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.