Host: How to divide equity among software start-up founders to achieve fair distribution and sustainability for the start-up?
Mouneer: equity is relative to risk, the first risk is the seed funding so this can give you initial assessment on how to divide things; based on share of the initial funding, then comes the time at which a founder started with the start-up. If there are 3 persons who started the whole thing, they get bigger shares, since they took on more risk, in other words at which stage a dude joined the group of founder.
Then comes the hires, the emloyees that founders hire; are they willing to take equity to compesnate part of their package OR they are totally risk-averse and they are only interested in "safe" salary.
This is the quick answer in a nutshell.
Host: if it's software startup and doesn't need much capital investment in the beginning. The investment is in effort .. how can you quantify dividing shares ?
Mouneer: interesting; this brings us to a very important factor which is the type of contribution.
Let's say there are 3 of you, one of is the contributor of the patent of the breakthrough idea on which the company will be based, and the 2 are great in execution and business; in this case the valuation is arbitrary
and is based on TRUST amongst you. Yet for me it would seem that the techy dude gets a bit bigger share than the other two.
|A great book on reflection|
Host: I see. How can you guarantee the start-up sustainability after everyone has got his defined share in the company .. how to protect the company from its owners possible fuzzy attitudes :) ?
Mouneer::) well, to begin with, it is essential to elect a leader.
The group need to have a leader and always reflect; periodical retrospectives are essential to see how you are doing on Business, on Execution Process. on Technology Challenges , AND on people dynamics and relations at your start-up.
Just as important, you have to agree on principles and values that your start-up will operate accordingly, and also agree on ROLES of each founder dudes. Remember that simple rules that will guide the relationship are extremely important.
Work iteratively on "what if scenarios", what if we disagreed on the choice of technology stack, architecture model, buy vs. built a component? what if we have different opinion on details of the business model and/or timing of potential business model growth?
[I do recommend Business Model Generation book here]
Host: great .. in these what ifs .. what if someone decided to leave and join another venture or work for a multinational company .. how can this be handled .. the company is mainly built on efforts and shares will reflect those efforts and commitments ?
|Recommended for those who want to get things done|
Read point number 4 in my previous blog post here 7 rules towards successful entrepreneurial business
Mouneer: do you know about the bus-syndrome?
Host: no,what is it ?
Mouneer: it is when a developer or a founder is hit by a bus on his way to the office :)
this is part of everyday life risks, we only try our best to select our partners, a wife when selecting a husband and vice-versa a partner when selecting a co-founder and then it is fate, serendipity or lack of it.
Host: yeah , sure .. nice example, but I meant the exact situation which is choosing to leave .. that's to protect the company not me or my partners .. even if I left .. I don't want the company to get destroyed because I left .. but in case of any bus syndrome events .. it's something you didn't decide about .. it happened to you and was not chosen by you so you don't carry its responsibility
A start-up is in inevitable risk in its early days/months; and value is based on the collective values that its members/founders create. Once it takes off, the start-up is past its infancy and it can cruise control on its own if wisely, intensely and passionately run.
Mouneer: I believe one cannot build a company that's bus-syndrome-proof since day one ESPECIALLY a tech start-up.
Host: Great, this is very helpful.
Host: How can we document our agreements and make a contract that guides them?
Mouneer: You can improvise. But bear in mind that trust is more important than any written agreements, especially in Egypt where such legal documents are not really binding.
A very simple agreement written and signed is not legally binding , it is more of a moral reminder that we have an agreement; in other words, if a dude wants to quit, it is not the piece of paper that will prevent him; you know what I mean?
Host: yeah, sure, he will quit anyway :D
Host: but such a document can be important to protect the company sustainability and other partners from any decision taken by one of the partners to quit
Mouneer: Sure; that's why it is advisable to have legal papers agreed upon and signed
Just BUT don't over do it; make it simple.
Host: thank you very much Mouneer.
Mouneer: most welcome, certainly my pleasure.
Best of luck!