Entrepreneurship Startup Kit

How to dilute equity for founders and core team

startup equity

 

The majority of founders have a hard time to allocate equity for co-founders and core team. I know how difficult it is because I am facing a hard time to dilute equity for new ventures I am working on. I personally feel, if a core member performance is great, loyal, reliable and passionate towards a startup you can’t justify only with equity. However, money is the prime motivating factor to survive. We need to allocate a good amount of equity.

I came up with a theory which makes founder’s life easier while allocating equity. 

Dividing startup equity among founders:

startup equity

Founders should be allocated equity for what they bring to the table. A founder can contribute in numerous ways. Some contribute investment. Some contribute sweat, some contribute domain & experience, some contribute guidance and some may bring the network of people. Million dollar question is how to measure them? How to dilute startup equity? Because it plays a vital role in motivation to do work.

When you are ready to dilute the equity between founders. Pick up three points 1. Skill set 2. Role 3. Core team to scale and dilute startup equity.

Entity Equity Allocation
Skill Set 25%
Role 55%
Core Team 20%

We have below 8 skills to measure for equity allocation for Entity-1 (Skill Set). Consider the scale 1-10 to measure each skill and weight age of each point should be 0.8, it can be changed based on the number of founders.

For instance, we have three founders to start a startup with different skill set.

If founder-3 has 7 points for domain knowledge. Multiply 7*0.8= 5.6. (5.6% of equity can get allocated for domain knowledge).

Founder1 Founder2 Founder3
Dedication & Commitment 0 0 0
Domain knowledge 0 1 7
Business strategy & Analysis 10 0 2
Technology 0 1 6
Idea & fine tuning 1 0 1
Total experience 3 5 0
Relevant experience for startup 0 4 0
Experience in startups 1 2 0
15 13 16
Equity for Skill set 12 10.4 12.8

Dedication & Commitment:

Dedication and commitment both are costly, don’t expect from normal people who don’t have real passion. If you get them, don’t lose them. Consequently, this is one of the items to measure for the equity sharing.

Domain knowledge:

Domain knowledge plays a key role, especially in the startup business. For instance, if the product is related to insurance, banking, retail etc. How can you develop a suitable product without having good domain knowledge. Technology is to enable the business easy, it is not an actual business unless it is an IT services company. Eventually, domain knowledge has to be considered to get dilute startup equity.

Business Strategy & Analysis:

Business analysis & strategy are key for any business and they are continues activities. These two varies from industry, competitor, target customers, product. Consequently, it has to be considered to have continual improvement in the business. Essentially, you can’t avoid considering this guy to dilute startup equity.

Technology:

As I already said that technology is an enabler for the business. Automating the processes of business would really a big advantage. It makes a huge difference in executing business. I would say it is difficult to execute business without technology nowadays.

Idea & fine tuning:

Eventually, an idea is the origin to start a business and it makes the difference.

Total experience:

An experienced person can deliver efficient within a less amount of time than freshers. Consequently, experience has to be considered in diluting the equity.

Relevant experience for a startup:

Relevancy of experience really makes the difference. If you have retail experience when you are building a product in banking , It won’t add any value.

Experience in startups:

Experience in startups is very much necessary. One should have passion towards startups to work as it is not everyone’s cup of tea, it is a great advantage as these guys have experience in end to end business cycle and know practical problems in a startup.

Dividing an equity for hierarchy:

startup equity

You can allocate shares with below percentage for cream people in the company. If any of the founders with below designations, both equities (skill set and Role) can be added up.

CEO 5-10%
COO 2-5%
CTO 2-5%
Vps 1-2%
Advisors 1-2%

Dividing equity for employees:

Rest of the 20% of equity can be shared among your core team based on skill set, loyalty, commitment and dedication, role & responsibilities.

Take Away:

  1. % of equity for the role should be changed based on the nature of a startup.
  2. Weightage can be changed based on a number of founders.
  3. You have to take enough care while judging about 1-10 scale.
  4. When a founder plays the key role, he has to get both equities of skill set and role.
  5. Diluting stake for investors has to be taken care with a different approach.

Hope this theory should address the majority of the founders’ problem while diluting the equity. Suggestions are open to tweaking the theory 🙂

Also read: 7 Steps to building right core team for your startup

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