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How much are you willing to give up in equity?

If you were given substantial money (over $150K) to develop an MVP, money to grow your business, great mentors/coaches, free workspace/food and a lean startup program curriculum, what sort of equity would you be willing to give up ? Now, suppose I give you the actual product idea that is validated by several fortune 500 companies who have hundreds of thousands of users committed to licensing your product when its complete and oh by the way they are part of the design, development, testing so they are validating with you every step of the way to ensure a successful outcome. Now what sort of equity would you give up since your chance of success is so high?

Based on the responses below, I've revised my question and provided further background in my response later in this thread. See below before posting a response. Thanks!

27 Replies

Vijay Goel, MD
6
0
Vijay Goel, MD Entrepreneur • Advisor
Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)
This sounds more like being an early employee prototyping something for an enterprise C-level champion or two than anything else.

Less of an issue here about equity and more about giving up the chance to do anything disruptive and selling into a top-down product development model (which may or may not have anything to do with what the actual end users want/ need).

You'd have to ask yourself if the idea was so great and obvious why the players with substantial budgets are looking to outsource this to an unproven startup and provide less resources than they would to a middle manager, top-tier developer, or custom dev shop.


Michael Barnathan
2
0
Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
Your chance of success is still pretty low until you have consistent and growing cash flow, or a significant investment. That's when risk tapers. Not coincidentally, that's also when you tend to have the cash on hand to avoid giving too much equity out :)

The first scenario is an accelerator model (sort of), and I think it's customary for them to take something like 7% in exchange for that. The second model doesn't sound like entrepreneurship anymore, since someone is handing me an idea and saying "go do that", and I probably wouldn't give anything up for that specifically.
Rob Gropper
0
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
for your first question relates to growing MY business: the mentors/coaches would need to be validated over time so from day 1 i'd say that ads 0%, but could prove to be valuable over time depending on experience and availability and whether they have expertise in our space. free workspace would be valuable if it was in close proximity to the team members otherwise not worth much - perhaps some value for occasional meeting space, but not likely worth equity so 0%. The lean curriculum is not worth much to me and my team at this stage so 0%. So the only real tangible value in this hypothetical case is the cash. At our current stage I'd say around 3-10%. The next question relates to a business other than mine. This scenario is much more valuable. The fact that you have validated product/market fit (assumed from the "committed" customers statement), lined up beta testers and have "committed customers" ready to pay (i assume "licensing" = pay $$) plus the seed money to build at least an MVP (is this enough to build a rev 1.0 such that we can generate licensing revenue? ) i'd say this is worth a lot. Now, assuming that it's legal and a market that i am interested in and i can attract a team that is interested in the space I'd say that's worth 50%... maybe more.
Mike Moyer
4
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
No matter how high the chances of success, the business is still a gamble and the actual odds are unknown. Most entrepreneurs think they have a sure thing, otherwise they wouldn't go for it.

Equity entitles people to reap the future rewards of a company. These rewards come in the form of profits and/or the proceeds of a sale.

No matter what the situation, there is a universal answer: a person's % share of the rewards should always equal that person's % share of the risk taken to achieve those rewards.

If the game was Blackjack, instead of your company, and you and I each bet $1 we would each be entitled to 50% of the winnings, if any. We each took equal risk and deserve equal rewards. Things rarely go as planned, however. If the dealer deals two aces and we split, additional bets are placed. Let's say I'm broke and you put down $2 more. Now the 50/50 split is no longer fair. Your risked $3 and I only risked $1. It would be fair for you to take 75% of the winnings, if any, while I should take 25%.

When someone contributes time, ideas, relationships, supplies equipment or anything else to a startup and do not get paid, they are, in effect, betting on the outcome of the company. Just like in blackjack, they should receive a slice of the rewards that properly reflects their slice of the risk.

The amount people risk when they contribute is equal to the fair market value of the contribution they make. So, if a guy can make $100K doing marketing and works for you doing marketing for free, he is risking $100K.

So, to answer your question, you should disregard your level of confidence in the company (because all entrepreneurs are confident) and instead look at what people risk. No matter how confident you are, it would not be fair to take a slice of the rewards that was disproportionately high. It's not fair to benefit from someone else's risk.

If you're sure you're going to succeed then pay everyone who helps you out of your own pocket. Empty your savings, mortgage your house, sell your cars. This gives you all the risk and entitles you to all the reward.

I've written a book about how this works. It's called Slicing Pie and you may have a copy if you contact me through SlicingPie.com

Good luck! Sounds exciting!

-Mike
Rob Gropper
3
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
.... this also begs the question 'why would you not simply build this and the team yourself?"
Sean Hurley
0
4
Sean Hurley Entrepreneur • Advisor
Strategic Marketing Leader with strong financial results for growing organizations
Great question. I am happy to facilitate an in depth discussion. Feel free to contact me. Sean Sent from my iPhone
Peter Jackson
0
0
Peter Jackson Advisor
CEO
1. If you don't need money to develop It = none 2. Normal to factor a valuation based on a lot of what you have already express. Add in revenue or TAM. There is a present value range that all sides agree too If you need cash, you sell X percent at that value. 3. Employees and key hires can be part of an option pool. At this stage maybe you give up 20% to equity and 10% over 4 years in A vesting pool. 4. Maybe the answer is you get 70% 5. Other factors are: logical exit paths- multiples in that sector Barriers to entry TAM Your past
Rob Gropper
2
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
@ Mike M; if i'm an expert blackjack player, have made a living over several years playing blackjack (or more likely, poker) and you are an occasional visitor to vegas, then the equation is not just related to risk, but also expertise. The $1 that i commit is worth more to our overall success than the $1 you commit. In fact your rookie mistakes could cost us more than the $1 you contributed. Also, cash seems to have a different quality to it. If our team needs a certain technical expertise, for example, and you and i don't have that expertise there is no amount of your time or mine that can solve our lack-of-expertise problem, but cash can solve that problem so cash takes precedence over forgone income or labor contribution. How much is up for debate.
Lorenzo Staunovo Polacco
0
0
Snr Director, Sales & Advertising Operations at Yahoo!
If you are so bullish about the product you should probably borrow money and keep all the equity. You can always onboard strategic advisers with .5% equity, if you are interested in the mentorship and the network they provide.

Andy Halliday
0
0
Andy Halliday Entrepreneur
COO LifeAID Beverage Co.
this doesn't sound like "I" am starting with much equity to give up, as the idea, the capital, and the key resources are all being supplied by you. So being a non-founder, presumed without a claim on the intellectual property of your idea, the question is what equity are you willing to give up to get a committed leader of your venture?
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