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Adding Founders and Valuation

Hi all

Quick question around how best to determine compensation/contributions for
those joining the team after we?ve built the initial product.

Here?s the situation, the founder created the first iteration of the
product and has significant sweat-equity invested to get the product
launched (it?s a software tool to help enable communications in between
patients and care-givers).  The product is has many attractive features yet
needs additional leadership in fund-raising and other functions.

The question is how to balance the ?sweat-equity? investment of the founder
with others brought on to help build the company.  How to value a
early-stage concept and how to ensure others who may invest sweat-equity
are appropriately rewarded upon exit.

Any help/ideas are greatly appreciated!

11 Replies

Paul D'Arcy
1
0
Paul D'Arcy Entrepreneur
SVP, Marketing at Indeed

Compensation questions are always tough, because they are so specific to the company and the person being hired.

A late addition post-product founder could be worth 2% or could be worth 50% equity depending on who they are and what they bring to the team.

If they play a major role in attracting funders, they are valuable. If they are a post-founder employee they could could be worth .5% to 10%.

Here are some questions to ask when thinking about the right amount of equity for the person:

- How much value does the addition of the person add to the team (are they a prominent entrepreneur or executive? do they bring customers or make funding much easier?)
- How does the addition of the person changes the risk profile of the company? (Does the company need this person to eliminate obstacles?
- Will they be paid? (If yes, equity is typically much less)
- How does their background compare to the background of the existing founders? (If the new person is significantly more or less skilled or experienced, that matters in the equation).

In my opinion, quantifying sweat equity isn't nearly as important as quantifying impact when it comes to a startup -- did the person's work build the product? Make the company viable? Get the company revenue? Raise money? Build a star team? Those are the things that tend to outline the share of stock. . . .

I hope that helps a little,

Paul

_                                          _                          
Paul J. D'Arcy
p...@darcy.net
@paul_j_darcy
www.scienceofrevenue.com

On Sep 12, 2012, at 11:00 AM, dangelow <dange...@gmail.com> wrote:

Eric Rogness
2
0
Eric Rogness Entrepreneur
Technical Product Manager

I highly recommend Founder's Dilemmas by Noam Wasserman<http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneur...>to all of you. My first couple startups, my cofounders and I approached
these sorts of questions as though we were the only ones to have ever been
in that situation. Founder's Dilemmas lays out very clearly the decision
you're actually making, the options you have, and then reveals what other
startups have done in the past: 20% did this -- this happened; 30% did
another thing -- this happened; and so forth.

Highly recommend it! With the knowledge and framework of that book, you
will be in a much better position to make these sorts of decisions. If
you'd been looking for a specific answer, I'm not sure a third party would
ever be able to provide one. (outside legal avenues of course, but that's
when you're picking up the pieces -- hopefully not there, mate!)

Victor Wang
2
0
Victor Wang Entrepreneur
Founder & CEO at GeriJoy

May be interesting also to google "Founders pie calculator". There are a
number of them online.

On Wed, Sep 12, 2012 at 12:26 PM, ericrogness <ericrogn...@hotmail.com>wrote:

AJAY BAM
0
2
AJAY BAM Entrepreneur
Ceo and Co-founder at Vyrill Inc
Adam Geller
0
0
Adam Geller Entrepreneur
education technology explorer

I started to get clarity on how to answer this question for myself when
someone framed it this way:

You've built a lot of value in X months. You've got a prototype version of
the software. People are using it. You're generating revenue. They're even
renewing! It's clear that there is a viable business opportunity. The
vision is big. The opportunity is huge. The timing is right.

Yes. There's a lot of value created to date, but 90% of the value is still
left to build during the course of the next few years.

So ask yourself how will you should compensate someone who is going to help
you build that 90% of the value relative to the risk they're taking on pre
funding. Maybe also consider the amount of compensation necessary to keep
them invested for the next few years to build that value.

Jeevan Koneru
0
0
Jeevan Koneru Entrepreneur
Software Developer

I found http://answers.onstartups.com/questions/6949/forming-a-new-software-s... very helpful when I was researching this topic a few months back. This particular piece was referred by many other posts too.

Best,
-Jeevan

From: ericrogness
Sent: Wednesday, September 12, 2012 9:26 AM
To: [removed to protect privacy]
Subject: [FD Members] Re: Adding Founders and Valuation

I highly recommend Founder's Dilemmas by Noam Wasserman to all of you. My first couple startups, my cofounders and I approached these sorts of questions as though we were the only ones to have ever been in that situation. Founder's Dilemmas lays out very clearly the decision you're actually making, the options you have, and then reveals what other startups have done in the past: 20% did this -- this happened; 30% did another thing -- this happened; and so forth.

Highly recommend it! With the knowledge and framework of that book, you will be in a much better position to make these sorts of decisions. If you'd been looking for a specific answer, I'm not sure a third party would ever be able to provide one. (outside legal avenues of course, but that's when you're picking up the pieces -- hopefully not there, mate!)

On Wednesday, September 12, 2012 12:00:46 PM UTC-4, dangelow wrote:

Andres Buritica
0
0
Andres Buritica Entrepreneur
Entrepreneur in Residence at MuckerLab

I second Eric's suggestion. The Founder's Dilemma<http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneur...> is
an essential book which will help you address the important questions. Once
you have answered those the actual numbers should be easy to come up with.

Mike Moyer
0
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Sorry I'm late to the game answering. But I love this question because the solution is EASY, EASY!!!!

Your problem is that:

  1. It's impossible to value your company without a series of wild guesses about the future that are most likely going to be wrong
  2. You have to throw a dart to determine how much each person gets. You don't want to give them too much, but you want them to be motivated
  3. You have to give it to them upfront not really knowing what they are going to actually produce
  4. You need a way of getting the equity back from them if they flake out
  5. You don't want to spend thousands on attorney's to write a bunch of agreements

The solution is a dynamic equity split. The dynamic equity split allocates startup equity base on the value of actual contributions to the company relative to the contributions of everyone else. With a dynamic split you will know exactly how much each person deserves and you never have to worry about getting burned by people who don't pull their weight. The book the Founder's Dilemmas cites dynamic equity splits as the solution to the problem and it's a great book. However, it does not go into detail on how to implement.

I've written a book, called Slicing Pie (www.SlicingPie.com, that describes in detail how to implement the model step-by-step. I would be happy to give you a copy if you email me at [removed to protect privacy].
Kimberly Moore
0
0
Kimberly Moore Entrepreneur
All,

I don't have anything to contribute to conversation because I'm not here yet. Mike, I'd like to take you up on the offer of a copy of your book.
Mike Mitchell
0
0
Mike Mitchell Entrepreneur
Consultant: Technology Development and Management
The dynamic system Mike Moyer describes is fairest, but requires allot of follow through that start-ups really don't like to do. If you are looking for a quicker static solution, consider having the existing founders bid to determine his perceived value.

ALSO - Be aware, there maybe some unusual tax consequences to the new founder. If you have traction and intangible assets, they will be getting equity whose value must be determined by a valuation that satisfies section 409A if the IRS code.
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