How To Distribute Startup Equity (The Smart Way)

Summary

This video provides an overview of how to approach startup equity, especially for first-time entrepreneurs. It covers the allocation of equity among four key groups: founders, team members, advisers, and investors. The speaker suggests a baseline allocation of 60% for founders, 10% for the team, 5% for advisers, and a varying percentage for investors based on funding rounds. The discussion includes tips on vesting, negotiating equity with early employees, and strategic adviser involvement, offering a simplified approach to equity distribution.

Takeaways

• 💡 Equity is a powerful tool for startups, allowing for incentivization of teams, attracting investors, and rewarding co-founders and advisers.
• 📈 For first-time entrepreneurs, equity distribution can be daunting due to lack of experience and fear of giving away too much or appearing uninformed.
• 🎓 The speaker suggests that after the first round of funding, approximately 60% of equity should be retained for further distribution among founders, team, advisers, and future funding rounds.
• 🤝 Founders should consider their equity share carefully, especially if there are multiple co-founders, as this will affect the overall equity pie.
• 👥 The team's equity, typically around 10%, should be allocated based on the value of their contributions and the salary they would otherwise command.
• 💼 Vesting schedules, such as a one-year cliff with monthly vesting over four years, are common to ensure team commitment and alignment with company goals.
• 📚 Advisers, who provide strategic guidance and industry knowledge, might be offered between .1% to 1% equity, with a total pool of around 5% reserved for all advisers.
• 💼 Investors provide the capital necessary to grow the business and typically receive a significant equity share, which can range from 10-35% depending on the valuation and the amount raised.
• 🔄 Each subsequent funding round will dilute existing equity holders, so it's crucial to plan for this when considering equity distribution.
• 💬 The speaker encourages创业者 to ask questions and engage in discussions about startup equity to better understand the complexities and make informed decisions.

Q & A

What are the four main buckets to consider when distributing equity in a startup?

The four main buckets for equity distribution are founders, team, advisers, and investors.

Why is equity important in a startup?

Equity is important because it can incentivize teams, attract investors, and provide a mechanism for sharing ownership and rewards in a growing business.

What percentage of equity should typically be reserved for co-founders after the first round of funding?

After the first round of funding, about 60% of the equity should be left for the co-founders to split among themselves.

How should equity be allocated for early employees who require a salary?

For early employees who require a salary, equity should be allocated conservatively, typically around 10% of the total equity, with a one-year cliff and monthly vesting over four years.

What is the vesting schedule for equity given to team members?

The typical vesting schedule is a one-year cliff followed by monthly vesting over four years, meaning they don't receive any equity for the first year and then it vests monthly after that.

What is the typical equity range given to advisers in a startup?

The typical equity range given to advisers is between .1% to 1%, with a generous limit of up to 2%.

How much equity should be allocated for investors in a startup's first round of funding?

For the first round of funding, it's common to give up between 10 to 35% of equity, depending on the valuation and the amount raised.

What is the significance of the 'cliff' in equity vesting?

The 'cliff' in equity vesting is a period, typically one year, after which an employee or team member becomes eligible to receive their vested equity. If they leave before the cliff, they receive no equity.

How does raising subsequent funding rounds affect equity distribution?

Raising subsequent funding rounds typically dilutes the existing equity holders, as new shares are issued to investors, which reduces the percentage of the company they own.

What advice does the speaker give for approaching equity distribution with investors?

The speaker advises thinking about equity distribution in terms of percentages of the pie and to be prepared for dilution with each funding round, suggesting a range of 10 to 35% for the first round.

Why did the speaker mention reading books and listening to podcasts as part of learning about equity?

The speaker mentioned reading books and listening to podcasts to illustrate the common approach people take to learn about equity, despite finding the materials often complex and not easily understandable.

Outlines

00:00

🚀 Startup Equity Distribution

The speaker discusses the importance and challenges of startup equity distribution, particularly for first-time entrepreneurs. They share their personal journey and the common issues faced when raising venture capital. The speaker provides a simplified approach to equity allocation, emphasizing the need to consider founders, team members, advisers, and investors. They suggest a general guideline of allocating 60% to founders, 10% to the team, 5% to advisers, and the remainder to investors, with variations depending on the specific circumstances. The speaker also touches on vesting schedules and the importance of not being overly generous with equity to early employees.

Keywords

💡Equity

Equity in the context of startups refers to ownership shares or stakes in a company. It is a form of capital that entrepreneurs use to incentivize teams, attract investors, and reward advisers. In the video, equity is discussed as a key component of startup funding, where the founder explains how to allocate equity among founders, team members, advisers, and investors.

💡Co-founders

Co-founders are individuals who start a business together and share in the ownership and responsibilities of the company. The video emphasizes the importance of considering co-founders when dividing equity, suggesting that after the first round of funding, about 60% of equity is typically left to be split among them.

💡Vesting

Vesting is a schedule that grants equity ownership to employees or founders over a period of time, typically four years. It is used to ensure that team members remain committed to the company's long-term success. The video mentions a one-year cliff for team members, meaning they receive no equity if they leave within the first year.

💡Investors

Investors provide capital to startups in exchange for equity. They are crucial for funding rounds and can contribute to a company's growth and success. The video discusses how much equity to give up to investors during various funding rounds, suggesting a range of 10-35%.

💡Team

The team refers to early employees who support the startup. The video suggests that equity分配 for team members should be considered based on their necessity for a salary; if they require one, the equity allocation might be less generous. A typical equity pool for the team is 10%.

💡Advisers

Advisers are individuals with industry knowledge who provide strategic guidance to a startup. They may assist with partnerships or fundraising. The video mentions allocating .1% to 1% equity to each adviser, with a total pool of about 5% for all advisers.

💡Funding Rounds

Funding rounds are the stages at which startups raise capital from investors. Each round can involve giving up a certain percentage of equity. The video outlines typical equity percentages given up in the first round, which can range from 10-35%.

💡Bootstrapping

Bootstrapping is the practice of funding a startup with personal resources or revenue generated from the business itself, rather than external investments. The video contrasts bootstrapping with raising venture capital, mentioning that the founder's previous company was bootstrapped.

💡Pre-money Valuation

Pre-money valuation is the estimated value of a company before a new round of financing. It is an important figure in funding negotiations. The video uses it as a reference point when discussing how much equity to give up for a certain amount of funding.

💡Dilution

Dilution occurs when new investors acquire equity, reducing the percentage of ownership for existing shareholders. The video explains that with each subsequent funding round, founders and early investors experience dilution of their equity stakes.

💡Strategic Advisers

Strategic advisers are experts who provide guidance on critical business matters and can influence company direction. The video mentions using an adviser's name in a pitch deck and how they can help close deals, exemplified by the mention of Travis Kalanick's involvement.

Highlights

Equity is a powerful tool for incentivizing teams and attracting investors.

First-time entrepreneurs often feel intimidated by equity distribution.

The speaker shares personal experience with equity from building businesses for 15 years.

Sphere Technologies was bootstrapped, contrasting with the venture capital approach of Flowtown.

A common challenge is determining how to allocate equity among co-founders, team, advisers, and investors.

After the first round of funding, approximately 60% of equity is typically left for distribution.

Co-founders should consider splitting the remaining equity, which is about 60% post-funding.

For teams, equity allocation should be considered based on their salary requirements.

A typical equity pool for early employees is around 10%.

Equity for team members should vest over four years with a one-year cliff.

Advisers, who offer strategic guidance, might receive between .1% to 1% equity.

The total equity allocation for advisers is suggested to be around 5%.

Investors, who provide funding, typically receive 10-35% equity depending on the valuation and round size.

Each subsequent funding round will dilute existing equity holders by about 5-10%.

The speaker invites questions in the comments and encourages sharing the video with others who might benefit.

The channel's mission is to inspire viewers to live and build bigger through their businesses.

Transcripts

- How to think about startup equity.

I mean, equity's amazing.

Think about it, you can have incentivized teams.

You can have investors, which is cool.

But most entrepreneurs that are starting off,

they've never done this before,

and they're probably scared they're gonna look stupid

to the investors or that they give away too much

or that they really don't know how

to approach advisers or their team

or even think about co-founders.

That's what I wanna share with you guys in this video.

When I started off, I've been building businesses now

for 15 years, but it was only two companies ago

that I actually raised venture capital.

My company that did really well, Sphere Technologies,

I bootstrap, self-funded it.

Then, I moved to San Francisco, and I want to learn

about this world of equity and venture.

So, Flowtown was my first experience.

And the same challenges

that you're probably experiencing yourself was

I didn't know how much, how do we divvy it up,

how do we think about vesting,

and I did what most people did.

I listened to all the podcasts.

I read all the blog posts.

I bought a few really, really boring books.

Holy moly.

Investor VC books, they're the most...

I don't even, I still don't understand them.

So, what I wanna share with you guys in this video

is the simplest way to think...

Again, this is the base line.

There's always variations, plus or minus, whatever.

I'm just gonna give you my thoughts on it.

There's kind of four big buckets to think about

when you're giving away equity.

One is the founders.

The second is the team.

The third are the advisers to your business,

and then, the fourth is the fun ones,

those are the investors.

They give you money to build your dream.

So, how do you think about that?

Well, number one, I really think that it's

about the co-founders thinking about...

Again, after you raise your first round,

60% is kind of what's left over so that you have to split.

If you have no co-founders, cool.

That's all yours.

If you have three co-founders,

you split up three ways, right?

Again, 60% plus or minus five to 10% is kind of the range.

The next one is the team.

You've got early employees, people that supported you,

and the way I like to think about team

is if they needed a salary to work with you,

then maybe you don't wanna be too generous with your equity.

So, typically, that pool of equity is 10% for the team.

So, if you had to pay somebody 50, 60,000 a year,

you give them a couple percent equity,

and as per traditional, one year cliff,

which means if they leave within the first year,

they get nothing.

And this is true really for,

well, it could vary with the founders, but with the team,

they leave within they don't get nothing.

Then, it's monthly vests up to four years.

So, that 2%, they don't get the first quarter of it

until the first year, and then every month after that,

they give kinda the equivalent.

So, team is 10%.

You split it up amongst whoever you have.

The third bucket is advisers,

and these are people that have knowledge

in a certain industry.

You might use their names in your pitch deck,

but they're strategic.

They might help you close partnership deals,

but the range there is giving each adviser

.1% to 1% equity.

On the very generous side, very generous side, it's 2%.

I've never personally done it.

1% was what I did.

Actually, one of my investors and advisers

was Travis Kalanick, the founder and CEO of Uber,

and we gave him essentially a half percent equity

to kind of be our quarterback in fundraising.

And just an amazing, amazing adviser,

and also investor, and obviously, entrepreneur.

But that was the way we thought about it.

So, I would say for your advisers, about 5%.

So, you've got 60% for the founders.

You have 10% for the team.

You got 5% for your advisers, and then, leftover

is your investors.

Usually, each round of funding, right?

If you raise a million dollars

on five million pre-money valuation,

you'll wanna give up about...

if you're great, 10 to 15%.

Normal is 20 to 25%,

and then, worst case is 30 to 35%

in your round of funding in equity

as a total percentage of the pie.

So, that is how I like to think about startup equity

for your first round of funding.

And usually, again, plus or minus, five to 10%

each time you raise a subsequent round,

you dilute yourself, and that's kinda how it rolls.

So, I wanna ask you guys if you have any questions

about startup equity, just leave them below in the comments.

I'll be sure to answer them there.

If you know somebody that needs to see this video,

be sure to share it with them.

Subscribe to this channel,

and as per usual, I wanna challenge you guys

to live a bigger life and a bigger business,

and I'll see you next Monday.