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How do I divide equity for new co-founder and future key employees?

What are some principles about sizing up the equity to give a co-founder joining during prototype testing (no salary)? How much should I set aside for future key employees to hire over the next 6-12 months?

For context: I am the sole employee and 90% owner in an early-stage SaaS startup about to begin prototype testing. We have cash from an F&F round and a few customers in the pipeline.

Thanks!

19 Replies

Reuven Granot
3
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Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
I was in a similar situation. First I thought that employees for shares should be treated as partners, but when they did not performed what were assumed to success, I understood that this way may bring me to a company with many partners and no products. I adapted the ideas from Slicing the Pie http://slicingpie.com/book/ by Mike Moyer. I "payed" shares by successfully achieved milestones.
To make all seal good, in my opinion these milestones have to a priory been agreed.
Sam McAfee
1
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Sam McAfee Advisor
Building Popup Incubators for Corporate Innovation Programs
I second @Reuven. I asked this question (or similar) on Quora, and Mike Moyer answered with a really fantastic detailed answer. This is the fourth time this week I have seen reference to Slicing Pie. I'd go with that. ;-)
Avrum Mayman
2
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Avrum Mayman Advisor
Innovator, Entrepreneur, Product Visionary
I went through this as well. I found some good websites (although I can't remember what they were. Google some) that had equity calculators that asked a lot of questions such as: who is investing their money? who, if they left, could not be easily replaced? Who is selling? etc. These calculators really helped get me to a ballpark range that was rational/defensible. Then the next step was to figure out when to vest the shares. In my case, we set a milestone of taking our product live, at which point they received a decent chunk of their total equity. The remainder vested over 3 years after launch, if they remained with the company in a full time role.
Barbara Wainwright
0
0
Get Certified with LifeCoachTrainingOnline.com and Join over 6,000 Coaches Worldwide LION
Absolutely agree. Slicing the Pie is what I'd recommend - it is ethical, and grounded in solid principles.
Martin Omansky
1
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
No formula. Lots of opinions. Your "co-founder" is not that. He/she is a contributor - even a valuable one - so treat that person as an early-on employee. award that person options to purchase 10% of the stock, vested over three years. No need to "set aside" equity for future employees. Usually the option pool for employees is about 15% of the equity, but this is voted on by the Board of Directors later in the life of the company. Subsequent investors will understand how to factor for the dilution represented by the pool. By your questions, I assume that you could be edit from legal (securities) and tax counsel. Pay their fees. You will thank them in the end. Sent from my iPhone
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X
Entrepreneur
I am struggling with the same question, so went on Quora and found Mike Moyer's answer to Sam McAfee question. It's good!
Bill Ferguson
0
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Bill Ferguson Entrepreneur
Member at Unique Infrastructure Group LLC
Talk to prospective investors so not to over-provide... my experience says they like to see something in the range of 20% for employee pool, but if to be consider a founder, that changes the game
Matt Bradley
0
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Matt Bradley Entrepreneur
CEO
If you do not have any investors yet, I would consider a larger option pool (of perhaps 30%) and create an option plan for any employees that you hire. If you have a product to begin testing, it is arguable that your company has some value now (assuming that there will not be a huge pivot), and that you can give people smaller chunks of equity than would a fresh startup with just an idea. That said, given how early the company is currently, you will still want to grow a team of key players, and that will cost equity. It is worth the expense - you have to remember that 90% of $0 is still $0. Also, teams have been proven to succeed much better than lone entrepreneurs. So, compensateyour early key playersvery very well.

That said, I would echo other comments that ensuring that people you bring on board earn equity over time (and give yourself some time to evaluate effort, fit, contribution, etc). Do a four year vesting with one year cliff (and then 1/36 thereafter), and make sure that there is a buyback clause in an at-will employment agreement.
Sam McAfee
0
0
Sam McAfee Advisor
Building Popup Incubators for Corporate Innovation Programs
Thanks, @Igor. I don't think my question was very clear or well worded. I was trying to get at something I get asked a lot by founders. But his answer was fantastic, and turned me around. So, it doesn't matter what I said. :-)
Lotfi Belkhir
0
0
Lotfi Belkhir Entrepreneur • Advisor
Associate Professor & Chair of Eco-Entrepreneurship at McMaster University
The standard practice in silicon valley is to set aside about 20% of common stock for employees. Stock options have became less popular lately; so restricted stock is a lot easier. However, every employee who's granted a certain number of shares is put on a standard vesting schedule of 4 years, with 1 year cliff. Meaning if they leave or are terminated before their first anniversary, they get nothing. However if they do, they get 25% of that grant, and then vesting continues to accrue at 1/48th of their grant per month.
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