Dan Martell - January 11, 2016


How To Distribute Startup Equity (The Smart Way)


Episode Stats


Length

4 minutes

Words per minute

209.5528

Word count

895

Sentence count

43

Harmful content

Toxicity

3

sentences flagged


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, I talk about how to think about startup equity and how to allocate it to your founders, team, advisors, and investors. I also talk about why co-founders are the most valuable part of your business, and why you should be generous with your equity.

Transcript

Transcript generated with Whisper (turbo).
Toxicity classifications generated with s-nlp/roberta_toxicity_classifier .
00:00:00.300 How to think about startup equity.
00:00:02.800 I mean, equity is amazing.
00:00:04.120 If you think about it, you can have incentivized teams,
00:00:06.500 you can have investors, which is cool,
00:00:09.020 but most entrepreneurs that are starting off,
00:00:11.280 they've never done this before, 1.00
00:00:12.380 and they're probably scared they're gonna look stupid 0.98
00:00:14.320 to their investors, or that they give away too much, 0.99
00:00:17.080 or that they really don't know how to approach advisors
00:00:20.360 or their team, or even think about co-founders.
00:00:22.560 That's what I wanna share with you guys in this video.
00:00:24.120 You know, when I started off,
00:00:25.400 I've been building business now for 15 years,
00:00:27.160 but it was only two companies ago
00:00:28.700 that actually raised venture capital.
00:00:30.400 My company that did really well, Sphere Technologies,
00:00:33.340 I bootstrapped, self-funded it.
00:00:34.980 But then I moved to San Francisco
00:00:36.340 and I wanted to learn about this world of equity and venture.
00:00:40.680 So Flowtown was my first experience.
00:00:42.560 And the same challenges that you're probably
00:00:44.520 experiencing yourself was, I didn't know how much,
00:00:47.500 how do we divvy it up, how do we think about vesting?
00:00:50.120 And I did what most people did.
00:00:52.100 I listened to all the podcasts, I read all the blog posts,
00:00:54.580 I bought a few really, really boring books.
00:00:57.740 Holy moly.
00:00:59.060 Investor VC books, they're the most,
00:01:01.300 I don't even, I still don't understand them.
00:01:03.220 So what I wanna share with you guys in this video
00:01:05.300 is the simplest way to think,
00:01:07.340 again, this is like the baseline, it's not,
00:01:10.640 there's always variations, plus or minus, whatever.
00:01:13.160 I'm just gonna give you my thoughts on it.
00:01:14.980 There's kind of four big buckets to think about
00:01:17.280 when you're giving away equity.
00:01:18.640 One is the founders, the second is the team,
00:01:21.700 the third are the advisors to your business,
00:01:24.800 and then the fourth is the fun ones,
00:01:26.600 those are the investors.
00:01:27.540 They give you money to build your dream.
00:01:29.200 So how do you think about that?
00:01:30.740 Well, number one, I really think that it's about the co-founders thinking about, well, at the end of, again, after you raise your first round, 60% is kind of what's left over so that you have to split.
00:01:42.140 If you have no co-founders, cool, that's all yours.
00:01:44.120 If you have three co-founders, you'll split it up three ways, right?
00:01:47.140 Again, 60% plus or minus 5% to 10% is kind of the range.
00:01:50.960 The next one is the team.
00:01:52.320 You've got early employees, people that kind of supported you.
00:01:56.060 And the way I like to think about team is,
00:01:57.800 if they needed a salary to work with you,
00:02:00.200 then maybe you don't wanna be too generous with your equity.
00:02:02.940 So typically that pool of equity is 10% for the team.
00:02:07.540 So if you had to pay somebody 50, 60,000 a year,
00:02:10.620 you give them a couple percent equity.
00:02:12.520 And as per traditional one-year cliff,
00:02:15.440 which means if they leave within the first year,
00:02:16.860 they get nothing, and this is true really for,
00:02:20.160 well, it could vary with the founders,
00:02:21.740 but with the team, they leave within the first year,
00:02:23.720 they don't get nothing, then it's monthly vest
00:02:25.300 up to four years.
00:02:26.140 So that 2%, they don't get the first quarter of it
00:02:28.760 until the first year, and then every month after that,
00:02:31.000 they give kind of the equivalent.
00:02:32.860 So team is 10%, you split it up amongst whoever you have.
00:02:36.820 The third bucket is advisors, and these are people
00:02:39.140 that have knowledge in a certain industry,
00:02:41.360 you might use their names in your pitch deck,
00:02:43.360 but they're strategic, they might help you
00:02:44.720 close partnership deals, but the range there
00:02:47.440 is giving each advisor 0.1% to 1% equity.
00:02:52.100 On the very generous side, very generous side,
00:02:54.980 2%. I've never personally done it. 1% was what I did. Actually, one of my investors and advisors
00:03:01.240 was Travis Kalanick, the founder and CEO of Uber, and we gave him essentially a half percent equity
00:03:06.500 to kind of be our quarterback in fundraising, and just an amazing, amazing advisor, and also
00:03:12.580 investor, and obviously entrepreneur. But that was the way we thought about it. So I would say for
00:03:16.300 your advisors, it's about 5%. So you've got 60% for the team, or 60% for the founders, you have
00:03:22.280 You have 10% for the team, you got 5% for your advisors,
00:03:25.440 and then leftover is your investors.
00:03:27.460 And usually each round of funding, right,
00:03:29.660 if you raise a million dollars
00:03:31.000 on five million pre-money valuation,
00:03:33.220 you wanna give up about, you know,
00:03:35.140 if you're great, 10 to 15%, normal is 20 to 25%,
00:03:39.900 and then worst case is 30 to 35% in your round of funding
00:03:44.480 in equity as a total percentage of the pie.
00:03:47.240 So that is how I like to think about startup equity
00:03:51.100 for your first round of funding,
00:03:52.420 and usually, again, plus or minus five to 10%,
00:03:55.440 each time you raise a subsequent round,
00:03:57.040 you dilute yourself, and that's kind of how it rolls.
00:03:59.680 So I wanna ask you guys, if you have any questions
00:04:01.900 about startup equity, just leave them below in the comments.
00:04:04.420 I'll be sure to answer them there.
00:04:05.860 If you know somebody that needs to see this video,
00:04:07.340 be sure to share it with them.
00:04:08.540 Subscribe to this channel, and as per usual,
00:04:11.240 I wanna challenge you guys to live a bigger life
00:04:13.480 and a bigger business, and I'll see you next Monday.