How much equity?

Posted: February 6th, 2010 | Author: | Filed under: posts | Tags: , | 1 Comment »

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.


Posted: January 30th, 2010 | Author: | Filed under: photo | Tags: , , | No Comments »

joeconyers:

caterpillarcowboy:

mikehudack:

gbattle:

@cdixon aka Chris Dixon challenging VC’s and entrepreneurs who don’t blog.

I think the supply/demand balance has changed in the last 3 years. Startups are now choosing VCs for the small amounts they need, not the other way around, and a lot of judgments about how “entrepreneur-friendly” a VC is is made via their public online presence.

Build a brand, folks. It’s part of your job now.

Caterpillar Cowboy’s last sentence is important – already just weeks after starting to blog again in earnest, I’ve already seen the power of using blogs and Twitter to get in touch with people who share my views.  People who I wouldn’t otherwise have any way of getting in touch with.  It’s all about building a personal brand for yourself.


Inspiring Action in 2010

Posted: January 24th, 2010 | Author: | Filed under: posts | Tags: , | No Comments »

If you haven’t read Thomas Friedman’s NY Times Op-Ed on making 2010 the year of innovation, you should. Friedman raises a number of interesting points around how President Obama has allowed the grassroots movement that carried him into Washington to disperse and that Obama should focus on inspiring long term economic development through entrepreneurship and innovation. All are great points and ones that I agree with.

However, I think Friedman missed an opportunity with his Op-Ed and one that is unfortunate, given how widely read the column will become. We don’t need a mandate from Washington to make 2010 a year where America emphasizes innovation. This goes back to the comments on the grassroots elements that Friedman opens his column with – each of us, individually, has the ability to make an impact and inspire action, and contribute to change that we effect together. When America is at its best, it is a nation of individuals striving collectively towards a larger vision.

Let’s make 2010 the year that each of us focuses on how we can be innovative ourselves and encourage others to do the same.

How many ideas did we ponder ourselves or listen to from others last year? The ideas that if we change x or did y, there would be some improvement, something changed for the better. How many of these ideas did we take action on? How many of these fall by the wayside, even though it was something that we could have done something about in just a few moments?

Let’s make a concerted effort in 2010 to encourage ourselves and others to do more to be innovative – to explore and take some kind of action on these ideas.

One of the most interesting and encouraging things about working with startups is the motivation and drive that each entrepreneur has, and the belief that they can change the world in some way, no matter how small. They are also highly optimistic, believe that they can make this change, in spite of odds that are set against them.

What can we take from this? First, that it is important to remember that the initial idea doesn’t need to be perfectly formed. Innovation and entrepreneurship is all about starting somewhere and figuring out what works. Second, we need to keep in mind that there isn’t just one way of looking at the world and solving problems. And finally that there is very little downside.

And the important thing to remember is that entrepreneurship is not just about business. Innovation and entrepreneurial spirit can be applied to anything and the impact can be huge.

This is fortunate, because we as a nation and as a world have huge problems facing us. Climate change and poverty for starters.

These may seem to be massive problems, but we can’t just sit here and stare at the big, looming issues. We need to start tackling them somewhere. And this is where we can all make an impact, without a mandate from Washington. Each of us sees the world differently and has different ideas about how things should be done. Don’t just sit there and complain about it – use that spark, that motivation, to figure out something small that you can do about it.

Look at the power that kind of reaction had for the people of Haiti. And what was required? Just sending one text message. And, given how easy it is to spread an idea virally via the web today, then lots of those people encouraged others to do the same. The result to date has been somewhere around $20 million dollars.

We don’t need a mandate or CNN coverage to inspire us to act or tell us what we should do, though.

So, for 2010, figure out what you can do to help make this a year of innovation. Start by being innovative in some way yourself and encouraging others to do the same. I’m making this one of my goals for the year. Start by making it one of yours.