Business plan · Equity

What size equity stake for writing business plan for an early-stage startup?

Paul Ph.D. EtaBoost; IEEE Nanotechnology Executive Committee

January 27th, 2016

I've been asked to write a business plan and help engage investors for a promising 4-person biomed startup (pre-seed, probably $100K founder bootstrap money in).  They wish to comp me with equity in lieu of cash.

How would I calculate what my share should be, and where would I search for comparables?

Leo PhD Product development executive, serial entrepreneur and Angel Investor

January 28th, 2016

I would suggest taking cash, and make it a clean transaction. Equity at this stage is basically worthless; you may never get paid. Taking equity for work at this stage is basically doing Angel investment.

You have to be very careful with the kind of setup that JD Ryan mentioned, and the equity/money you earn can be considered as commission (if it's tied to money raised). Only Brokers (as defined by the SEC) can earn commission, and "Finders" are generally required to be registered with FINRA and a state's securities board; although there are plenty of unregistered ones out there in reality (not recommended). I would advise you not to become either one of the two.

Just be a consultant, get paid, and be done with it.

Michael Brill Technology startup exec focused on AI-driven products

January 28th, 2016

As Leo mentions, you don't want to tie compensation to funding success... and definitely don't wait until you get funding where equity/exercise price has gone way up.

Maybe just enter into an advisor agreement for, say, 12 months for, say, 0.5%. Your responsibilities are to help them on financing activity. If you do a good job, they keep you on. You do a bad job, they terminate the agreement early and everyone moves on.

Trying to create a highly-principled level of equity probably works against you at this point. No matter how you do the math, it's going to come up as a relatively small number because the target valuation you'll use will be high. If you try to bring that down then you look like you don't believe in the size of the opportunity. Neither works in your favor. Just pick a number that you think they won't vomit on, tell them that's what other advisors told you is normal, and get to it.

And it goes without saying that you want to lock in your equity pricing now.

Dilyan Dimitrov Founder at Eleven Ventures

January 28th, 2016

You should clearly differentiate the two transactions here: 1) Consulting services and 2) Equity investment in a company.

Because your clients wish so, both deals are merged into one. You should consider them separately and on merit and decide 1) what is the compensation you ask for your services, and 2) do you want to invest in that company, what amount and at what valuation. If you break it down this way it becomes somewhat simpler. And mind that money invested is irrelevant to the valuation of the company - it is the stage they are at that matters.

On the other end, I have invested in about 120 startups, and I generally advise them against giving up equity for one-off services, unless they expect the advisor to be in position to contribute to the long term success of the company. 

Mike Moyer

January 28th, 2016

Think about it this way: the fee that you would otherwise get paid for your services (aka "fair market value) is being put at-risk. This is your "bet" on the future of the company. Your reward, if the company does well, will be a portion of the profits or a portion of the proceeds of a sale. 

Your share of the rewards (%) should equal your share (%) of the risk.

If you and I went to Las Vegas and each bet a dollar on the same hand of Blackjack you would expect 50% of the winnings, if we won. This is because you took 50% of the risk. 

If the dealer dealt two aces and I was broke so you put down $2 more you would no longer be satisfied with 50%. You bet $3 against my $1. You deserve 75% of the rewards, if any.

The same goes for startups.

All you do is determine the fair market value of each person's contribution. That's their bet. Your bet, relative to their bets, should be your % of the rewards.

This is the basic principle behind the Slicing Pie model, a form of dynamic equity split that guarantees a perfect split.

Every other model is a guess that depends highly on your ability to predict the future. This just lays the foundation for future disputes.

I've written a book about how this works and I would be happy to give you a copy if you contact me through SlicingPie.com

JD Ryan Downunder Toys Pty Ltd

January 28th, 2016

Thanks for checking your local legal restrictions, Leo. I'm commenting from Australia.

Joe Riano President and CEO at 3i Tech Works, Inc

January 28th, 2016

You use the word "promising" meaning you must see something of value in this team.  
Any startup, just like any other business requires risk taking and compensation should be based on potential returns.  If you believe there is a chance of success in the team, the idea and the timing you should do it to help the startup.
I would calculate the cost of producing the business plan and assigning a dollar value to your labor ($100/hour, or whatever market rate is).  When funding is achieved you should receive value at whatever the funding source calculates the value of the company to be.  So if the value of your services is $10,000 and the funding source assigns a value of $1 a share you would receive 10,000 shares.   

Max Avroutski

January 28th, 2016

In reality anyone who is getting equity is an Investor. If you want to take any part or full payment in equity then you are an Investor who is also helping to make intros, which many Investors do for free to further their investment

Most equatable, win-win, arrangement would be to value your work in amount of money and company giving you Equity Note, no interest, no cap, with 2% /mo or 10-25% fixed discount of future properly valued round. (no interest, no cap) is best so you don't send any negative signals.

0.5% (0.25-1%) of company as Adviser suggested by Michael my also work, but my be not enough or too much depending on traction company already had.