Perfect equity splits for startups
You and a partner go in “50/50” on a new business. You do all the work, he owns half the company. Now what? Traditional equity splits are never fair. Someone always has more than they deserve at the expense of others. Contrary to conventional wisdom, there is a simple method for dividing equity in an early stage company that tells you exactly the right number of shares for each participant. Attendees will learn how to implement a practical dynamic equity split using an allocation framework that tells you how many shares each person gets, and a recovery framework that tells you the fair buyout price (if any) in the event that someone leaves.
Hi Mike, I have a question regarding the model and I’ll phrase on the example you gave in the presentation. So before the Series A fund, the slices are contrubuted through a rich uncle with cash injection and non-cash/cash contributions from a founder and a marketer. As the latter 2 keep working they’re adding slices to the pie. The question is, wouldn’t that eventually eat up the rich uncle’s investment? so hypothetically a 2x cash injection of the founder’s market value will be eaten up in a year given the difference in the cash and non-cash multipliers unless the rich uncle pays salaries to avoid more slices being added and effectively freeze the pie till revenues catch up. Is that considered fair for the rich uncle ie to pay a initial investment and have a diminishing ownership?
Yes, if the Uncle’s investment was a one-time event his % would shrink over time as others continued to make contributions.
Pretend each participant is contributing a fictional unit of value called a Grunt Nugget (GN).
Rich Uncle contributes 100 GN
Founder contributes 50 GN
Marketer contributes 25 GN
The Founder and the Marketer each continue to contribute on a monthly basis 50 and 25 GN respectively.
At the end of the year the total contributions will be:
Rich Uncle 100 GN
Founder 600 GN
Marketer 300 GN
At the beginning of the year the Rich Uncle was a majority contributor. As time goes by, it’s not very impressive
Here is an article that sheds more light: http://slicingpie.com/dilution-is-not-a-four-letter-word/