Raising the stakes: Who should get a share in your startup and which one?
The numbers speak for themselves. India, with more than 4,200 startups, is the third largest entrepreneurial ecosystem. According to the NASSCOM report, Indian startups have reached a new level, thanks to an increase in the number of private capital, angel investors and venture capitalists by 100%. Moreover, over the past year the amount of funding has increased by 125%.
While these numbers are encouraging start-ups themselves, they also bring with them the need to divide share capital among stakeholders and determine how to divide money between founders, investors, employees, and consultants.
Usually, for the co-founders, the “less-better” rule works for the distribution of share capital. That is, the co-founders rely the smallest piece of the pie, compared with other stakeholders. When distributing shares among co-founders, the following factors should also be taken into account:
1. Terms of cooperation: the co-founders who work the longest in the company usually receive the largest share in the distribution of shares due to the founders.
2. Investments: the higher the share of personal investments of the co-founder, the higher the likelihood that he will want a percentage of the company's shares.
3. Expert knowledge: not only cash deposits, but also deposits of a different kind are important. Some co-founders find investors, while others bring in expert knowledge or new technologies.
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Bhavish Aggraval and Ankit Bati - the co-founders of Ola own 12% and 5% of the shares, respectively, according to mutual agreements. Dipinder Goral, co-founder of Zomato, believes that the 45:55 ratio is ideal, so the right of veto belongs to one person.
An alternative approach is to assume that all co-founders contribute the same amount of effort and are equally at risk from the very beginning. In this case, they can agree on an equal division of capital among all the co-founders. Ashish Goel and Ravi Rajish Srivatsa from Urban Ladder own an equal share of 48.5% of the shares.
Ashish Goel and Ravi Rajish Srivatsa - co-founders of Urban Ladder
In order to fairly distribute the shares among the co-founders, it is necessary to develop a system for evaluating the founders according to the duties to be performed. Check the “Definition” calculator to understand how this assessment is conducted.
Whichever approach you take, make sure that all the co-founders agree to a 4-year vesting (with getting the first part of the shares in one year). Thus, the co-founders will not suddenly leave the company, and your startup will not raise doubts among investors.
Investors want to get a stake in a company in exchange for an investment in a startup based on current valuation. In February 2015, Paytm was valued at $ 800 million. In September 2015, Alibaba and Ant Financial invested $ 680 million in the company based on the company's latest valuation. After this transaction, there have been significant changes in the distribution of Paytm shares. Alibaba received a 20% stake, while Ant Financial’s share dropped from 25% to 20%. The share of SAIF Partners decreased from 37% to 30%, and the share of Paytm founder Vijay Shekhara Sharma decreased to 21% from 27%. The rest is now owned by SAP Ventures, Silicon Valley Bank, Reliance Capital, and others, including company management.
If a start-up has not yet been assessed, investors prefer to invest based on the idea, the product’s fit to the market, the growth potential and in the team / management. Usually invest 10-25% in the sowing round. However, to conduct an assessment for a sowing round, the first question to be answered is: for how much would I sell my startup? Let's say you wanted to sell a startup for $ 20 million. In so much you rate your startup. If you want to get 5 million from the investor, they will want a 20% stake for their money.
Every investor or financial agency has its own rules on the acquired share of property. For example, Utthishta - a company that provides seed funds for Indian startups involved in software, web technologies, mobile applications and cloud computing, invests 0.02-0.03 million in exchange for a stake of 10-15%.
See the article: Startups shy away from splitting stocks until the market opens their arms for them.
With the help of a share in the package of shares and monetary compensation, you can lure competent personnel to your startup. It will also help to keep employees. From the point of view of the employee, joining the company in the early stages, he risks taking stock and working for a small salary. They share the risk of failure with you. They are your true allies in achieving success and deserve a part of "hard earned property."
Remuneration of employees part of the shares - not an easy task. It is necessary to take into account the competence of the employee, the period of stay in the company, and its value for your business. For example, a technical director is entitled to more shares than a software developer. To simplify the task, you can develop a plan for the additional promotion of shares for employees who work the longest in the company, according to their qualifications. You can develop 2, 4, 6 year old shareholder plans, etc. The longer an employee works for you, the greater should be his share. These plans can be developed taking into account the business risks - possible liquidity events, the probability of the company's survival.
The company Flipcart, very reasonably hired and was able to retain highly skilled specialists using the ESOP program (employee engagement program to acquire the shares of the company), which amounted to 70% of the senior management compensation package in the company. In August 2014, when the company was valued at $ 7 billion, about 400 Flipcart employees who sold their shares became millionaires. Today, the company is valued at $ 11 billion, which means that employees have even more reasons to be jubilant.
Consultants accompany capital raising events, product launches, crisis management, market analysis, and much more. Given this, it is worth to appreciate their time and offer a sufficient percentage of shares. Maybe some of the consultants do not work for money, but it is worth conducting a transparent dialogue with them when discussing compensation with company shares. Typically, consultants allocate 0.5-2% of the shares. Much depends on the stage of development of a startup, on whether it was held pre-financing or already conducted a round of financing.
When Rishab Malik joined Frrole, a company engaged in social intelligence, as a business development consultant and market entry strategy, he received 2.5% of the shares. After the sowing round, investors acquired 23% of the shares, of which 10% went to the pool of options, and the remaining share was divided into equal parts between the founders and Rishab.
The distribution of shares is not an easy task. There are no iron rules, but before making a decision, an appropriate assessment should be made.
Source: Raising The Stakes: What Should You Get?
While these numbers are encouraging start-ups themselves, they also bring with them the need to divide share capital among stakeholders and determine how to divide money between founders, investors, employees, and consultants.
Founders
Usually, for the co-founders, the “less-better” rule works for the distribution of share capital. That is, the co-founders rely the smallest piece of the pie, compared with other stakeholders. When distributing shares among co-founders, the following factors should also be taken into account:
1. Terms of cooperation: the co-founders who work the longest in the company usually receive the largest share in the distribution of shares due to the founders.
2. Investments: the higher the share of personal investments of the co-founder, the higher the likelihood that he will want a percentage of the company's shares.
3. Expert knowledge: not only cash deposits, but also deposits of a different kind are important. Some co-founders find investors, while others bring in expert knowledge or new technologies.
')
Bhavish Aggraval and Ankit Bati - the co-founders of Ola own 12% and 5% of the shares, respectively, according to mutual agreements. Dipinder Goral, co-founder of Zomato, believes that the 45:55 ratio is ideal, so the right of veto belongs to one person.
An alternative approach is to assume that all co-founders contribute the same amount of effort and are equally at risk from the very beginning. In this case, they can agree on an equal division of capital among all the co-founders. Ashish Goel and Ravi Rajish Srivatsa from Urban Ladder own an equal share of 48.5% of the shares.
Ashish Goel and Ravi Rajish Srivatsa - co-founders of Urban Ladder
In order to fairly distribute the shares among the co-founders, it is necessary to develop a system for evaluating the founders according to the duties to be performed. Check the “Definition” calculator to understand how this assessment is conducted.
Whichever approach you take, make sure that all the co-founders agree to a 4-year vesting (with getting the first part of the shares in one year). Thus, the co-founders will not suddenly leave the company, and your startup will not raise doubts among investors.
Investors
Investors want to get a stake in a company in exchange for an investment in a startup based on current valuation. In February 2015, Paytm was valued at $ 800 million. In September 2015, Alibaba and Ant Financial invested $ 680 million in the company based on the company's latest valuation. After this transaction, there have been significant changes in the distribution of Paytm shares. Alibaba received a 20% stake, while Ant Financial’s share dropped from 25% to 20%. The share of SAIF Partners decreased from 37% to 30%, and the share of Paytm founder Vijay Shekhara Sharma decreased to 21% from 27%. The rest is now owned by SAP Ventures, Silicon Valley Bank, Reliance Capital, and others, including company management.
If a start-up has not yet been assessed, investors prefer to invest based on the idea, the product’s fit to the market, the growth potential and in the team / management. Usually invest 10-25% in the sowing round. However, to conduct an assessment for a sowing round, the first question to be answered is: for how much would I sell my startup? Let's say you wanted to sell a startup for $ 20 million. In so much you rate your startup. If you want to get 5 million from the investor, they will want a 20% stake for their money.
Every investor or financial agency has its own rules on the acquired share of property. For example, Utthishta - a company that provides seed funds for Indian startups involved in software, web technologies, mobile applications and cloud computing, invests 0.02-0.03 million in exchange for a stake of 10-15%.
See the article: Startups shy away from splitting stocks until the market opens their arms for them.
Staff members
With the help of a share in the package of shares and monetary compensation, you can lure competent personnel to your startup. It will also help to keep employees. From the point of view of the employee, joining the company in the early stages, he risks taking stock and working for a small salary. They share the risk of failure with you. They are your true allies in achieving success and deserve a part of "hard earned property."
Remuneration of employees part of the shares - not an easy task. It is necessary to take into account the competence of the employee, the period of stay in the company, and its value for your business. For example, a technical director is entitled to more shares than a software developer. To simplify the task, you can develop a plan for the additional promotion of shares for employees who work the longest in the company, according to their qualifications. You can develop 2, 4, 6 year old shareholder plans, etc. The longer an employee works for you, the greater should be his share. These plans can be developed taking into account the business risks - possible liquidity events, the probability of the company's survival.
The company Flipcart, very reasonably hired and was able to retain highly skilled specialists using the ESOP program (employee engagement program to acquire the shares of the company), which amounted to 70% of the senior management compensation package in the company. In August 2014, when the company was valued at $ 7 billion, about 400 Flipcart employees who sold their shares became millionaires. Today, the company is valued at $ 11 billion, which means that employees have even more reasons to be jubilant.
Consultants
Consultants accompany capital raising events, product launches, crisis management, market analysis, and much more. Given this, it is worth to appreciate their time and offer a sufficient percentage of shares. Maybe some of the consultants do not work for money, but it is worth conducting a transparent dialogue with them when discussing compensation with company shares. Typically, consultants allocate 0.5-2% of the shares. Much depends on the stage of development of a startup, on whether it was held pre-financing or already conducted a round of financing.
When Rishab Malik joined Frrole, a company engaged in social intelligence, as a business development consultant and market entry strategy, he received 2.5% of the shares. After the sowing round, investors acquired 23% of the shares, of which 10% went to the pool of options, and the remaining share was divided into equal parts between the founders and Rishab.
The distribution of shares is not an easy task. There are no iron rules, but before making a decision, an appropriate assessment should be made.
Source: Raising The Stakes: What Should You Get?
Source: https://habr.com/ru/post/311258/
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