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How to address equity questions during "interviews" when the startup is not founded yet?

I'm currently having some coffees with several people interested to joining the project which I am involved and most of the times I have to face equity questions (people want to understand what is going to happen when the startup is founded).

For now, I only think in create a few-member team in order to finish the product asap (in terms of saving as much time and money as possible). The point is that I wouldn't like to put as an on-board co-founder the first person/people I encounter, since as I have read a lot of times this one of the big mistakes. However, I understand they want to know something about the short-term future and I would like to give them an accurate answer.

Said that, I wonder which be the best way to address equity questions when I am not sure beforehand if they fit with the perfect co-founder profile but wanting to be fair with the answer and taking into account that they will work for free (since the startup is neither founded nor funded): I want to reward their effort (assuming one of them accept to join the team).rt.

Hope you guys may give me a hand with this early-stage problems/doubts and your opinion based on your experience.
. Note that I do not believe in the founding of the company until the product is finished, released and having gathered some positive market metrics (I communicate this to all of them in order they understand how I approach the business and therefore telling them that the constitution and the capital raising will take a certain time in function of the traction).

5 Replies

Tomas Gutierrez
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Tomas Gutierrez Advisor
Partner at Scalable Path | Product Architect | On-Demand CTO | Entrepreneur
I've been having success with the Dynamic Equity Split model for early stage organizations. IMO, Mike Moyer's Slicing Pie is the most accessible approach for this -http://www.slicingpie.com/.

This works well when a venture is starting out, but it can also work if you have an existing organization with legacy investments.
Eleanor Carman
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Eleanor Carman Entrepreneur • Advisor
Incoming BLP Sales Associate at LinkedIn
There was a great question asked about a similar topic yesterday. I think the responses will be helpful here too. Here is the discussion board. You can also do a search for equity and there are tons of questions that relate to this one. The equity you give out will remain relatively the same just based on the party alone.
Paul O'Brien
0
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Paul O'Brien Entrepreneur • Advisor
Tech Economic Development and VC CMO
Most schools of thought have to do with valuation, compensation, and commitment but I've found that those "hard" considerations of an early cap table fail to really establish the value and passion of the core team. The way in which early equity is handled (not just share but cliff and vesting), speaks to less tangible values that the company is establishing.

Here are some thoughts on what to consider with regard to the stage of the company, the role of the individuals, and how much (or little) they are valued.


I want you to first ask and answer that question by warping your perspective of the term "investor" for a moment. I'm not asking you if your co-founder and employees are indeed investors, I'm asking you if they are investing their time in your venture. How do you perceive their contribution?

All that said, if you want a more practical and tangible way of addressing the issue, along the lines of Tomas' suggestion of Slicing Pie, consider using the Startup Equity Calculator.
Tomas Gutierrez
0
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Tomas Gutierrez Advisor
Partner at Scalable Path | Product Architect | On-Demand CTO | Entrepreneur
Agree with Paul; it depends on the stage of the company, and how many players have stakes in the funding/financials. The more parties, the more complex the discussions/models.

However, especially at early stages of an organization (pre-series?), a dynamic equity split will remove friction if done right. Also, once you grow out of that model, converting the equity into something more formally accepted by investors is straightforward.
Kenneth Larson
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Kenneth Larson Advisor
Retired Aerospace Contracts Manager, MicroMentor Volunteer and Founder "Smalltofeds"
Equity is best developed as a natural function of a business plan and an associated operating agreement. Both must occur up front. The net result is a well communicated equity arrangement that will last.

During an interview the concept of the plan and the weight of the associated equity can be broached on a preliminary basis to permit the next step. But the final arrangement occurs after the enterprise and the contribution by each party has been thoroughly defined.
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