Mike Stonebraker says:
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| Mike Stonebraker |
I should start with the template for my experience.
I have started companies with an initial A round investment by a VC. I have also started companies with an initial seed round investment from a VC. In this case, the seed has always been structured as a “down payment” on an A round: that is, an A round with the same investors has been pre-negotiated, with a clause added that allows them to walk away if they don’t like the result of the seed effort. I have never had angel funding, so I can’t comment in that area. I also have never self-funded a start-up. In my opinion, that creates far too much domestic stress with my wife!
Anyway, my experience has been negotiating A rounds. My last seven start-ups have conformed to the following. The VCs have gotten between 45% and 50% of the company in exchange for $5M to $7M of capital. The range is determined by how attractive the VCs think your idea is and how strong your initial team is.
The rest of the ownership is split into two buckets, one for the founders and then a pool for yet-to-be-hired employees. In general, the pool is intended for the rest of the company hires during the A round period. However, the VCs will typically insist on covering a complete complement of executives, all of whom will not be hired before a B round (for example, a CFO). Hence, the pool is almost certainly larger than you will give out in the A round, and is designed to knock down the size of the founders' pool. So, in round numbers, figure on 20% for the pool.
That gives you 30+% for the founding team. I have seen two kinds of initial teams:
Initial Team Format #1
One executive, with the company idea
A collection of supporting programmers
Initial Team Format #2
One or more technical people with the initial idea
Additional technical people, recruited into the team
An executive, recruited into the team
With the first kind of team, the initial executive can expect 20+% of the company and allocates the remainder to the supporting programmers. If you are such a supporting programmer, you should expect at least 2%: therefore, don’t let the initial executive be too greedy.
With the second kind of team, the initial executive can expect 10% or so. The remaining 20+% can be allocated among the technical founders. Again, supporting programmers should expect at least 2%.
Always remember that the VCs will never let the founders control the company. They will make sure that they can “outvote” the collection of founders. Hence, a typical scenario is the VCs with 45-50% and the founders with 30-35%.
Also, the VCs may well veto the stock distribution proposed for the founders. This will occur if the VCs think the value of the various individuals is not reflected in their percentage ownership. They will also typically insist on approving everyone’s salary. Again, they will veto salaries that are out of whack. I have also seen them make everybody “take a haircut,” if proposed salaries are too generous.
Also, the VCs may well veto the stock distribution proposed for the founders. This will occur if the VCs think the value of the various individuals is not reflected in their percentage ownership. They will also typically insist on approving everyone’s salary. Again, they will veto salaries that are out of whack. I have also seen them make everybody “take a haircut,” if proposed salaries are too generous.
I would like to close with one plea. The VCs have a lot of information on the above numbers: they see far more deals than you do. Hence, the current negotiation (yours) is conducted with them having all the information (many deals) and you having none. They will very often respond to a proposal with “That’s not market.”
In a sense, it’s similar to the way we used to negotiate with a car dealership when buying a car; blindly, because the dealer knew the numbers and you didn’t. With the advent of Web sites like Edmunds, there is now much better new-car cost information, and the playing field has been leveled.
I would love it if somebody would put up a Web site so entrepreneurs could share stock information among themselves – an Edmunds of deal flow. That is the only way that the information playing field will be leveled.
Until then, I hope that this information about my personal experience is helpful.
Andy Palmer says:
In my experience, the key to stock distribution is to take the long view. Stock distribution is a strategy not an event. And, if you do it right, it can be a highly effective strategy for attracting, keeping and motivating good people. I’ve published some of my other thoughts on The Fundable blog in the past. You can read them here.
Andy Palmer says:
In my experience, the key to stock distribution is to take the long view. Stock distribution is a strategy not an event. And, if you do it right, it can be a highly effective strategy for attracting, keeping and motivating good people. I’ve published some of my other thoughts on The Fundable blog in the past. You can read them here.
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| Andy Palmer |
To build a great company, you need an inspired, non-incremental idea and the people who can turn that idea into a solid starting point for building a great company. Then, you need a bunch of people who can scale the idea into a repeatable business. Through this you’ll need great leaders who can find their way through seemingly insurmountable ambiguity and a roller coaster of big wins and brutal setbacks ―without giving up or believing their own BS.
In taking the long-view approach, remember two important things:
Starting Companies is a Team Sport: Given all the different kinds of essential people, stock compensation can be a difficult balancing act. All of the people who are necessary to create a great company from scratch are going to be prone to overvalue their own contributions. Many will truly believe that, without them, the company would not have been successful ― and many of them will be right. However, starting companies is a team sport. Over-allocating stock to any one individual or group of individuals can prevent you from having enough stock to compensate the other people required to start and scale a great company through its life cycle ― from birth through adolescence to adulthood and maturity.
Don’t Get Distracted by the Screamers: The biggest stock-distribution pitfall that a company can fall into early is basing allocation on who screams the loudest or is the most aggressive. Tech start-ups tend to be littered with business people who overvalue their contributions and are good at screaming louder than the average engineer. As a result, in general - engineers end up being under-compensated just because business people are more aggressive. Now, the converse can and does happen, where engineers/technologists view the business work that needs to be done as “intellectually trivial” and thus undervalue the benefit of strong business execution.
I think that the best companies are those that (1) appreciate the mix of talent and the quantity of people required to build a great company and (2) are thoughtful and conservative about stock distribution throughout the full company life cycle.
There are many ways to be successful with stock distribution. I’ve been part of companies where one person owned more than 95% of the stock and other companies where no one person owned more than 5% of the stock. The most important thing is to pick a model that is right for you as a Founder/Co-Founder and then work towards that model, managing the development and motivation of your team accordingly.
If you’re generous in sharing stock with the people who work at the company, they should be expected to align their behaviors with the best interests of the company in the long term to maximize the value of their stock. If you hold the stock close and don’t share with many people, don’t expect folks to make unnatural sacrifices in the interest of the value of the long-term value of your stock. You’re probably going to have to pay them a lot more and be more deliberate in how you motivate them.
