Cofounder's stake

Now in continuation of the previous post, let us consider one Founding Team with three co-founders. As I said early, one can split and change each value by a percentage no more than twice the number of cofounders. With 3 in a team, the ideal is 33.33% for each. However, basis on certain parameters I discuss below, one may have 27.33% while the third has 39.33%.

Why is this an ideal situation? In any venture, the problem or pain that the team is working to solve or reduce is asymmetrically felt by each member. The visionary founder will be the first to acknowledge the pain and seek a solution. S/he would have ideally approached the other two over a long-or-short conversation.

Subsequently age, experience, network, skillset, functional requirements, and the difference in joining periods – at what stage does one join as a full-time teammate – is an essential consideration. Someone working part-time and joining after you raise the angel or seed round is relatively risk averse, thus deserves a relatively lower stake than those dedicatedly working from the first day.

Also keep in mind, the math works only for founders up to 5

In my opinion, I do not see success in companies with too many founders. Larger founding teams are great, but a lean group of 3 to 5 founders bring in the diverse skills and networks to the table and disputes can be amicably resolved. Founders are required to provide a strategic vision. Your team works with you because they relate and align themselves with the vision. Once you have your founding team, you are good to execute tactical and immediate goals.

In building an objective equity split, with variations among the founders, I recommend the below list of questions:

A1. If this founder left, it would severely impact your chances of raising funding?
A2. If this founder left, it does not impact your chances of raising funding?

B1. If this founder left, your development schedule would be severely impacted?B2. If this founder left, my development schedule is not impacted?

C1. If this founder left, I cannot launch my product, or my initial traction is compromised?
C2. If this founder left, my launch or initial traction is as is?

D1. If this founder left, it would probably prevent us from generating revenue quickly?
D2. If this founder left, we cannot generate revenue quickly?

E1. Who is well connected with the industry, large-ticket customers, press & influencers?
E2. Who is least connected with the industry, large-ticket customers, press & influencers?

In the above five question, add a percentage (1%) to the founder that you mark against the #1 and deduct a percentage (1%) from the founder that you assign #2. Once you have the responses, ask: Do you have a CEO? Is the CEO pitching to the investors? Or, does your CEO also handle CFO or CTO functions?

If one person answers yes to all three, add 1%; and if your CEO and CFO or CTO are two different individuals, then add 0.5%.

Ideally, the CEO should pitch to investors. Mostly, the CEO is the Founder who reached out to the others unless the CEO lacks people or communication skills. However, the CFO and CTO ideally should never be the same. It is wise for the CEO to handle marketing and finance or technology and marketing, but never finance and technology, unless you work in financial technology.

Once you have those scores added, ask who is working part-time and deduct up to 3% from them. No benefits for being full-time. If you have a dedicated person for the creative content that increases your visibility, add 1% to that person.

Then, did you find a person who came up with most of the features? If yes, you need to keep that person happy. Can s/he implement them? If yes, great! A person who comes up with most features and can implement must be well rewarded, else you are creating competition for yourself. This is a subjective call, but do not negotiate beyond 7% with this person. I’d limit it to a 5% variation.

So far, if any one person has paid for business expenses: give that person a suitable equity based on a 3-year NPV calculation of your possible and projected earnings. This will ensure the person is happy and not feel to have a financial burden.

Quick note: Duos are best to work with and the bestest (unsure if such a word exists) if both are partners committed to working together in solving the problem and make impact!

In part 3 (which will likely come in December/ January) – I will show a break-up of many possibilities of a 3- and 5- member team. Meanwhile, for any queries: I’m on LinkedIn and – just got my access to OnMail few days back and what better way to try?!

Siddhartha Sharma

Siddhartha Sharma

IIT Kanpur | CFA Institute Working Body Member | UN Climate Leader | Angel Investor | WEF Global Shaper & former fintech entrepreneur

Original article published on LinkedIn