Jonathan Steiman
  • Blog
  • Resources
  • Photos
  • My Dad's Photos
  • About Me
  • Contact

A Model to Help Split the Start-up Pie

3/8/2011

3 Comments

 
Splitting equity is typically the first business challenge that founders face. The first hours, days or months of a start-up are exhilarating - intense brainstorming sessions shape the product and market research reveals the size of the nut you're cracking. You and your partner(s) are excited and decide to take the leap and start a company. How will the equity (or ownership) of the company be divided? Most founding partners simply split the pie evenly, so two partners own 50% each, three own 33.3% each, etc.

Recently, a friend came to me with this problem. He was working on a mobile application with two people and they had not yet decided how to split the equity. He also needed to attract talent, so keeping equity on the side was necessary. For the first hour, we just threw numbers out there and framed everything from the vantage point of "what would my friend be left with." We eventually drafted a structure but it just did not feel right. It was formed from a hunch and WITHOUT any analysis. It could not be defended.

I thought about the meeting for a day or two. There just had to be a better way to split the pie. So, here is what I came up with. It is a two step approach that, first, weights the functions of the company and, second, applies a percent score that each founder brings regarding that specific function. I have shared the template on Google Docs, so feel free to use. (If you have trouble finding it, the title is: Framework for Calculating Equity in a Start-up.) Here are additional thoughts on this approach.

In terms of my friend's start-up, I defined the functions/components as the initial idea, technology, business development and business operations. I applied a weight to each component. Since ideas are, well, just ideas, I gave that a 10% weighting. Technology got a 50% weighting due to the fact this was a mobile application that would live or die by the design of the product. Business operations and business development were equally weighted at 20%. It was then up to my friend to figure out what percent of each function the founders brought to the table. Using my friend as an example, he had the initial idea and was going to be responsible for for all business development and half of business operations. Thus, his stake should be worth 40% (100% of idea @ 10% + 100% of biz dev @ 20% + 50% of biz ops @ 20%).

This approach creates a defensible split based on analysis of the company and the strength of the partners. It is important, however, to not simply accept the end number as gospel. After all, we cannot forget the last time analysts put full-faith into models (see Rating Agencies 2008). So before you go use this model, here are a few key notes:

First, the founders should decide together what each function of the company is worth. Doing so, increases buy-in to the process.

Second, remember that there are subsets for each function. Take technology, for example. There is a need for user interface talent, database talent, Android/iOS talent, etc. If need be, use the template to calculate the value for specific subsets and then use a second template for the full company view.

Third, use the modeled number as a starting point. I suggest being creative and using milestone approach to divvying out equity. Take for example a company that needs to fulfill 30% of technology talent. It would be crazy to recruit a partner and give that person 30% from the start. Instead, give him 5% and a plan to obtain the additional 25% by hitting two or three milestones. This way you are protected from an under-performing partner controlling a disproportionate amount of the company. Here is a great article about this very topic.
3 Comments
    Picture
    JONATHAN STEIMAN
    Follow @jonsteiman
    I'm the Founder and CEO of Peak Support. This blog is my take on early-stage companies and innovation. Every so often, there may be a post about culture, networking, family -- you name it. After all, what is a blog if it isn't a tad bit unstructured.

    Enter your email address:

    Delivered by FeedBurner

    Archives

    December 2016
    August 2016
    December 2015
    August 2015
    May 2015
    September 2014
    July 2014
    April 2014
    March 2014
    December 2013
    August 2013
    June 2013
    May 2013
    April 2013
    March 2013
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011

    Categories

    All
    2011
    Accredited Investors
    Airbnb
    App
    Apple
    Bankrupt
    Bankruptcy
    Benjamin Graham
    Best New Business Blog
    Beta
    Blog
    Bob Dylan
    Capital Asset Pricing Model
    Capital Requirements
    Capm
    Coaching
    Codecademy
    Codelesson
    Competitive Strategy
    Continuous Improvement
    Convertible Preferred
    Creative Destruction
    Crowd Sourcing
    Crowd-sourcing
    Customer Insights
    Database
    Data Repository
    Dcf
    Debt
    Design
    Development
    Discounted Cash Flow
    Disruptive Technology
    Ed Tech
    Education
    Education Technology
    Elizabeth Warren
    Entrepreneur
    Entrepreneurship
    Ephemeral Era
    Equity
    Facebook
    Facebook Marketing
    Facebook Mobile Advertising
    Finance
    Finance-ability
    Fortunate
    Function
    Functionality
    Fusion Tables
    Google
    Google Chrome
    Google Docs
    Google Fusion Tables
    Google Spreadsheet
    Google Table
    Hiking
    Innovation
    Instagram
    Institutions
    Intensity Map
    Internet Access
    Internet Platforms
    John Rawls
    Joseph Schumpeter
    Leadership
    Location
    Location-based Data
    Management
    Marketing
    Mba
    Microsoft
    Microsoft Access
    Mobile
    Model
    Nda
    Networking
    Novartis
    Operations
    Participating Preferred
    Pay-off Diagram
    Performance
    Personal Improvement
    Peter Drucker
    Polaroid
    Portfolio Management
    Postagram
    Private Equity
    Product Development
    Risk Free Rate
    Risk Management
    Scale
    Schedule
    Sec Regulations
    Sincerely
    Social Media
    Standards
    Start Up
    Start-up
    Steve Blank
    Table
    Talkto
    Taxation
    Ted Fortsmann
    Treehouse
    Twitter
    User Interface
    Valuation
    Value Chain
    Venture Capital
    Venture Finance
    Warren Buffett
    Water Safety
    Web 3.0
    Working Capital
    Y Combinator

  • Blog
  • Resources
  • Photos
  • My Dad's Photos
  • About Me
  • Contact