Equity research from the CoPress-era

For a friend, these are links I pulled together when researching CoPress’ equity split Fall 2009.

Startup Equity Distribution

Notice that I used the word allocation above. Allocated means not vested. In my mind all founders stock should have either a milestone or time based (or some mixture of the two) vesting schedule. If you want to know why find someone to tell you a story about a cofounder who walked away from the company and is still holding a 25% ownership stake. Trust me. It creates problems. Personally I prefer 25% one year cliff vesting with 6.25% quarterly vesting thereafter combined with individual milestones.

It’s all about K.I.S.S. Lance argues against equal equity distribution and for dividing it based on contributions of time and expertise. One approach is to determine the valuation of the company, and then use a function of proposed wages and time contributed to divide up ownership.

Equity distribution amongst startup co-founders?

Technically, equity distribution is proportional to the “value contribution” by each stake holder. In general, tangible contributions (investment, land, resources) are considered much more important than intangible contributions like experience/expertise.

The options seem to be 50/50 or distribution as a function of contributed value. People answering the question lean more towards the latter and offer some suggestions as to how to do it best.

Calculating Partnership Equity Splits

Potential formula for equity distribution: break down money to be invested, time to be invested, and experience of partner into percentages, and then determine percentage contributions of each partner. This breakdown then determines overall split of shares.

How do I survive when starting a business without a paycheck?

There are very creative ways to live cheaply if you’re dedicated. The best response in my opinion is to live out of your car and buy a gym membership for exercise and showering.

Equity-Split Results, Part 1: When Do Teams Split Equally?

Interesting chart comparing different situations. An equal split is more likely amongst smaller teams coming from similar backgrounds that divide equity at the start of the project or company.

Dividing equity between founders

One thing I’ve also noticed is people tend to overvalue past contributions (coming up with the idea, spending time developing it, building a prototype, etc) and undervalue future contributions. Remember that an equity grant is typically for the next 4 years of work (hence 4 years of vesting). Imagine yourself 2 years from now after working day and night, and ask yourself in that situation if the split still seems fair. Another consideration is if one founder has had greater career success and will therefore significantly improve the odds of getting financed at an attractive valuation. One way to figure out how much this is worth is to estimate how much having that founder increases your valuation at the next financing and then, say, split the difference. So if having her means you can raise $2M by giving away 30% of your company instead of 40% of your company, let that founder have an extra 5%.

Variables to potentially consider include: past and future contributions, career success, and who had the big ideas (and whether those ideas have any technology or intellectual property associated with them).