Topic: General Posts
Message:
A start-up company has a 4 owners. The founder with a patent has 60% of the shares, 10% are reserved for future hires and the remaining 30% are held by the other 3 owners. The 3 owners have been with the start-up from the beginning and are referred to as "co-founders". The company is 4 years old and has no revenue. A pivot is needed and the 3 co-founders want more equity to stay involved. Their argument is 4 years is a long time in the start up world and they could be using their time on other endeavors and it would cost the company equity to recruit someone new anyway. The question is - how much, if any, additional equity should the 3 get? One of them argues the FMV of his time to be devoted to the pivot divided by the value of the company now is a reasonable and fair calculation. This co-founder estimates the value of his time at $50K and the company valuation now at $500K. Thus, he should get an additional 10%. Question 1 - in the start up world, is it customary for the 3 early stage "co-founders" to get more equity in this situation? Question 2 - is the $50K/$500K calculation fair?
Subject: Re:Start up company equity award to founders
Message:
It is always good for founders to have equity. An earn-out for founder to meet goals could be a strategy. However, sadly in most cases, the founder shares a decrease with new investment. Feel free to give me a call anytime and we invested in 7 startups last year and 2 this year. - [email protected]
Subject: Re:Start up company equity award to founders
Message:
Good morning Mark,
We were in a similar situation early this year and handled with a combination of additional convertible debt securities to fund the pivot as well as a new options program.
Make sure you take into account the tax implications to the other founders if they get straight equity vs. options!
Glad to talk through the various mechanisms if you want to give me a call. Always great to connect with fellow Ausinites.
Thanks and best of luck with the new direction.
Alex E. Newton, CFA
VP Finance & CFO
Seattle Sport Sciences
Subject: Re:Start up company equity award to founders
Message:
Difficult to understand what value the other founders are providing if the business is still pre revenue after 4 years. What are their roles. What is the sector?
Subject: Re:Start up company equity award to founders
Message:
What's really missing here is how long and what is required to get to revenues and then cash flow positive.
This company is worth zero, the question moot, without that information.
There are a million "idea" companies out there and every such founder/CEO/patent holder is convinced he has the prettiest baby at the party. The only problem is that other CEOs, etc. feel the same and they have taken more proactive steps to make theirs genuine revenue-producing companies.
This is a business situation but zero mention of those $-based business metrics.