We’ve just released our free Co-founder Equity Split tool. It’ll give you a fair and objective recommendation about how to divide your startup’s ownership, so you and your co-founders will have a sensible, real starting point for this notoriously hard, crucially important conversation.
Many startup founders find themselves lacking clarity and direction when it comes time to divide their new company’s ownership among co-founders. It’s a crucial step, and one that is very important to take seriously: in addition to having potentially massive effects on each person’s earning potential if the startup takes off, showing that your team (and CEO) can handle hard discussions is an important signal to potential investors. But finding and asking the right questions to split equity is difficult, and because your team is excited, new, and probably close, it’s tempting to avoid the issue, sidestep it, and take shortcuts.
For founders who do take on the responsibility head-on, there are many existing guides, blog posts, books, Quora answers, and rules of thumb recommending processes to split equity, but many founders run into difficulties actually applying these guidelines and frameworks. They usually require estimating obscure values and seemingly arbitrary percentages: “Founder B increases our value by 25% sometime in the future, so I should be willing to give them 1/(1-0.25) of the company.” To arrive at that answer, you’d have to be able to guess your venture’s current value, future value, and if the value would increase by a certain percentage from a certain person’s actions, without any context at all.
Our goal in building this Co-founder Equity Split tool was to consume all the different methods out there and build a framework that avoided their shortcomings but still appreciated the complexity of the question at hand. We found that, across all of these frameworks (and in our own experience), the most basic question co-founders need to answer is: “What are the venture’s needs, who is bringing value to the table, how much and what kind of value is each person bringing, and how can we make all these different kinds of contributions comparable?”
By value, we mean any attributes or effects that will be integral to building, growing, and managing the venture. While there are many kinds of value each co-founder can bring to the table, there are basically just two ways to assess value:
- By looking backward: what background, skills, and experience is a co-founder bringing to the table?
- By looking forward: what impact and commitment will a co-founder bring to the table in the future?
Given that startups split equity very early on, most companies going through this process have more future than they have history, so our framework puts more weight on the forward-looking framework than the backward-looking framework.
The forward-looking framework, which is the backbone of our methodology, essentially looks at the potential path and future of the venture in terms of challenges that the company will face and the value the company will create by overcoming those challenges. By looking at the venture’s future as a series of opportunities to create or lose value, it becomes possible to estimate the value each co-founder may individually create, based on their particular background, skills, and degree of commitment.
At Gust, we reviewed hundreds of equity ownership agreements between founders of successful ventures, analyzed various forms of businesses, and studied the frameworks available to allocate ownership. This research helped us develop our own framework for determining a co-founder equity split.
While analyzing these ventures, we found patterns in the types of skills that tend to lead to successful outcomes. Some ventures need founders with deep technological knowledge (think Google) while others require a balanced approach to technology, design, and hustle (think Airbnb). Most ventures require one entrepreneurial co-founder who can commit wholeheartedly to the company, serve as the primary spokesperson, be willing to forego work/life balance, and drive the venture to success. That person will usually act as CEO, but may well require a strong team of co-founders to complete the management team. Accordingly, we believe that you should view equity allocation as a function of:
- The type of venture you are pursuing (a big and difficult question that our tool can help you break down into several simple questions), and
- Which co-founders are bringing what kind of value to the table, what kind of value, and how much.
Based on responses to questions about your business and your co-founders’ backgrounds and contributions, as well as the level of commitment and personal responsibility they are willing to sign up for, we can produce a venture-specific recommendation about the proportional ownership of the company. This will help you decide how much founders stock is issued to whom in your startup’s initial cap table.
This framework doesn’t rely on figuring out your company’s current value, your company’s future value, or the benefits a founder is forgoing by joining the venture versus remaining on the market. In addition, it’s sensitive to what your venture is actually doing.
Thinking about equity in these terms—as portions of the overall value created by the team—helps co-founders avoid mis-valuing each team member based on superficial factors, like the order in which they joined, interpersonal relationships, or small amounts of initial personal funding. In particular, there are two very common, very understandable, but very serious errors that co-founders make:
1. Splitting equity 50/50 is rarely the right answer
While an even split may turn out to be the best answer, founders should not split the equity blindly. Investors look for CEOs who can have difficult conversations and resolve them sensibly and satisfactorily. The question of ownership between co-founders is one of the earliest of these difficult conversations, so it’s an important signal of the future CEO’s leadership and judgment for investors. Having a framework that helps co-founders discuss their individual relationships to the value the team must create as a whole, and the skills necessary to overcome future challenges, is key to considering each person’s role objectively.
Some schools of thought suggest that an even split is necessary to prove or preserve mutual respect between founders. In some situations, this is a sensible move—if the founders have access to a large pool of possible co-founders where they can find mutually complementary skills and ability to create equal value. In most cases, though, these conditions aren’t met. Equity isn’t a portion of a company’s respect, it’s a portion of a company’s value. Not all founders deliver equal value, and that’s okay. Founders that don’t recognize this reality are already demonstrating their inability to act in the best interest of the venture by putting themselves or their co-founders first and the venture second.
In addition to these concerns, there is also the relationship between equity and leadership. Most ventures hinge on the direction and drive of one co-founder in particular—generally the CEO—who will be the one to break tie votes, make the hardest calls, and probably sleep least. Because this person will be the primary focus of investors and partners, and thus the person on whose shoulders responsibility for the company’s performance ultimately rests, it is rational, reasonable and will be expected by investors that this person have a larger equity share than other cofounders.
2. Early-stage founder contributions should not be quantified in dollars or equated to salaries
There are a plethora of reasons why pegging each founder’s contribution to a target dollar amount is a bad idea. Here are some:
• Valuations are effectively risk-adjusted and time-adjusted future possible values, expressed in today’s terms. Adjusting for a future value and adjusting for risks is difficult even for a public company (despite being given all the identical data available about any public company stock, 20 analysts will produce multiple different opinions about its value). Doing the same for a new, pre-revenue startup in an emerging market is even less likely to produce a consensus estimate.
• A company’s valuation is not a single data point. It’s a distribution of values, with more-likely and less-likely scenarios. With startups, the spread of distribution is so wide (any given company could yield either a 0x return or 1000x return) that using a distribution as the basis of a conclusion about the dollar value of equity would amount to a wild guess at best.
• Despite the appealing simplicity of the concept, the fact is that value created by a member of a venture is not the same as the price of that person’s labor on the market. Take a simple three-person structure (hacker, hustler, and designer). The hacker could be making $200K as a consultant, the hustler may be making $120K base with a $100K commission at a fortune 500 company, and the designer may be making $180K as a VP of design at a Series D startup + 20,000 shares that he’ll have to forgo if he joins. But these figures are related to the value of their work for their employers, not their contributions to the new venture. Because equity represents the value each founder creates, not the price of hiring the founder, trying to peg the amount of equity a person receives to the amount of money they would otherwise make is a misuse of the concept. Take a more complicated scenario: a professional athlete who is making $5M a year, but is interested in the soft-drink industry and wants to use her star-power and fame to help launch a new venture. She finds a co-founder with entrepreneurial ability and technical knowledge that allow the venture to develop the product, but who makes $150K at her current job. The $5M salary that the athlete makes doesn’t represent a contribution to the venture that is 33 times more important than that of her co-founder, who is actually going to be driving the company, so structuring equity around their “market value” is neither fair nor sensible.
Complicated questions rarely have simple answers, but these same complicated questions can be answered with intelligent approaches. We have found that the questions that will inform an equity split can be broken out into smaller, digestible steps.
The resulting framework: Gust’s Co-founder Equity Split tool. We hope you enjoy it.
NYC-based Oceans Ventures raises $11 million for its first fund Oceans Ventures Fund I to invest in seed-stage startups
Over the years, the number of startup investments at the seed and early-stage has dropped off, according to data provider PitchBook. And even when the funding is available, some venture firms simply follow the mantra of “invest to divest,” meaning […]
Over the years, the number of startup investments at the seed and early-stage has dropped off, according to data provider PitchBook. And even when the funding is available, some venture firms simply follow the mantra of “invest to divest,” meaning they sell their stake at some point down the road.
Now, one VC firm wants to change that. Oceans Ventures is a New York City-based venture firm started by the advertising guru who led Foursquare’s turnaround. Deeply entrenched in the Valley but pulling on a long legacy in Manhattan, Oceans was founded by Steven Rosenblatt (prev. the president of Foursquare, Director of iAd @ Apple), Joshua Rahn (prev. Facebook), Glenn Handler (prev. Morgan Stanley, Google & Facebook), Sara Barek (prev. ClearForest, acquired by Thomson Reuters) and Brian Lew (prev. Time Inc.).
Oceans is backed by a team of early-stage investors and mentors focused on giving startups the hands-on support they need to succeed. Other mega backers include Ron Conway, Dennis Crowley, and Howard Linzen. Oceans is hyper-focused on seeking deals with historically under-represented founders, and they work to prioritize a game plan for implementing D&I into any company they back from Day 1.
Today, Oceans announced it has closed $11 million for its first fund – the Oceans Ventures Fund I. The fund will be invested in early-stage technology startups. Oceans Ventures has already made 18 investments out of its debut fund, alongside other investors.
In a post on LinkedIn, Steven Rosenblatt, Co-Founder & General Partner at Oceans, said: “We started Oceans after realizing founders both want and need the best partners on their cap tables. We’ve experienced firsthand the power early, strong support can have in turning great ideas into great companies. Our belief is we get more done together as one collective team, bringing our operational experience to help founders turn brilliant ideas into great businesses.”
Unlike the traditional VC firms, Oceans doesn’t invest to divest. Instead, Oceans works directly with founders to either help design their organization’s team structure or fundamentally re-focus the product strategy. Oceans has already built a strong portfolio of 18 amazing companies, two-thirds of which are in New York. Below are some of Oceans key investments:
• IFundWomen, founded by Karen Cahn (ex-Google, YouTube) with the purpose of creating funding platforms for women entrepreneurs;
• Play, which was founded by Dan LaCivita who was previously CEO of the award-winning agency Firstborn (acquired by Dentsu);
• Teal, founded by Dave Fano who sold his first company, CASE, to WeWork;
• and SpikeTrap, founded by Kieran Fitzpatrick who led a discovery that discovered that over 90% of all data on the internet is not monitored – so he’s doing something about it.
Jen Gennai, Google Head of Responsible Innovation, said in a new unearthed video that Google should not be broken up because smaller companies don’t have the resources Google has
Jen Gennai is Google Head of Responsible Innovation. In June 2019, Gennai published a Medium blog post titled, “This is not how I expected Monday to go!” The piece was written after she returned to the US from an overseas trip, and […]
The post Jen Gennai, Google Head of Responsible Innovation, said in a new unearthed video that Google should not be broken up because smaller companies don’t have the resources Google has appeared first on Tech News | Startups News.
Jen Gennai is Google Head of Responsible Innovation. In June 2019, Gennai published a Medium blog post titled, “This is not how I expected Monday to go!” The piece was written after she returned to the US from an overseas trip, and found “an enormous collection of threatening calls, voicemails, text messages and emails,” from unknown people.
It all started after Project Veritas, a conservative media outlet that specializes in exposing organizations by using undercover audio and video recordings of prominent people, to show that they are biased against conservatives. Back in May 2019, disguised as an organization called “2 Step Tech Solutions,” a representative from Project Veritas met up with Gennai for dinner at a restaurant in San Francisco to discuss a mentoring program for young women of color in tech.
Gennai said she was filmed at the restaurant without her consent by Project Veritas, which Gennai said they lied about who they were. Gennai later claimed the resulting video has been selectively edited to make it appear as if Google senior executives like Gennai are biased against conservatives and intend to suppress certain search results so as to disadvantage conservatives in the upcoming US elections.
Fast forward a year later, the U.S. government and 11 states filed an antitrust lawsuit against Google for allegedly breaking the law in using its market power to fend off rivals. According to the lawsuit, the lawyers representing the DOJ accuse Google of illegally using its monopoly power to stifle competition and hurt consumers through exclusionary agreements, including deals like the one it struck with Apple making Google the default search engine on the Safari browser on iPhones. One of the options being considered by the U.S. government is the idea of breaking up Google into separate companies.
It is now abundantly clear that Google is not going to give up without a fight. A new video of Gennai’s meeting with Project Veritas has just surfaced on social media. In the video, which was part of the same video recorded in June 2019, Gennai said that Google should not be broken up because smaller companies don’t have the resources Google has. She also added that Google has not shown up because they know Congress is just going to attack them.
“We got called in front of Congress multiple times, and we’ve not shown up because we know they’re just going to attack us. We’re not going to change our, we’re not going to change our mind. There’s no point in just sitting there being attacked over something we know we’re not going to change. Like they can pressure us but we’re not changing. But we also have to be aware of what they’re doing and what they’re accusing us of. Like I said, they can just… Elizabeth Warren even, I love her but she’s also saying you’ve just got to break up Google and that will solve everything.”
Below is the video recording.
GOOGLE EXEC: “We got called in front of Congress multiple times, so we’ve not shown up because we know that they’re just going to attack us. We’re not going to change our, we’re not going to change our mind.” #GoogleExposed pic.twitter.com/cQAdro6nfi
— Project Veritas (@Project_Veritas) June 24, 2019
Berkeley SkyDeck announces 16 tech startups from around the globe to participate in its fall 2020 startup cohort
UC Berkeley SkyDeck, the startup accelerator of the University of California at Berkeley (UC Berkeley), today announced today that it is launching its fall 2020 startup cohort program with 16 tech startups from eight countries and the U.S. The new group […]
UC Berkeley SkyDeck, the startup accelerator of the University of California at Berkeley (UC Berkeley), today announced today that it is launching its fall 2020 startup cohort program with 16 tech startups from eight countries and the U.S. The new group of startups specializes in a wide range of industries including AI, life science, robotics, enterprise software, health, and bioscience solutions.
International startups participating are from Australia, Canada, Czech Republic, Germany, the U.K., Italy, Singapore, and Sweden. The 16 tech startups were selected from a record-breaking 1850 applications. The fully-remote program incorporates the full range of workshops and programs. U.C.
Berkeley is a hotbed of entrepreneurship, identified by Pitchbook as the No. 1 public undergraduate program for producing startup founders and the SkyDeck’s accelerator program is thriving, named in 2019 by Forbes as one of the top five university accelerators.
“We are thrilled to have received the largest number of applications to date, spanning five continents. There were so many excellent ideas and technologies. For our Fall remote cohort, we selected the best of the best.” said Caroline Winnett, Executive Director, Berkeley SkyDeck. “We also will have more international startups participating than ever before. One advantage to remote work is teams can stay where they are, yet take full advantage of the excellent resources, global network, and premier advisory services we offer.”
This is the second remote program for SkyDeck. The first cohort started just at the time of the shutdown in March and the staff quickly adjusted to an all-virtual program that the startup founders judged as being very successful. Derrick Koenig, CEO of Ontopical, participated in the Spring cohort. He said, “The program itself ran amazingly well. I honestly don’t know how they did such an effective program, almost overnight. They worked with Slack for effective day-to-day communications and were able to make all the workshops and programs virtual. We’ve been told that there were even more workshops with the remote program than there had been ever before, in-person.”
During the COVID-19 pandemic shutdown period, eight SkyDeck alumni startups successfully raised $32 million.
“It takes a lot of courage and commitment to launch a business right now given the current state of the world,” said Chon Tang, founding partner, SkyDeck Fund. “We were very impressed with the drive and determination of the founders we talked to. In order to be admitted to this new cohort, we were looking particularly carefully at how far along the companies had come, whether they had previously raised any funds, and how their solutions would meet business and consumer needs and grow. It was an extraordinary effort to choose these companies.”
The Cohort (accelerator track) startups receive a $105,000 investment from the Berkeley SkyDeck Fund and access to 300 top advisors and mentors as they prepare to pitch more than 800 investors on Demo Day. The 100 new HotDesk incubator track startups will have access to events, mentors, and pitch opportunities to help them grow their innovative ideas and businesses.
ABOUT BERKELEY SKYDECK
Berkeley SkyDeck is a top global accelerator. Named by Forbes in 2019 as one of the top five university accelerators, SkyDeck is UC Berkeley’s premier startup accelerator and a joint program of Berkeley, the College of Engineering, and the Office of the Vice-Chancellor for Research. SkyDeck combines the hands-on mentorship of startup accelerators with the vast resources of its world-class research university. Participating startups have access to SkyDeck’s 240 advisors, 50 industry partners, and a network of more than 500,000 Berkeley alumni. SkyDeck also stands alone as the only accelerator that provides funding for its startups via a public-private partnership, bringing funds back to Berkeley with the Berkeley SkyDeck Fund, a dedicated investment fund. For more information, see skydeck.berkeley.edu.
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