The Right Way To Distribute Equity

The Right Way To Distribute Equity

Okay.

Due to popular demand, I’ve decided to finally tackle the billion dollar question.

And while it’s not easy to have a conversation about startup equity without putting the faint of heart to sleep, it’s territory that simply can’t be overlooked.

Because for any growth-oriented entrepreneur entertaining the idea of handing out equity in their company, the math absolutely matters…

And one small misstep can be the difference between accelerated growth or the speedpass to startup hell.

So if you’ve ever wondered what a healthy equity breakdown looks like for all key stakeholders (founders, advisors, investors and team members)…

… then give this new video a quick spin.

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As you can see, used appropriately, equity can be an amazing way to incentivize team members and attract key advisors and investors.

Like I did with Uber’s Travis Kalanick

But if you don’t enter the conversation with clear knowledge of the right benchmarks to shoot for…

… then you’re setting yourself up to either give too much away, or lose talent and investors to other startups playing a much sharper numbers game.

So get your numbers right.

Make the right offers.

Here’s to splitting the pie… and watching it grow!

  • Andrew

    Hey Dan,

    Loved how you simplified the way to think about equity splits. Would love to get your thoughts on this approach: https://vimeo.com/135089162

    I saw Mike at StartupFest in Montreal last year and was intrigued. What would you say about this approach based on your experience?

    • http://twitter.com/danmartell Dan Martell

      Andrew, will queue up the review of this video and get back to you… haven’t heard Mike’s approach on this.

      Although, the one I described is what 99% of startups are currently using.

      Hope that helps.

      DM

  • Jose

    Dan, man thank u for this info… I really needed it… I need to make some changes but not a lot… I’m on the right track here…. Thanks again…

    • http://twitter.com/danmartell Dan Martell

      Jose, glad I could provide a bit of guidance.

      Have an incredible day!

      DM

  • Val Tsanev

    As always very useful Dan. Another important distinction and something I would love to hear your thoughts on is convertible notes vs. equity. Thanks.

    • http://twitter.com/danmartell Dan Martell

      Val,

      That’s a bigger discussion and one I will queue up to shoot a video on since I don’t want to cause any confusion.

      That being said, my preference is doing a priced Series Seed round vs. Notes (both as an investor and entrepreneur) as it reduces the amount of ambiguity of how the rounds are evaluated.

      More on that soon.

      DM

      • Val Tsanev

        I agree with you Dan on Series Seed vs. Convertible Notes. Looking forward to watching your next video.

      • Blake Connoy

        Hi Dan! If possible, could you please also address the use of Simple Agreements for Future Equity (SAFEs)? I’d really love to get your perspective there! Thanks so much!

  • genecat

    As both a founder and CEO would I include myself in the 10% team pool you mentioned (my founding steak is 17.5%) and if so, what would be a reasonable percentage?

    • http://twitter.com/danmartell Dan Martell

      Genecat, great question.

      Nope, your equity as a founder is not included in the ESOP (Employee Stock Option Pool).

      Normally the pie looks like this after initial seed round: Founding Team + Advisor Shares + Employees (ESOP) + Investors (60%, 10%, 15%, 25%).

      That’s a general rule of thumb but could change due to MANY different variables but good to use a target.

      (Disclosure: I’m not a lawyer, nor do I play one on TV. Please seek professional legal advice).

      DM

  • https://pedramdaraeizadeh.com Pedram Daraeizadeh

    Great value in this video as always. Considering about 5% for advisors with an average of 0.5% for each, gives founders an opportunity to have 10 advisors. What are the average or optimal number of advisors that you’ve seen? If founders only have a couple of them, should they keep that pool for future advisors or should they add it to a different bucket? Thanks Dan!

    • http://twitter.com/danmartell Dan Martell

      Could be 10 advisors, or 5 if you give em’ each 1%. All depends on what the company needs re: 1) expert advice, or 2) credibility.

      If you don’t use it, usually just stays in the pool for the founders… and normally the advisors are set by the time the first round happens… but if it more are required, then it would normally come out of the ESOP (Employee Stock Option Plan) pool.

      DM

  • Joseph

    You see on shark entrepreneurs to raise a round of funding with an over the top valuation. So lets say you need to raise a few million dollars, what would be a reasonable equity amount so that the co-founders have enough skin in the game? You mentioned 10-15% and worse case scenario is 30-35%. How much equity would you give up in a Series A round? B Round? etc…

    • http://twitter.com/danmartell Dan Martell

      I use the 25% rule as a target… shark tank is for traditional “private money” type investing, not for venture backeable high growth technology startups.

      Two different asset classes with different ways to asses their worth imho.

      DM

      • Joseph

        So if 25 % is what you would start with for Series A round then what would you ask from an angel investor?

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