How To Determine Equity for Startup Founders, Explained
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- čas přidán 27. 04. 2022
- How to determine the equity splits between you and your co-founders is a key indicator of whether the relationship between you will work out. Unless you and your co-founders are happy with the results there will be problems ahead.
Over 50% of all co-founder relationships end in failure. In today’s video, I’ll explore how you should structure the equity agreements between you and your co-founders the best chance of success. And, I’ll explain how to make sure you and your company are protected, just in case things don’t work out.
We’ll cover a lot of ground in today’s video. We’ll talk about the obvious stuff like equity splits. And, you’ll want to wait around to the end of today’s video when we talk about some critical not so obvious stuff like what if you invest money in your startup and your co-founder doesn’t. I hope you like it.
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This is excellent and succinct. Thank you!
you're welcome!
As a subscription member, I always enjoy Brett's videos. As a professor of Georgetown, I enjoy sharing these videos with my entrepreneur students. This one in particular. Thank you - well done!
Thanks for the kind words, Michael. I am glad to be of help to you and your students!
Thank you for posting this comment. I’m trying to find information for my startup and trying to find who to listen to is challenging. I know I still need to do my due diligence, but this helps me understand what to look into.
Lots of useful points here, answered many Qs that I had. Thx!
Thanks for sharing this video Brett. Really helpful.
You're welcome! I'm glad you liked it!
Thanks for sharing your valuable knowledge to us Brett!
You're welcome, Taran. Thanks for your kind words.
Asking the co-founder to not invest literally gives lot of power to the Founder which is good
Thanks for sharing your thoughts
Thank you so much, Brett! You are awesome! Your video is so useful! Especially for beginners startupers.
You're welcome, Andrey. I'm glad you're finding them useful!
Thank you Brett, this is such helpful information
You're welcome, Joseph. I'm glad you found this helpful.
thanks Brett, very helpful!
You're welcome!
Thank you, Brett! I did not realize before that if I invest in my own company I get preferred stocks, which are different from the common ones that I have as a co-founder. Great to know!
you're welcome. I'm glad I could help.
Great Video and explanation
Thanks for the kind words. I'm glad you found value in the video.
Informative...thanx
you're welcome!
Thank you for this very insightful video Bret. Could you suggest how to define what amount of investment as a founder constitutes receiving investor equity? For instance if I were to invest significantly smaller investments than 100k and make this incrementally, would these smaller investments be treated differently to a large one off investment.
Thank you
You're welcome. I'm glad you found this video useful.
Really great
Glad you liked it!
Thank you for the video. For early start ups, how do we decide on the valuation so that we can calculate the preferred shares for each of the co-founders who are investing money?
You're welcome, Coco. That's a great question. The answer is you should really hire a lawyer to help you set up your company properly. The valuation really isn't so important because, but the number of shares is very important. So if you start your company with 10 million shares and you allocate 8 million for you and your co-founders and 2 million for future employees, then you're good to go. The valuation only comes in if you put some money in the company as I cover in the video. But get a lawyer to get this setup properly. It will save you a lot of heartache later.
@@BrettFoxstartupceo Thank you so much for replying. I already set up the company with the shares allocation, and am at the point where the co-founder wants to consider investing money, but no idea how to calculate the valuation so that we can decide the shares that she gets as investor here
@@normie333 It's a great question that I try and answer in the video. There are no rules here, but usually the initial investor(s) get somewhere around 20% equity. So, if your co-founder invests $50,000, then you are saying your company is now worth $250,000. You have to feel good about this and your co-founder has to feel good about this too.
I stumbled upon your videos a few weeks ago and have really enjoyed going through them. Thanks for putting them up. I liked you thoughts on equity but I'm curious how you might approach this scenario.
(a) I have a POC a investors are intrigued by, but want to see it further developed before investing.
(b) I believe in the market and concept enough that I've left my job and am working on it full time, and I feel comfortable living on savings for a while.
There are other people interested in being co-founders, and it would be nice to have more help. However, either (1) they aren't in the position to live off savings, or (2) they like the vision but aren't sure enough to quit their jobs (which I understand). Anyway when I talk to them they are curious about what the equity split might look like.
Do you have any thoughts or principals that might be of use? Do I just think of my lost salary as "investment"?
Any thoughts?
Hi Kevin,
Thanks for the kind words. You and any potential co-founder both have to feel good about whatever equity agreement you make.
The challenge in your particular case is that some of the co-founders can't afford to work for free. What I did in these cases was I negotiated with them to join after we got funded.
In many cases this worked. Plus, the reality is you should always be recruiting.
One more thing. Anyone you bring on should understand they will get more by joining now than later. This should be obvious, but sometimes it's not.
I don’t know what vesting is
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Great
Thanks for the kind words
Why would a seed investor or a VC want common stock instead of preferred?
They don't and they will not take common stock. They want preferred stock. It puts them at the top of the cap table with the exception of debt.
What doses the equity split looks like if I payed my developer to build my high functioning prototype and, I want him to be my CTO once I have funding? We have never discussed equity. I see him as a limited cofounder, and I want him to feel like a vested part of the team.
If you want him to be your co-founder, then treat him as your co-founder, not a limited co-founder. I view this situation as similar to the late co-founder situation I describe in the video. Be generous and give him what he's worth.
Thanks.
so the money invested by the investors are paid back in terms of equity and no need of paying it back? Pls elaborate !!
That's the way venture funding works. You give up a percentage of your company. The investors are betting they will make at least 10X to 30X on their investment over time when the company is sold or goes public.
@@BrettFoxstartupceo Thanks
Cliff?
who decides the salary for the founder?
Great question. The board of directors determines the CEO's salary. But, I'd have a number I wanted to pay myself in mind or likely be disappointed.
@@BrettFoxstartupceo Thanks, I heard in general, the founders get 30% less salary than norm, is it true?
@@mudasirshora77 It's more complicated than that. Read this for more detail: www.brettjfox.com/how-do-you-determine-your-salary-as-a-startup-ceo/
Co-Founders can bring skills and experience rather than cash.
absolutely, Craig!
Diluted?
Felicidades, es un buen ejemplo. 106 sentadillas son unos mikujava.Monster muchas y un buen ejercicio. Se deja ver que hay muy buenos resultados 😍👍 Saludos desde la Cd.. de world 🌹😉💖 los mortalesw abian apreciado tan hermosa mujer.k
Thanks, but I this video has nothing to do with exercise and beautiful women. Only about startup equity.
So lost when you started talking about 64% and you’re down to 50% now you’re up to 36% totally lost