I month ago I wrote a fairly popular article about startup equity distribution among co-founders. It generated a nice little conversation. The short answer was there is no short answer. Dividing startup equity is a complex process. Doing it right takes a lot of time and effort.
Yesterday I stumbled upon a post by Frank Demmler where he talks about the Founders’ Pie Calculator that he "invented." While I don't think that the calculator provides an absolute answer (and neither does Frank). I do think it is a useful tool that could be used as you think through how you should divide up the stock equity in your startup.
As reported over on PeachSeedz, SoloHealth made it to the semi-final round of the Forbes Business Launch competition. I am exceited to tell you Solohealth has made it to the finals. Over 1,600 companies entered and SoloHealth is in now in the final five. Part of the reason they got there was the help of the FoG faithful voting for them in the contest.
A few weeks ago Forbes flew SoloHealth CEO Bart Foster up to NYC. After presenting to a panel of judges Bart tooled around the city on the Forbes yacht. You can see Bart's presentation to the finalists panel here (video auto-roll warning).
Once agian Bart needs your help. Online voting counts for 50% of the formula Forbes will be using to pick the winner. He needs you to vote for SoloHealth so he can take home the $100,000 grand prize.
Here is what you can do:
1. Go to the Forbes Business Launch voting site. 2. Vote for SoloHealth and enter your first name and email address 3. Go to your inbox and click on the "validate your vote" link. Note: You may need to check your spam/junk folder.
Voting
ends Saturday, November 29th and the winner will be announced in early
December.
Monday and Tuesday I have provided links to posts written about Atlanta Startup Weekend 2.
Well this year we also received a little media attention. The Atlanta Business Chronicle, CNN.com and TechDrawl all visited. Never heard of TechDrawl? That's because it is a startup itself. TechDrawl is a new video blog produced by Celia Dyer. Celia and the TecDrawl team were on hand to capture Atlanta Startup Weekend. Below is a highlight video.
Celia and her team did a great job. You can expect more videos of the pitches to surface here and across the Internet.
And stay tuned for the launch of TechDrawl in the next few weeks. TechDrawl is going to cover breaking technology
news and venture capital investment opportunities in the South between DC and Texas. It should be up and running by Thanksgiving.
Good stuff is happening down here y'all. And it's good that TechDrawl is going to make sure the rest of the world knows about it.
Note: Celia is looking into get in contact with the 40 or so people that did a 60 second pitch at ASW2. You can track her down on twitter.
But last year after a bit of reflection I wrote up the lessons of Atlanta Startup Weekend. Some of the lessons apply to any startup. Some are particularly important if you are participating this year.
If you are attending Atlanta Startup Weekend 2 a quick read will increase your odds of success.
On Tuesday November 11 at 8:00 am ATDC is hosting the third rev of "Meet the VC." This time around the highly popular program will feature Lon Chow of Apex Venture Partners out of Chicago. Some of Lon's investments include Bellamax, KnowledgeStorm, LifeSnapz, Placeware. Shoebuy, and Tradex. With that mix and recent economic developments it promises to be an interesting session.
We are expecting another sellout crowd. So after you down your free coffee and doughnuts for voting today wander on over and register for this free event. And if you have any questions that you would like Lon to answer let me know in the comments.
On my Skribit app (located in the right sidebar) someone suggested that I write about how an early stage technology startup should determine who gets how much equity and when. With the upcoming Atlanta Startup Weekend 2 expected to spawn 5 - 10 projects spread across 100 "founders" it seems like a good time to address the question.
The Simple Answer
Divide all equity equally. People do this all the time. It's simple. It's makes everybody equal. It avoids the difficult discussion of the value and effort that each founder brings to the startup. And it's the wrong answer.
It's the wrong answer because everyone does not bring the same value to the venture. It's the wrong answer because everyone usually does not bring the same effort to the venture. It's the wrong answer because having the complex discussion about who is worth what, what value they bring, and what role people will be playing is a key to success in the early stage of a venture.
A More Complex Answer
I will grant you this. Assuming equal equity might be a good starting point to a discussion about equity distribution... but it should be just a start. The founders need to look at their specific situation and adjust accordingly, weighing the contributions of time and expertise that each founder brings to the table. If a founder is crucial to the task, they deserve more equity. If someone has a role that is somewhat interchangeable with a host of other individuals perhaps they get less.
You can approach this logically.
Start by giving everyone that was "in the room" when the concept was conceived a 5% stake. The idea in and of itself should be worth something. If you don't think it is find another startup.
Then sit down with your co-founders and determine what key milestones need to be reached in order to add significant value to the company. That will lead to some interesting discussions around company direction, funding strategy, and corporate control. When it is all said and done you will have some idea of strategic direction on which to build. Direction that all the founders can agree on.
Now look at those milestones. Break them down. Determine who is going to do each task. Determine the person's open market hourly rate (What they make as a contractor or annual salary multiplied by 1.4 divided by 2,000). Determine the time it is going to take to complete the task. Get buy in and commitment including dates.
Determine the valuation of the company and the number of outstanding
shares, use that to calculate the share price. But determining valuation in an early stage company can be hard. If you are truly early stage use the Y Combinator model. Average Web startup with 3 founders is worth $285k. Use that as a start. Use whatever makes sense for your situation. Just think it through.
Then allocate each cofounder a number of shares whose value equals the hourly
rate that they charge multiplied by the number of hours they contributing. You now have a nice analytical basis for which to have a meaningful equity split discussion as well as a clear understanding of roles and responsibilities.
I have seen this done effectively several times. There is usually enough common left over to hire shorter term contractors in this manner as well if the startup cares to do so.
Timing
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.
Legal Issues
I am sure that many of my legal friends will disagree with me on this but pre-funded companies need to conserve their cash for things other than attorney fees. Lawyers are last. Founders can memorialize their arrangement through a simple letter agreement and a covenants agreement. You will find samples of both below. Disclaimer: I am not an attorney and I am not providing you with legal advice. Consider them illustrative.
The issue of equity allocation and the timing is a very important discussion that startup founders need to have. Yes it is a difficult discussion. A hard discussion. But starting a company is difficult and hard. Take the time and energy needed to think and talk through who gets how much equity and when they should get it. Every startup is unique and the equity structure of a startup should reflect this uniqueness.
Interesting times. And I have a pretty interesting job. A job that allows me to interact with lots of investor types. Individual angels, angel groups, angel funds, venture capitalists, venture bankers. And they don't mind telling me whats on their mind because at the moment I am somewhat like Switzerland (Entrepreneurs do the same thing BTW). Last week at Venture Atlanta and Meet the VC I had a chance to talk with a lot of investors over a brief period of time. And while I hesitate to quote anyone directly I can summarize what I learned over the past week.
Angels A Mixed Bunch
Some are frozen into inaction. Some, but not many, continue business as usual. The latter are being more selective. Asset allocations are being closely watched. Which is closely tied to the broader stock market. Many angles have to allocate more money for follow on. Overall not good for early stage.
VCs Intend To Keep Investing
This message is loud and clear. VCs have lots of money. Sitting in cash. They intend to invest it. They also will be more selective. Either gravitating towards later stage deals to shorten their exit horizon or doing less deals as the need to keep funds available for follow on increases. Also not good for early stage.
Business models will drive interest. Advertising is out. Platforms, analytics, and cost savings are in.
With that said some deals that would have been consummated fours weeks ago are not getting done today. I personally know of several. VCs are pulling back to conserve their funds for what they believe to be higher probability deals that can make it through the startup winter.
VC Advice
VCs are looking to help extend the cash runways of their deals by cutting costs. They want their companies to get more conservative. They are advising their companies to draw down their credit lines.
Startup Reaction
Startups are heeding this advice. TechCrunch offered up a layoff tracker. To date it is showing 3,689 laid off employees at 22 companies. Back out the more established eBay and Yahoo and you get 689 employees at 20 companies. Startup CEOs are acting, and acting fast.
Surveys
In an interesting side note DLA Piper released its "Technology Leaders Forecast Survey" this week. Conducted in late September and early October, the survey shows 47% of VCs believing that the financial crisis will adversely impact the tech industry while 33% of technology company executives (not just early stage) believe this is the case. Based what I have seen and heard in the past four weeks both parties are acting a bit counter to how they responded a month ago.
Some Key Quotes
"I'm getting a deal done."
"You will see a flight to quality."
"It's grim."
"I am looking for a real entrepreneurial spirit. Someone who can efficiently get to revenues and profits."
Wrap Up
Like the broader economic climate, times are not good in the technology startup world. But deals are going to get done. Good deals. With smart entrepreneurs. Helping each other to achieve a dream.
It will take longer. It will make a hard task even harder. But deals will get done. If you are an entrepreneur you need to adjust to the new realities of our times and go find yours.
Over the weekend at BarCamp Atlanta nobody wanted to fill the opening slot in the main room. I ended up stepping up and doing an ad-hoc presentation on what is changing with 2.0 version of Atlanta Startup Weekend. There are some major changes in the works, all of which I think will add to the excitement. Here is a brief summary.
Multiple Projects
Perhaps the most exciting change is that instead of all the participants working on a single project we will be working on as many projects as the group wants to support. Since the new format was introduced at Boulder in March 6 - 9 projects have been moved forward in a typical (if there can be such a thing) weekend. Last year we experienced a problem with too many cooks in one kitchen that created some issues. This resulted in talented folks disengaging. I have great hope for the multiple project format making Startup Weekend a richer experience for all.
No Atlanta Startup Weekend 2 LLC Will Be Formed
Last year we formed a partnership with all the participants of Atlanta Startup Weekend getting shares in an LLC which then got a 50% ownership stake in the resulting company, Skribit. At Boulder 2 Andrew Hyde stated that this was taking place due to some blue sky law issues. Don't know much about that. What I do know is that the LLC component has created some complicating issues for Skribit as it continues to move forward. A change for the better. No Company Formation Requirement
As with the LLC, there is no requirement that a project team form a company around their concept. They can. They can agree to work on an ad-hoc basis. They can abandon their project all together. They can join another team that wants to push forward. The only requirements are to build the Atlanta startup community, learn, and have fun. Sounds easy enough. Less Hours
Last year we went from 6 pm - 2 am on Friday, 8 am - 2 am on Saturday, and 9 am on Sunday to 4 am on Monday. We launched a Skirbit alpha at midnight on Sunday and spent a few hours doing testing. I know the Atlanta Web community is very proud of the fact we launched on time with a great product (as it should be). This year the official hours will be Friday from 6-10 pm, Saturday from 9am-9pm. and Sunday from 9am-6pm. You can expect ATDC to be open for a few hours on each side of the official hours as needed. But there will be a bigger emphasis on informal project team meetings before and after hours.
More Fun
The multiple project format and lack of legal wranglings required is going to mean more fun. More fun because more people will be able to be involved (expecting 100 or so, mosey on over to the Atlanta Startup Weekend blog to learn more and sign up). More fun because we can focus on what matters. Building stuff that people want to use. Now if we can only get Andrew to join us...
Administrative note: Please go to the Atlanta Startup Weekend 2 blog and subscribe to the feed. Updates concerning the weekend will be taking place on a regular basis there.
My name is Lance Weatherby. This is my blog. I am a technology entrepreneur and currently a Venture Catalyst at Georgia Tech. I help launch and build technology companies.
The opinions expressed here are mine and mine alone (with the exception of comments by others of course). They do not represent the opinion or position of any other person on entity. All postings adhere to my personal values.
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