STARTUP EQUITY - The bill that you never split equally!

Well as it turns out while building a startup you can rarely be right. I had anticipated that the initial few days of building TagZ foods, would allow me adequate time to keep publishing my thoughts alongside. I was proven wrong! Clearly, there’s too much action happening under the surface at TagZ :-)

Another thing which is difficult to get right while building a startup is the equity allocation between co-founders. In this piece - I am going to talk about how we went about it at QANS Consumer Products (Yeah, that’s what the company is called. TagZ is just the brand name! )

What does it mean? Its an acronym for ‘if the world poses a Question - Anish, Neeraj & Sagar will try their bloody best to find the ANSwer’ ;-)

So, a few principles we adopted while going about the equity split:

1. Use only numbers and logic to arrive at the split
2. Make provisions for future ambiguity or disagreement
3. Have this discussion as threadbare, upfront and ugly as possible

And then we did what we usually do best - we created an excel grid. A mock version of the same is here in the image above.

So here’s how each element of this excel grid works:

1. Initial Working Capital:

This is more or less self explanatory. This is the equity allocation each founder receives in lieu of capital infused. This is the capital investment which could be valued at a 15-20% of the firm’s value - typically the same as what you would have diluted for any fund raise at this stage.

This part of the equity allocation doesn't have any vesting period since this is against actual cash infusion towards the business.

2. Opportunity Cost

As founders, the biggest investment that you make in the business is perhaps the opportunity cost of the time you are committing to the startup. The best way to measure this is the the compensation that you are letting go off - what you would have earned in a regular job. 

Attaching a 25-30% weightage to this element and distribute this block on the basis of actual last drawn compensations could be a good idea. However, this needs to vest over a peiod of 4 years to make sure the attribution happens over a period of time and ensured continuity.

3. Value Add in current role in the startup

Founders end up doing everything in a startup and hence it is difficult to measure actual value-add of each founder on the basis of their job description. Attaching a 25-30% weightage to this and distributing this on the basis of number of years of work experience may be a good idea. This assumes that the value add created by each founder would be proportionate to his/her experience level given similar past educational/professional backgrounds.

This again should vest over a period of time and not upfront.

4. Pre-incorporation Ideation 

Not all founders join the team at the same time and this component can help you account for the same. Depending on when each founder came on board and contributed to the ideation process - this could be divided with some element of subjectivity. 

The moot point here being, if you are struggling to figure out how to go about splitting equity at your startup - don’t settle for appeasing, conflict-avoiding, arbitrary methods like equal-splits. There is always some logic that you can derive to agree on this and make sure long-term alignment and expectation-setting. 

The above method is just a suggested approach. I am sure together we can make it much better. Happy to receive questions or feedback to that effect.