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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.
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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?”
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Note: The above Equity Model Spreadsheet link goes to the file on PSUstartups.com. I have also placed this file on Drop.io here and on Google Docs here to make sure it can be accessed.
I was reviewing my Feedburner stats recently and saw something interesting. I’ve kept the same Feedburner feed URL for both of my attempts at blogging (the first time, during college, which ended sometime in 2007; and now this second effort at getting a personal blog going!) The slope of the subscribers line at the start of both of these time periods is interesting. Back in 2006, it was a very gradual climb in subscriber growth. This time around, growth has spiked much more quickly.
I’m attributing much of this to the importance of social media - blog posts are broadcast and retweeted so much more in today’s world. Before, sharing and broadcast options were more limited.
I think this is an interesting comparison between the time periods, with my own little sample set, and clearly shows the importance of using social media to drive readers to your posts.
Legal River, a LaunchBox Digital company, recently launched a Terms of Service generator and a similar tool for creating Privacy Policies.
Along with their new StackOverflow-style Q&A forum, I think these are great moves for the company. Granted, there are many nuances and details that must be considered and each company is different, there are also a number of common legal questions and action items that startups have. Thus, it would be a real savings if there was a common checklist and resource to accomplish these without having to pay the lawyer bills. After all, most lawyers just pull these things out of their document repository and simply customize them for each client. The more that startups can do this on their own, the more we can save the legal dollars for when it really matters.
These recent offerings from Legal River, in my opinion, are much, much more valuable than their initial lawyer search engine (when we started this past spring, we just asked around in the community for lawyer recommendations - I don’t think we would have trusted an online search engine to find us a reliable attorney).
This touches on what Dave McClure wrote about back in 2007 - innovate and automate. Nearly three years later, not much has changed. It’s good to see some innovation.
It’s amazing the recent growth in accelerator programs around the world! In the past few days, I have come across several additional programs that I am adding to the list:
A couple of interesting highlights about these additions:
Also on the radar recently was the Ventura Ventures Technology Center, formed in associations with the VC fund DFJ Frontier and the city of Ventura, CA. Because this program appears to focus more on getting companies to run out of the physical space in Ventura and it doesn’t offer the same types of mentoring initiatives that have become a common part of accelerator programs around the globe, I think it makes sense to label this one more of a conventional incubator than an accelerator program.
The master list has been updated! Be sure to post in the comments if you’re seeing other programs that aren’t on the list yet!
Per an article on the Techvibes Blog, Bootup Labs, “along with Y Combinator’s Paul Graham and TechStars’ Brad Feld have agreed to drop the ‘Incubator’ term for good in favor of ‘Seed Accelerator’.”
“Seed-stage Accelerator” is the term that I’ve long used for these programs and it’s good to see that the programs are now going to brand themselves as such, to better differentiate them from conventional business incubators, which typically have a bad name among entrepreneurs and investors.
I’ve been collecting some information on why incubators have such a poor reputation among entrepreneurs and investors for a future post. The National Business Incubation Association makes incubators sound pretty good, though.
Why do incubators have a bad reputation? Any good links to incubation horror stories?
@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.
Very thought-provoking post on how the time horizon of investment strategies can have an important impact on investment decision making.
Love the post. This is fantastic advice for anyone who wants to work at a startup and for MBAs who are ready to move into the 21st century as far as networking.
Every entrepreneur who’s deeply engaged in running the business has problems to solve and trying to figure out how to get a new employee excited about working on those problems takes time away from other tasks. If someone came to me and already laid out a plan for how they could tackle one of our current issues or something that’s coming down the road, it makes it such an easy decision, because now, rather that needing to explain what it is they would need to do, it’s clear they’re already thinking on the same wavelengths as my team.
The ideal startup hire should be seeking out products that they love (and use) and engaging directly with the team via their discussion forum, Twitter, Get Satisfaction with ideas and suggestions for the product.
I’m surprised more MBA programs haven’t started encouraging their students to put more effort into blogging as a networking tool. All that thinking and writing that goes on in classes - what better outlet for that than a blog focused on how you want to apply the skills and getting input from the community into your ideas. And even if you don’t want to work at a startup, there are plenty of connections to corporate America that can be made via social media, as well.
Hopefully both MBAs and MBA programs are reading this post!
Interesting new summer “dormcubator” program for students from the University of Waterloo:
The VeloCity Entrepreneur BootCamp (VEB) will enable top student entrepreneurs to fast track the launch of their technology-based startups. Selected students will be mentored by some of Canada’s most experienced and successful entrepreneurs. They will live rent-free at VeloCity and will work out of office space provided at no charge by the Accelerator Centre in Waterloo’s research and technology park.
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The students will each receive $3,000 (up to a maximum $9,000 for each team) and own 100 per cent of their intellectual property. As well, they will attend seminars and workshops on important business-related topics. It is the first nation-wide, residence-based program of its kind in North America.
More information in this press release. Interested students can apply here.
