A German startup I’m working with is preparing for its initial incorporation. In this context, the topic of how to allocate shares between founders came up. In Germany, startup teams often default to allocating shares equally between founders. However, that is not always fair and may lead to resentment in later stages. In this article, I’ll share some ideas that are used by tech startups in the US.
First, the question is: who qualifies as a founder? I like Don Shapiro’s article from 2011 for his definition of startup stages and how they relate to founder status:
- Founding stage: In the very beginning, a startup cannot pay its contributors, and everyone who contributes at this stage is a founder, i.e. they get shares in the company as compensation for their contribution.
- Startup stage: the company has some money – from investment or revenue – and pays its contributors a salary, but typically well below the market. Shapiro does not mention this in the article, but in the US, employees at this stage typically get options for company shares to compensate for the below-market salary and the risk they take by joining a startup that may very well fail.
- Real company: is not that likely to fail any more and employees get salaries that are closer to the market.
Don concludes with this definition of a founder:
“The rule is this: if you’re working for a company that’s so young it can’t pay you, you’re a founder. If you are drawing a salary on your first day at work, you’re not.”
Based on that definition, he develops criteria for establishing a founder’s worth relative to the other founders: since founders contribute at a stage where the company has no money, everyone’s overriding goal is to get the company money – either from investors or from the market, i.e. revenue. A founder’s worth should be determined based on how much their contributions help to either get investment or to generate revenue.
Don continues with some guidelines, some of which I find very helpful, such as
- having come up with the initial idea is worth a small markup
- joining earlier gets some markup
- taking the CEO role is worth a small markup
- full-time commitment gets a huge markup
- reputation that will help secure investment gets a huge markup, too
- cash that a founder puts in should be treated like an external investment, i.e. the resulting share should be based on company valuation
For more ideas on how to value different types of contributions, I also like the co-founder equity calculator on foundrs.com.
The results of the calculator are not meant not be accepted at face value. But I believe the questions asked help founding teams to have a healthy discussion about roles, such as:
- Who is going to be CEO?
- Who will pitch investors?
- Who will contributes most of the code?
- Who will write the marketing copy?
Overall, discussing what everyone brings to the table, as well as clarifying roles, expectations, and commitment level – that is something that founders need to do early on to avoid disastrous fights down the road.
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