“Experience is a good school, but the fees are high.”
— Heinrich Heine
It is the lesson of the true cost of recruiting the wrong founding team in a startup. You fill a role out of desperation, or even worse, recruit a friend or family who will do for now but never was quite the right fit. There are moments of convenience and other times, rationalization, for hiring people you trust, forgetting to foresee roles and consequences. Hiring at the top of a pyramid, the bottom grows over the years even when founders leave. And then the recruit in turn takes the organization down the garden path, hiring more of the wrong people, perpetuating one error to final destruction. The good old adage for entrepreneur CEOs – hire the very best for your life depends on it – we have heard it all, many times. And again, to do it in reality, even the brave will falter.
How does an entrepreneur divide equity among co founders?
Should I divide the equity in my startup equally?
How do you do it?
- Connecting a World Changer / George Page - February 17, 2012
- Roar of the Cloud - September 22, 2010
- IIT Kanpur Golden Jubilee Initiative: The Next50 Global Innovation Challenge - March 5, 2010
At the very start, value the invariants (factors that cannot change) more than the variants. Invariants include *time*, *money* spent on the idea and the business.
Variants include the founders market salary, job profiles, and the results conceived so far. The reason I don’t bank on the variants at the seed stage is because a startup is destined to undergo many revolutions. Each revolution supersedes and sometimes invalidates work and ideas conceived in the past.
Equity structure _must_ reflect risk and ownership.
Some folks belong to the other school – where the founder who conceives the idea takes maximum equity (and therefore risk).
– Santosh
BB: My thoughts on Advisors/Mentors: Definitely single digit, let us say not more than 0.75%
Thanx deepak,
I recently did a similar valuation exercise and walked away from a partnership deal. My partner was saying 50:50. I said 50:50 rewards also meant risk to be spread 50:50, which he was not agreeable to.
Apologies for deviating a bit from the topic. I have another question.
What should typically be the stake given to advisors/mentors?
Also, how does one resolve the conflict of interest issue while choosing an advisor/mentor? For example, lets say I am planning a venture related providing services to retail industry. A founder of a successful retail venture would be an ideal candidate. But would other retailers be comfortable becoming my customers given that a competitor could have access to their data and problems being faced by them
In my last co we split the equity equally. But then we brought the same things to the table – all of us had about the same experience, no one brought in any money, we brought in our own computers. My extra contribution was a half broken aircon that we fitted on a wall for one year before we moved and the summers got bearable. I didn’t take any extra equity for that.
In an unequal case, I would say that you decide on a certain salary for each role of the company – typically they would all have the same salary. Each person then decides how much of it will be left on the table. So if you say 1 lakh per month per person, and y’all take salaries of 20,000 per month instead, the net value per person is 80k per month for a year.
Then you figure how much money each founder brings in, which could be varying amounts. You get a figure per founder. Allocate that to 60% of the initial capital.
Make the founders earn capital each month – in the case above assign say 80K worth capital each month to each founder for a year (or over three years or whatever)
20% can be left for the idea itself, if the idea is allocatable to certain key founders.
The remaining 20% is for stock options and the like. Of course later dilutions by VCs etc. will most likely change the entire equation.
This is a tough one and i’m facing this dilemma currently. I’ve seen/read enough suggesting don’t go with a friend, keep biz and friendship separate if u value either. At the same time, there are others swearing by it and suggesting that the only way u can do a startup and hire at the top of the pyramid is if u can trust someone. Incidentally, trust is pointed out as the single most important aspect by many ‘experienced professionals’. The same one’s who are against the idea of friends working together. Typically, you can’t trust strangers (if at all) as much as you can trust a friend. If that holds true then i see a contradiction here. Could someone enlighten the rest on how one can ‘trust’ a stranger.
One thing is clear, if ur busy looking over ur shoulder all the time then there is no way u can focus on building a startup.