Founders

What

A brief module of learning about founder activities related to fund raising and splitting equity.

Learning Objectives

Upon completion of this module you should be able to:

• explain the need for complementary, rather than redundant, skills from the members of the founding team

• explain the reasons for and against "equal splits" of founders shares

• list the different "triggers" that create the need for founders to allocate shares among the team (e.g., incorporation, hiring employees, taking outside money)

• explain the problem Govworks.com faced when trying to close their first round of venture capital funding regarding the three founders and their share allocations and what the solution should have been

• list five mistakes that first-time founders make when starting companies

Instructions

• Watch the assigned videos and presentations;

• Read the assigned readings;

• Complete the practice quiz or other assigned practice activity

• Complete the assessment;

• Complete the "Mark as Complete" checklist.

View and Read

How to Split Equity Among Co-Founders,

Michael Seibel, Y Combinator, 12/5/2015. Michael Seibel says:

• "Founders tend to make the mistake of splitting equity based on early work."

Any equity-split rationale you use to justify unequal founder splits will fail in at least one of four fundamental ways:

• It takes 7 to 10 years to build a company of great value. Small variations in year one do not justify massively different founder equity splits in year 2-10.

• More equity = more motivation. Almost all startups fail. The more motivated the founders, the higher the chance of success. Getting a larger piece of the equity pie is worth nothing if the lack of motivation on your founding team leads to failure.

• If you don’t value your co-founders, neither will anyone else. Investors look at founder equity split as a cue on how the CEO values his/her co-founders. If you only give a co-founder 10% or 1%, others will either think they aren’t very good or aren’t going to be very impactful in your business. The quality of the team is often one of the top reasons why an investor will or won’t invest. Why communicate to investors that you have a team that you don’t highly value?

• Startups are about execution, not about ideas. Dramatically unequal founder equity splits often give undue preference to the co-founder who initially came up with the idea for the startup, as opposed to the small group founders who got the product to market and generated the initial traction.

Equity should be split equally because all the work is ahead of you.

Tips for starting out as a non-technical co-founder, from Janine Sickmeyer on Twitter, August 26. 2020.

Thought Experiment on How You Look to Others

I have a thought experiment for you. How would you respond to investors' questions about how and why you decided to allocate equity unequally among the founders? What would your answers signal to the investors?

When They Are Throwing Money At You, Fred Wilson, AVC.com, Union Square Ventures, 1/12/2011

Fred discusses how to deal with investors who want to fund you because you're hot and they want in and/or the market for (popular tech startup category goes here) is particularly hot. All cash comes with a price, regardless of how hot you or your industry happens to be. First time I ever read an endorsement to sell some secondary shares if "you" need the money but your startup does not.

Assessment

Complete this "longish" form to assess your Founder Expertise Profile (Link will open in a new tab).

Mark as Complete

Completing this form is optional for in-person lecture-style offerings of this course.