I wanted to republish here one of my posts from PSUstartups.com, the blog on Penn State startups that I’ve maintained. This post was originally published on March 30, 2009, as we were in the midst of figuring out the equity stakes for FanGamb (now Three Screen Games). We were hunting for advice on how best to figure this out amongst a team that hadn”t worked together before and we came across the following model, which I published for the benefit of others. In trying to compile some of my thoughts on this blog, I wanted to move this post over.
Recently, I was asked to help figure out how much equity the co-founders of an early-stage startup should be given at the outset of the venture. This is an interesting question – in most cases, I think that early-stage startups all too often forgo the question and just divvy the equity pie up evenly. It”s quick, easy, and doesn”t require difficult discussions and decisions. Still, there”s often many differences in what is brought to the table and the risk borne by the each individual co-founder, and it makes sense to factor this into the equity pie from the start.
Still, how do you make “equitable decisions” on this topic? Some quick research presented this article from OnStartups.com that essentially states what was already discussed – the simple, equal division, is rarely the correct answer. Still, it doesn”t provide many suggestions about making the right decisions.
However, one of the comments is more helpful and provides a link to a page written by Frank Demmler, Associate Teaching Professor of Entrepreneurship at the Tepper School of Business at Carnegie Mellon University. Frank was previously in senior positions with multiple investment/venture funds in the Pittsburgh area, including general partner of the Pittsburgh Seed Fund, so he clearly has some experience in this space.
Frank promotes the idea of developing a matrix with the key elements of the business (idea, business plan) along with who’s bringing what to the table (risk, responsibilities, domain expertise), along with each of the founders. The key elements should be weighted and then values assigned in each category for the founders. The article just shows screenshots and doesn”t provide an actual Excel model that you can use, so I created my own version of the model in Excel – please see attached Equity Model Spreadsheet. This certainly seems to be a more empirical and quantifiable means of answering the question “How much equity?”
Note: I have also placed this file on Google Docs here to make sure it can be accessed.