equity, mobile-apps, investment, incorporation, incubatorsThis is a question about equity split and incorporation, but it is not about splitting between co-founders. My (part-time) co-founder and I have agreed that I will take more of the company until it grows and then when he leaves his job equity will transfer to his side. There is no problem with this, everything seems fair and everyone is happy. Sweet Right?!
Here is where things get tricky. I have been involved in creating a startup incubator (not off the ground yet) with a mentor of mine. This mentor has been very helpful and supportive over the last year and has provided connections and knowledge to help us reach our short term milestones. I really think he would be a person worth keeping on board.
However, he and another acquaintance of ours (a finance guy) were approached by a couple of people who really needed business help (engineers with great tech but no business/personal skills) and so they created a venture group to help these guys get their thing off the ground. Now they want to do the same thing with us and they are asking for something in the way of 20% equity. For background, we are a mobile app company in beta stages.
It is my thought that 20% is way too high, and we are not in need of a CFO at this stage with no sales. However, I do want to keep the mentor on board for a more reasonable equity split. I am thinking it is too high because of multiple reasons…
Questions:
PS. I am aware that mentors normally shouldn’t be asking for equity, and this makes me uncomfortable for sure, but I think the value he adds may be worth the hassle.
PPS. I am also a member of a prominent startup accelerator, and this is what is pushing us toward incorporating right now.
Thanks in advance for any input.
TL; DR: Think in terms of shares not percentages.
Your equity structure is significantly complex that IMO defining ownership in terms of percentages is impracticable, difficult to manage and could potentially box you into a corner. Especially with that unusual agreement you have with the guy who will be leaving his job.
I suggest you allocate ownership in terms of shares instead of percentages. You could define in the corporate documents (or just an agreement between the parties):
For example, you could state that each one equivalent full-time day of work is worth, say, four shares per day for the tech person, two shares for the business plan writer, one-eighth share for the mentor per billable hour. And the salesperson doesn't get a daily allocation but will receive 100 shares per sale. Something like that. Then make a google sheet (spreadsheet) that everyone can access (for complete disclosure and transparency).
Also, there is a tool here to help with equity allocation between co-founders.
I don’t entirely agree with @Mowzer answer - I perfer to “weigh ownership” via percentage of shares, not number of shares. A million shares in a company that is doing a billion in profit does not give any insight as to how much profit the shareholder will get, nor the influence they might have. Knowing they have 1% or 20% gives a greater (even if only rough) insight.
My understanding is you are concerned about the 20% this other business ask for. Compromise is your best bet… though I have to admit, I think their 20% is on the high side considering they are offering time/skills you don’t immediately need, and zero cash investment. Furthermore, just because they have contributed to some success elsewhere does not automatically mean that they can replicate the success with you guys. You could well achieve this without them. You need know your own strengths and your weaknesses. Do they help you stand stronger, or are they extra weight?
If 20% is too high to you, what about 10%? or 5%? What is the impact if you did not have their help? Do you have an accountant or even a local school/college that teaches accounting? If true - I would consider talking to one of the teachers/professors or even a student who has two or three years behind him.
Once you put a value on their contribution, share it with them. If they don’t accept it, so be it… You two can always discuss again in three or six months time. By then, one of two things will be true: 1) Your business will be better/stronger and that success more visible than now which implies their risks are lower which (arguably) implies they can achieve a healthy reward with lower share ownership or 2) your business is in poor shape and needs help in which case you reach out for guidance and put a price on that help.
Without prejudice, and with greatest respect… I do think that there will be a time you need hand the company over to someone else - if these conversations are proving uncomfortable for you to handle, then it will only get more tough and your discomfort will bring risk to the business.
One suggestion you might want to keep in the back of your mind is “share class”. Some companies have A and B type shares whereby owning one just gets you a share of the profits, while the other gets you a share of the profits and a chance to vote (The voting shares could disrupt the sale of the company). You could award employees profit-only shares (it also offers tax advantages).
Either way… best of luck…
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