Idea Entrepreneurs and the Startup Equity Advantage
September 12, 2008 · Print This Article
A post on TheFunded.com yesterday requesting information on typical Founders Ownership Percentages in startups caught my attention. One of the comments within pointed me to Noam Wasserman’s Founder Frustrations blog and a specific post on the average equity advantage of entrepreneurs who bring “the idea” to a startup that contained some great information that wasn’t just the hearsay I’ve always just run with in my new ventures. How entrepreneur of me. Surprisingly my own rules of thumb were quite close to the results Noam turned up. I posted the following comments on his blog in response to his post.
Noam, this is a great post. Thanks for getting this information out.
I’ve launched a number of startups over the last ten years and in the ones that we’ve been sophisticated enough to carve out the corporate structure at the very beginning our split of equity has been very similar to what you’ve mentioned here. All of these companies have been in the IT industry. I don’t know where it came from but my partners and I have always used 20% as the generally agreed upon rule of thumb and it has served us well. Although, that number has not differed based on the position that the idea person takes within the company (either intentionally or unintentionally).
In our most successful company the idea person became the CTO with his 20% equity advantage which in your research shows to be uncommon (around 6%). Although I should also mention that this person not only had the idea for the software but also wrote 100% of the code that initially took the company to market before the additional partners joined. This could be considered an investment of capital which would then bring it back in line with your findings.
I think it’s also worth considering the leverage advantage that idea entrepreneurs gain in a startup considering a 15-20% equity advantage. In your example of a common spread being 55% for the idea partner and 35% for the other partner, considering that these startups are always private companies on day one, the idea partner has full control of the company with his majority ownership because in a private company only three ownership amounts really matter (<50%, 50%, >50%). But, as with my primary company, once VC funding arrives the dilution of shareholders pushes the majority owner below 50% assuming he approves the funding round from his position of complete veto power.
This is a delicate dance in many startups and a point of contention as the partners must all be on the same page in regard to their expectations of using equity to grow the company. As a corollary when the minority ownership partner is actually building the idea brought to the venture by the majority partner I’ve seen great concern from the minority equity partner about losing his job and losing everything he’s built by being diluted out by the majority partner. Again, simply being on the same page about expectations goes a long way here.
This brings me to an idea I’ve had about matching entrepreneurs on more than just their skills and experience (which I figure they match up based on most frequently since those are more obvious) but instead on the total picture of their expectations on running a startup. If done right I think this could help more startups succeed and jump the hurdles of growth strategy alignment which I’ve seen tear so many teams apart. From my experience when the team behind the company splits the company always fails.