To improve how you operate your startup studio, ask this: how much does a startup studio give founders in equity?
In this post, you will find out the answer.
Here, we will learn more about this subject. After all, startup studios function to help a startup get the most benefit.
This way, you may approach a startup studio for help with your startup.
Tips for Giving Equity to Startup Founders
Below are the things many startup studios do when giving equity to founders of their portfolio companies.
Tell the founders how much equity they will get.
If you want to give them 60% equity, inform them of that percentage and state the reason.
If only one founder exists, that person gets all 60% of the equity.
But, if a startup has two or three co-founders, they will divide that percentage among themselves.
It’s ideal for the startup studio to facilitate this to avoid conflict within the founding team.
It means you should divide the amount before telling the founders.
For example, if there are two co-founders, tell them that each co-founder will receive 30% equity (total = 60%).
At this stage, it’s best to acknowledge their roles and responsibilities.
Also, tell them what they bring to the table and why they deserve that much equity.
The goal is to help them feel comfortable in their equity stake.
Negotiate and discuss details
Before you make any critical decisions about the subject of splitting equity, hash things out with the founders.
Maybe, many details about the equity split can be challenging to discuss.
You need to discuss them and clear the air anyway.
If the founders ask for more equity, an open conversation allows them to state their reason.
Having an open conversation with the founders also allows all the parties involved to be on the same team.
Finalize It Through Writing
After hashing out the terms, it’s time to write them into a formal document.
Make it clear, easy to read, and understandable.
I suggest having a legal team draw it up for you.
You may also show it to a team to review.
This legal contract will outline the various equity splits and ownership percentages and can be referred to throughout the company’s history as the company grows.
It’s also your source of truth.
It can be impossible to win an argument if a written basis exists.
From the beginning, outline all agreed-upon terms in the contract.
It ensures that there is a level of protection for everyone involved.
Do you feel the terms may change over time?
Then, include a clause.
In it, state that terms need reevaluation every month or year.
Who Else Receives Equity?
In a typical startup studio model, the founders of a startup have the biggest portion of equity.
But, as to the exact amount of that equity, that’s up to you.
According to Alcor, a globally renowned recruitment agency, typical startup studios divide equity among the different parties involved — the investors, founders, and essential employees.
Investors may own 20-30% of startup shares.
Then, the founders and co-founders may have 60%
And they allocate 10% to startup studios employees.
As for any shares left (about 5%), they are available to the public.
But others also contribute to its growth.
Below is a discussion about the parties that get equity.
Their role is to improve a startup.
Without them, the startup may still grow. But, it will have no direction.
They give professional advice, introduce a startup to a network, strategize future activities, and more.
Also, they help create a realistic business plan, mitigate risks, identify problems, and offer criticism.
You can think of them as a sounding board.
They are there to listen, observe, and absorb everything they see.
And they can call out a startup or provide constructive feedback as necessary.
Because they play a valuable part in a startup’s growth, they deserve an equity stake.
The equity stake you give them is up to you.
And according to Dan Martell, a Canadian entrepreneur and coach to successful companies (like ClickFunnels and Carrot), they should receive about 1% equity.
They believe in a startup — in its business idea and core team.
They see its potential.
And because they are confident in what a startup can do, they capitalize on it.
How much equity you should give to potential investors is up to you.
Something to think about: they give startups the money to build their dreams.
You may give away 10-30%.
The percentage of the stake depends on the value they provide.
Also, don’t sidetrack the team members and essential employees.
Without them, a startup couldn’t be where it is. And without them, a startup couldn’t be functional.
Like the advisors and potential investors, they also provided support.
It’s up to a startup how much equity it wants to give its team.
Ideally, you could base it on their value to a startup.
If their value is indispensable, you should raise the equity you give them to about 10%.
Especially if they were part of a startup from its beginning, you might also offer them some loyalty reward or a generous equity stake.
How Startup Studios Fairly Split Equity Among Co-Founders
ZipCar, a car-sharing alternative based on a European business model, often comes up concerning talks of an unfair equity split.
It is due to a hasty equity allocation made by one of its two co-founders, Robin Chase.
Below are considerations related to a fair equity split.
No Change in Business Model or Strategy
The split is not all about someone’s brilliant business idea or startup creation efforts.
Here, let’s elaborate on ZipCar to make a point.
When Robin Chase and her business partner (the other co-founder of ZipCar), Antje Danielson, came up with the original startup idea, they agreed to a 50/50 equity split.
But, when the company grew, Robin Chase ended up doing all the work.
And her co-founder (with 50% equity) did not lift a finger.
Considering that having a business idea is only a start, avoid making an equity split decision based solely on it.
Equity Will Be Based on Their Level of Involvement
You may also refer to ZipCar’s rushed equity split agreement to understand this better.
If someone wants a portion of the equity, you need their involvement to justify it.
For instance, they are one of the biggest financial investors. They also handle administrative tasks.
And if they also devote most of their time and energy to the startup, consider giving them higher equity.
By how it looks, they deserve a higher share.
They worked for it. They also have an essential role in day-to-day operations.
A startup may also be more functional with them.
Make sure their heavy involvement in a startup’s operations is consistent.
You can commend them if you see their heavy involvement for a month.
But, avoid rushing into promising them more significant equity.
For all you know, they may be significantly less involved with a startup the next month, and you might rethink their bigger equity.
Experience and Skill Also Determine Split
A key consideration when dividing equity is a cofounder’s expertise.
It includes the years they spent working in the industry or related fields and the skills they bring.
For example, if one of the founders has worked at a large health insurance firm for several months, they may have unique insights into the future industry.
They could also help identify potential clients, target marketing efforts, or develop an overall strategy for the company.
In addition to expertise, you should consider how much each person contributes to the business.
Be practical and clean up a startup’s team.
If someone does not contribute to the operations, then let them go.
If letting them is not possible, help them understand that they should receive a manageable amount of equity.
Conclusion: How Will Your Venture Studio Split Equity to Founders?
For your startup studio or venture builder to gain respect from startups, investors, and advisers, approach the subject of equity with caution.
Avoid rushing into the matter.
You might soon regret it if you do things without thinking them through.
Also, understand that sometimes, an unfair equity split happens in the startup world.
One of the best things you can do is to have a working knowledge of this subject.
How much your startup studio gives founders in equity is up to you.
You don’t want to give away too much. And you don’t want to let go of too little, too.
For advice, refer to the discussions in this article.
The points here should give you enlightenment.
You may also ask other startup studios about how much does a startup studio give founders in equity.
Learn more about a startup studio and equity in this article.