Cofounder · Customer Feedback

When should I distribute startup equity?

Patrizio Iezzi Too much ideas, too little time

Last updated on April 18th, 2017

Hi,


I'm developing a new service for a specific market: there are a lot of users but only several thousands of customers. Actually we need to decide if it's affordable developing this service or if it's better offering a demo product (also just by asking about the interest of customers in using it).

We talked with customers about the problem we are going to solve, and everybody have this issue, but we have never talked about the concrete services we are going to offer.

Then, when should I write a document where explained startup equities? We are two founders but I've already spent 4000€ and 2 years in this project, instead, the other has begun to join the team only for a month. He is a developer (46 y o) and I'm the creator without any specific skills.

Furthermore, we are focused in a market (intially only in Italy) underdeveloped and only for a couple of years it seems to be developing and discovering the potentiality of web.


So, what could you advice us to do?


Thanks.

Patrizio



Mike Moyer

April 18th, 2017

Easy: Use the Slicing Pie model. Slicing Pie is the only equity model for startups that will give you the right answer. Every other model is based on a person's ability to predict the future. Because nobody can predict the future, nobody can actually create a fair split before knowing what's actually going to happen. It's very common to split equity into chunks at the outset of a new venture, but things change. To mitigate the damage, people use vesting and reserve chunks of equity for the future, but this merely puts a band aid on the underlying bad equity split.


The Slicing Pie model, on the other hand, splits equity based on the actual contributions of participants. Think of a startup like a bet. People bet time, money, ideas, relationships, facilities, supplies and equipment. "Winning" means the creation of profits or the proceeds from a company sale. Betting continues, therefore, until the company breaks even or raises Series A. The value of each person's bet is equal to the fair market value of each person's contribution. Unlike the future, it's easy to observe the fair market value of contributions.


A person's share of the equity, therefore, should logically be based on the person's share of the bets. Any other model is foolish.


You'll get all kinds of other advice from very smart, experienced advisers. They mean well, but if their advice bases equity splits on negotiation, rules of thumb, financial projections, or anything other than what's described above you can count on the resulting split leading to mild to severe founder conflict that could easily lead to the demise of your business!


You can learn all about Slicing Pie at www.SlicingPie.com

Arthur Lipper Chairman of British Far East Holdings Ltd.

April 18th, 2017

If you have decided that it is ok for your interest in the company to be diluted then you might consider issuing either non-voting stock or phantom stock. You might also consider using modest royalties as rewards and anchors of employees. I suggest that you read "the Larry and Barry Guide to Entrepreneurial Wisdom" and also the just released "The Larry and Barry Guide To Understanding Royalties" Both are Amazon available.