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Background

I'm doing some due diligence regarding a US registered (Delaware C-corp) tech startup in Europe, where the founders are located and living in the EU. Although the business idea is very good, there are already operating competitors, while this company is still in the development stage.

As I provide VC access and some decision say, I am a bit concerned about the "team" as the founder and major shareholder has a great fear of share dilution and thus not willing to give his 3-5 team/partners more than 2% after 5 years with a SAFE agreement. This seem quite extreme as the company's present share value is only $100, does not have any products, has not yet been funded nor have any capital. As a European, I seriously doubt someone can remain motivated enough to drive a company forward under these terms.

Question:

What are the typical/acceptable share distributions for these types of contracts?
(Assuming the initial core team of the company will have 3 people.)

  • 4
    You can assume from the share distribution that the founder does not see the other people as co-founders or partners, they are seen instead as employees who have a little equity as a bonus incentive. If the founder tries to pretend otherwise, you can be sure they are lying or delusional - 2% equity does not a true partner make. As more or less disposable employees, you should evaluate the business as one founder and a few employees who are offered a small equity bonus after 5 years (which is quite a long vesting time, so a rational person should assign a likely value of $0 for those shares). – BrianH May 23 at 14:18
  • What @BrianH says. If they are actual partners, then it would be near equal percentage or a percentage tied to what they invested, etc. Right now you have someone that started the company and needs employees to help grow it/get it off of the ground and so they need enough stake to stick around. If they draw an average salary then it is a big bonus, if not then it is hopefully salary replacement later. – AbraCadaver May 23 at 19:50
  • Is it safe to assume the founder has contributed all of the actual capital so far and everyone is drawing a salary? – quid May 24 at 14:45
  • It's only safe to assume he's paid $100 and have does not have any money to pay anyone. So no salary anywhere. – not2qubit May 25 at 15:52
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If you watch episodes of shark tank, you might gain some insight into the uniqueness of deals that are dependent upon a myriad of other factors.

Having to choose, the three will typically split the equity in the company equally. That is smart because if you are a 40%, 20%, or 10% owner of a failed business it really doesn't matter. Also, on the flip side, if you build a business that is worth 100 million are you good with owning 10% of it? Probably although feelings might get hurt. So independent of percentages, all the partners win, if one wins all lose if one loses. So it is best just to be equal.

However, what if three people start a company where each brings a necessary skill but only one provides funding? That person that provides the funding should probably own more of the company. What if one person brings in existing business and desires the other two to help expand? What if one person cab generate more revenue?

There are many factors that can influence a different split then an equal one. Having it all in writing with contingencies is a great first step in making a startup a success.

  • In this case, the founder has not been able to bring in any funding since registration (a few years back) , nor have any technical skills necessary for the development. – not2qubit May 23 at 14:18
  • Yes, there are oo ways to fail. But for those with successful vesting schedules and seed + rounds funding, what are the most common numbers for non hyperbolic evaluations? – not2qubit May 23 at 19:27
  • Unfortunately Shark-Tank is not watchable outside the US. – not2qubit May 27 at 10:38
  • @not2qubit Shark Tank is US version of Dragons Den, which I'm pretty sure you'll be able to find. I'm not sure you have to watch the show to get the analogue, but knock yourself out. – Nathan Cooper May 28 at 12:42
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Often, an equity agreement is based on whoever will contribute most to the company’s ultimate success.

For example, if Bill Gates were to do absolutely nothing other than invest a nominal amount of money attach his name to the company so that you could capitalize on his name and clout, that would still be worth a substantial chunk of equity, probably even a majority stake.

If the science and technology is so esoteric that the scientist or technical founder is the key to everything, and the company could raise capital from numerous sources, then the VC money is not worth as much equity as the technical founder’s share.

If they can’t get money anywhere else, then VC money is worth more when you’re the only one willing to invest.

So ask yourself and everyone who will ultimately ensure the success or failure of the venture and decide accordingly. Basically, it’s whatever you can agree on.

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