THE ART OF WAR FOR STARTUPS: HOW TO SPLIT EQUITY AMONG FOUNDERS

@pango

YOU FOUND A CO-FOUNDER…

TIME TO SPLIT EQUITY…

You want to be fair

… so you split 50-50… or 33-33-33… or 25-25-25-25

DID YOU ALSO SPLIT 50-50?

WOULD YOU ALSO SPLIT 50-50?

WHAT HAPPENS AFTER SOME TIME…

If you contribute more… If you contribute less…

Here is you Here is your co-founder

WHAT IS A ‘FAIR’ DISTRIBUTION OF EQUITY

Should reflect what you bring to the table

WHAT DO FOUNDERS BRING TO THE TABLE

PROPOSED FORMULA FOR SPLIT

= 5%An idea is worth nothing without execution…

PROPOSED FORMULA FOR SPLIT

A startup has 6 roles

Who builds the product / offering? (Product lead)

1

Who sells the product / offering? (Sales lead)

2

3 Who manages finance/raises funds? (CFO)

4 Who hires and builds the team? (Team builder)

5 Who gets the things done? (COO)

6 Who makes decisions? (CEO)

= 25%= 20%= 15%= 15%= 10%= 10%

Typically founders play more than one role. Equity adds up

PROPOSED FORMULA FOR SPLIT

= 0%Founder only bringing cash should be issued convertible debentures

These debentures can be converted into equity at high discount.

Note this is valid for founders, not investors

PROPOSED FORMULA FOR SPLIT

Penalize part-time founders by 25% reduction in their equity.

Distribute this equity among full time founders

PROPOSED FORMULA FOR SPLIT

Who builds the product / offering? (Product lead)

1

Who sells the product / offering? (Sales lead)

2

3 Who manages finance/raises funds? (CFO)

4 Who hires and builds the team? (Team builder)

5 Who gets the things done? (COO)

6 Who makes decisions? (CEO)

= 25%= 20%= 15%= 15%= 10%= 10%

= 5%

= 0%, convertible debt

= 25% reduction

You may change the exact numbers based on your business. It is Ok. Approach is more important.

LET’S TAKE AN EXAMPLE  Tom Tim JohnWhose idea was it? √ (5%)    Product lead   √ (25%)  Sales lead     √ (20%)CFO √ (15%)    Team Builder √ (15%)    COO √ (10%)    CEO √ (10%)    

Total 55% 25% 20%Who works part-time?

Full time Full time Part timeReduce equity of Part-timer

    (25% of 20%) = 5%

Equity to be redistributed

+2.5% +2.5% -5%

Final total 57.5% 27.5% 15%

Suppose there are 3 founders: Tom, Tim and John

HOW DID YOU SPLIT EQUITY? Equal? Based on contribution?

DOES THIS FORMULA MAKE SENSE TO YOU? Broadly yes? It is nonsense?

Reply at Twitter @pangoMore real-life entrepreneur stories at http://howtopreparetostartup.wordpress.com/http://www.slideshare.net/pankajg05/the-art-of-war-the-startup-version