So, what factors should be considered when dividing shares? How to divide it in a reasonable way? In this article, ThinkZone will share with readers some of the following notes.
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THE IMPORTANCE OF REASONABLE DIVISION OF SHARES
Imagine the following, you and some co-founders founded a startup. Initially, everything went very smoothly according to plan, everyone started the business together with full enthusiasm and dedication to their work.
However, over time, differences in working style, personality and business difficulties occurred, causing controversies about the level of contribution of members to gradually appear. Some people spend more hours on work than others, some people contribute more capital. Then when discussing the division of shares, people begin to argue about the shares they deserve, sometimes they are not really satisfied with the final division result.
These conflicts can have significant impacts on the company, because shares represent the influence of each individual in each company decision. Too small a shareholding can also reduce the level of enthusiasm and dedication of important members. As long as one member still has questions about the fairness of the division, disagreement will remain, leading to a decrease in their enthusiasm, sometimes even dissatisfaction, and will lead to negative impacts on the company.
Therefore, dividing shares appropriately between co-founders is very important for the team to bond and stay together for a long time, and also affects the capital raising process later.
HOW TO DIVIDE SHARES APPROPRIATELY?
A reasonable way to divide shares is one that all members agree on, based on their level of dedication to the company.
And the division should be done early, right from the beginning of the company so that everything is clear and avoid conflicts later. Not too early, of course (because at that time the co-founders may not have clearly envisioned the company's direction and their role), But it shouldn't be too late (because when the company has achieved certain achievements, there will be "disturbances" in terms of benefits, making the division process more difficult).
Below are some frequently asked questions during the share division process.
1. I am the one who came up with the startup idea, the company would not exist without me. So is it worth it for me to hold the majority of shares?
This is a common mistake in many startups, when the person who comes up with the idea thinks that he or she should be the one holding the majority of shares.
However, you need to remember that: the idea is only the first part of the startup process, and only accounts for a very small percentage of the startup's success. "Startup is about execution" (Startup is the entire operating process), so even though you have an idea and established a business, you will still need billions of other factors to succeed.
So, remember that the idea is not really that important, so give it a small weight. If you fail, 50% of zero is still just zero, and it's best to reserve shares for people who have worthy abilities and make real contributions to developing the company.
For example, the case of Myspace and Facebook, two social networks started from the same idea, but Facebook implemented its idea better, built more and better features, and became a giant dominating the market. As for Myspace, it has fallen into the past. Mark Zuckerberg only holds 13% of Facebook shares (August 2020 data).
2. Who has experience in this business?
Many people think that "Members who have had a lot of experience in establishing a company before should receive a higher amount of shares than other members, because they contribute huge resources of knowledge and experience. And many times these things are more valuable than cash.". And this is really true.
In a competitive startup environment, all experience in raising capital, relationships with investors and partners, or experience in building MVPs and product development are invaluable assets to the company. These experiences will increase the startup's chances of success, so it makes sense for experienced co-founders to have more shares.
3. What values do members bring?
One of the controversial factors in dividing shares is the value that each individual brings. What do people bring to the company? What do they contribute to the startup's success? Which value is more necessary?
The above questions can be resolved when we look at the contributions of members in both aspects: finance and non-financial. Depending on the field your startup is operating in, factors will have different importance, corresponding to different weights.
|
Financial contributions |
Non-financial contributions |
|
Charter capital |
Specialized knowledge |
|
Sweat Equity (instead of salary) |
Specific responsibilities and roles |
|
Additional capital contribution in the future |
Relationships with potential partners or business opportunities |
Tip #1: With the first charter capital, you can leave it in the form of convertible debt (convertible notes) to minimize risks for capital contributors, encouraging them to accompany the company. If the company develops well, that convertible debt can be converted into shareholders' shares.
4. What is the level of commitment of members?
This is an important question that every founder needs to pay close attention to when choosing a companion. Usually when first established, the spirit of the members is very high, everyone works together and devotes themselves to their work.
However, over time, this will likely change. Usually there are difficulties such as not being able to raise investment capital, building an MVP takes more time than expected, ambiguity in development direction, the company's resources are gradually depleted,... Many events can happen that cause the team's morale to go down.
--> In that situation, if a member wants to leave and wants to withdraw capital from the company, what will you do?
This often happens, and is also very understandable, because members working in startups will sometimes have to sacrifice their salaries to save the company, leading to personal financial problems, and gradually lacking motivation.
This is a very common situation in founding teams, so it's important to be clear about the level of commitment of members (and what happens when they want to leave) very important. The level of commitment here is not only about how many working hours/week they will spend for the company, but also how long they will stay with the company, especially in times of trouble.
Tip #2: Co-founders can choose to vest shares (I can't find the Vietnamese term for this phrase), which means the amount of shares of a co-founder will be gradually given to that person after a few years.
For example: After the division process, Mr. A receives 50%, however, to minimize the risk of Mr. A leaving the company early, the members decided to implement a stock vesting policy for Mr. A as follows:
- After the first year with the company, Mr. A will receive 20% of the shares.
- For each year after that, Mr. A will receive 30%, 40%, and 50% of the shares respectively.
Companies often implement a vesting cycle of 4 years, in which the first year is called "cliff", implying that if Mr. A leaves in the first year, Mr. A will not have any shares at all. Vesting helps ensure that the co-founder will stay with the company for at least 1 year, and motivates them to stay long-term.
5. Is there any formula or framework to calculate shares?
The answer is YES, but of course it's still relative. The purpose of this formula is to outline a way to divide shares with quantitative elements, so that everyone can evaluate it more easily.
This formula is called Founder's Pie Calculator, given by Frank Demmler. This method helps quantify factors that affect the share ratio of startups. Suppose with startup ABC, the co-founder team divides shares based on 5 factors:
1. Idea: Each member's contribution to the startup idea
2. Business Plan: Contribution of each member to the business plan
3. Domain Expertise: Member's specialized knowledge related to the business process
4. Commitment & Risk: Time and level of dedication of members to the company
5. Responsibilities: Role of members in the company
For each of the above factors, we will decide a weight (from 1 to 10) depending on the field in which the startup is operating. The detailed calculation method will be described by ThinkZone below:
Let's say your startup operates in the technology field with 4 founding members:
1. "Inventor", the person who comes up with the initial idea of a startup
2. "Business guy", the person in charge of business development for startups
3. "Technologist", IT person, is the right hand of the "inventor"
4. “Researcher”, someone who does not have many important contributions to the team, mainly helps the team with small tasks
After meeting together and discussing the weight of each factor, you decide the weight for each factor as follows. Then, each member of the team will evaluate themselves based on the above 5 factors on a scale of 10.
We will multiply the weight of each factor with each person's score. For example, for Founder 1, we have 10 (points) x 7 (weight) = 70. Similar to the remaining Founders, we have the results table below:
In this case, Founders 1, 2, 3, 4 will have 33%, 44.2%, 16.5% and 6.2% of the company's shares, respectively.
Although dividing according to the above method takes time, it ensures fairness for team members based on the values decided by the members themselves. This process can be time-consuming and controversial, but will ensure the most objectivity and fairness in dividing shares.
However, when looking at the results in the case above, we can see that Founder 4 has the least Capital, and that may cause some frustration for this member. This brings us to the final question.
6. How can everyone be satisfied with the end result?
In fact, you'll spend more time with other founders than your entire family. Therefore, it is very important that all members are satisfied and happy with the end result. This is a relationship in which you'll want everyone to feel valued, and of course, giving them more stakes also shows that you value them a lot.
So no matter what, you should prioritize the decision that will make all members happy and feel most rewarded. That includes giving up a few points or a few percentage points to create an outcome everyone can agree on, Of course, the equity results must be reasonable
CONCLUDE
The process of dividing shares among members is not easy. However, this will avoid causing problems and misunderstandings among the members if any problem happens to the company. So, take the time to meet and discuss this issue carefully together.
A suggestion from ThinkZone to make your meetings easier is to have members answer a questionnaire before the meeting. 20 Questions to Ask a Potential Co-Founder, and see if all members are on the same page with the same mindset and vision.
Finally, consider some of the following:
- Shares for members of the Board of Directors and Advisory Council --> to increase their level of commitment
- What will happen if another founder, or an investor, is added?
- A reserve of shares (Option Pool) for employees, especially key employees --> to encourage and increase their commitment level