in an unusual way.

The original founder (and friend of mine) came up with the idea, name and initial business model. Then some months back, he pivoted his attention and energies into a different business. At that point I was already on board, passionately convicted on the idea and hungry to build it.

So I offered to take it over and he agreed. Now we’ve drafted a stock transfer agreement to put ownership under my name. 

I wanted to ask - how much equity should my friend retain? He’s a super sharp guy who only wants a minor role. He also wants his piece to be small enough that it still makes sense and is attractive to future investors. His suggestion was somewhere between 3 and 5%.

Thoughts?

Cheers in advance for the guidance and being awesome.

Anonymous

October 3rd, 2013

Wait, does this mean that we'll be getting auto-responses from Deborah e. Hecht, G.G. on every discussion and after every comment until the 10th? 0.o .

Bill Kelley

October 3rd, 2013

Ideation is really worth very little. 5% is the upper limit for equity. Having said that, if you were to build a $50 million business from the original idea, think about additional financial rewards you might offer: a compensated seat on an advisory board or options with a strike price reflecting a very high valuation... 

Remember, there's really no way to "dilution-proof" that early 5% so it could turn into, say, 2-1/2% after investment.

Friendly agreements can become less friendly in the case of a truly major success. I suggest you have a brief conversation about all the possibilities and memorialize it on paper.

Trevor Collins Crowdfunding Entrepreneur & Co-Founder of 100 Danish

October 3rd, 2013

Brenda! - he isn't handing over any patented or trademarked IP.

Ori & Helen - it's good to hear this vantage point, as I've definitely been of the Warren Buffett philosophy of leaving money on the table for all parties involved.

Adam - in this case, the biggest value he's provided (after switching businesses) is connecting me to an incredible advisor in the space. However, from here on out, he won't be putting time or energy in on a consistent basis. More of just an advisory position of sorts. 

Bill - really great points. I'll think you're helping me distill down what kind of conversation I need to have.

Deborah e. Hecht, G.G. - you're killing me :)


Helen Adeosun

October 3rd, 2013

Hey Trevor,

I'm glad to hear things worked out and this is the best case scenario :-)! I agree with Ori, I have heard really really bad stories so 5% is good for a new passion that was gifted and nicely wrapped. Keep up the great work and here is to many wins!

Adam Porroni Entrepreneur / Criminologist / Developer

October 3rd, 2013

A ton of people have already pitched in some really great advice.  Jeremy has some very valid concerns - producing value while moving one's daily efforts to another business/industry/space/project can be really hard for someone, no matter how passionate, to deliver.  Brenda's point about IP can be extremely key if your product relies heavily on said IP, so always consider that, but there are other ways to compensate for IP without equity transfer.  And Bill's remarks said that best (and offered really good caveats; always, always, always discuss success states and failure states with your co-founders!).

That being said, 4 or 5% sounds perfect (and the community agrees!).  Another thing to consider is any personal money that this other founder gave or is still willing to give to the venture. 

A quick and dirty article for early-stage ventures that helped my team is here: http://www.geekwire.com/2011/wrong-answer-5050-calculating-cofounder-equity-split/ and there's also this neat calculator for equity estimation (seems to be best for 3+ member teams; you will have to always keep in mind voting and non-voting shares), here: http://foundrs.com/

James Bond CTO at SupplyBetter

October 3rd, 2013

sounds about right to me

Tim Scott

October 3rd, 2013

I recently faced a very similar situation. The difference is that our brainchild brings some valuable connections / sales leads, and he has agreed work them with us and participate in other sales activities, at least early on. He will also stay lightly engaged as an advisor. He runs a TV production company and will provide some creative help over time too. Something like that is worth 3-5%. Dropping an idea, without protected IP, and running is worth considerably less IMO.

Deborah G.G.

October 3rd, 2013

Thank you for your email. I will be out of the office until October 10. You will hear back from me then. Meanwhile...V-By! Deborah :)

Trevor Collins Crowdfunding Entrepreneur & Co-Founder of 100 Danish

October 4th, 2013

Adam - I love that article you linked to. Should be valuable reading now and later down the line.

Tim & Jeremy - Such great points about formalizing exactly what a 'minor role' looks like. And also bringing up vesting if he does put in any sort of hours going forward.

I can't say thank you all enough for the hard-earned wisdom. I feel stronger going into the conversation I'll be having with the original founder. Cheers!

Tim Scott

October 3rd, 2013

Good advice from Jeremy to formalize time commitment of a minor co-founder. We kept it informal. We've had only minor grief so far, but in hindsight having a number in writing would have been better.
And yes, absolutely all founders must vest over the same duration.  Sorry, you don't get x% fully vested for having the idea while everyone else slaves for years to earn their bit.