How to Divide Founder Equity: 4 Criteria to Discuss

View from Seed

Editor’s note: Understanding how to divide founder equity at a startup can be tricky, even to the point of reaching emotional riffs between founders. Below, Lee Hower offers advice for approaching these equity discussions objectively and properly. Ideation/IP.

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Punch & Pie: How Should Co-Founders Divide Equity?

Agile VC

As a result, one of the trickier things co-founders tackle is determining the equity split amongst the founding group of individuals. Sometimes co-founders put off the equity split question for some time. Both of these are typically reflected in the founder equity split.

Trending Sources

Protecting IP in Crowdfunded Deals

Angel Investing News

Investors will eventually want to validate the intellectual property (IP) prior to investing but not just to hear about the opportunity. During this phase of the investment process, representatives of the investor group may agree to a non-disclosure agreement as part of their validation of the IP. Unfortunately from what I read, crowdfunders expect to invest in the next potential IPO in which IP may play a huge role in the success of the company.

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Legal Checklist for Startups

Scott Edward Walker

Button-down IP ownership and assignment issues (see post here ). Split the equity based on prior contributions and expectations going forward, not necessarily equally (see post here ).

How Do Angel Investors Make Decisions?

Early Growth Financial Services

They’ll want to know what’s unique about your IP and … Continue reading → Investment Capital: Equity / Debt / VC FundingIn some ways, getting your startup funded has parallels with The Amazing Race. It can seem like a long, winding, obstacle-strewn course.

Crowdfunding: Ways to Boost Your Campaign Success

Early Growth Financial Services

Before you go public with your campaign, you need to identify and protect your IP. Some things, like putting simple copyrights in place, are straightforward enough … Continue reading → Investment Capital: Equity / Debt / VC FundingWith crowdfunding blowing up, in a good way, more and more entrepreneurs are considering jumping on the bandwagon. But before you upload your product video and hit the launch button on your campaign, there are some things you need to know.

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IPO? IP-no!

EIN News

A lot of private equity funds and venture capitalists have been holding their investments for a have gone on sale yet. By mid-June, U.S. firms had raised $22.7 billion through IPOs. "A

If I Launched a Startup

The Startup Lawyer

7) Founders Equity Split: Depends on the Team, But Quickly and After the Awkward & Difficult Conversations. (8) 10) Consideration for Founders Shares: Cash & IP. (11) 11) Handling of “Lost Founders&# : Lock Down the IP (then Wish Them Well). Here’s what I’d do in the beginning: Incorporation. (1) 1) Entity Choice: Corporation or Corporation. (2) 2) State of Incorporation: Delaware. (3) 3) Authorized Shares in Charter: 10,000,000 Shares. (4)

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Lockdown Lost-Founder IP

The Startup Lawyer

Thus, it’s wise to lock down your startup’s IP early to prevent the lost founder problem. How to Lock Down the IP. Consideration for services rendered should be given to all developers and consultants that work on anything IP-related at your startup. The consideration given to developers and consultants does not have to include your startup’s equity.

Do It Right The First Time, Part II: Visit the Doctor or House Call?

Gust

Readers can anticipate my next point in continuing the analogy: It makes no more sense for a non-lawyer to prepare fundamental legal, governance, equity and intellectual property documents than it would for a patient to self-diagnose and begin taking prescription-strength antibiotics or other medications. Stepping off the soapbox, let’s examine the highest level “To Do” list for a new startup: Formation, Governance and Equity.

When Should A Company Be Formed Around an Idea?

Ask The VC

He formed a company 2 years ago that he talks about (though from the research I’ve done has no IP or product of any kind) and thinks that this idea fits into that vision, but doesn’t want to include anyone. We’d suggest that you form a company (LLC or S-Corp is fine at this point), divide up the equity and make sure it is subject to vesting. That way, if someone does decide to leave, they will not leave with all of their equity.

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Are Universities The New VCs?

A VC : Venture Capital and Technology

It isn't the IP and patents that are held by Universities that interest me. I think capital gains from equity investments in startups that are birthed inside universities is an interesting idea and I am glad to see Stanford and some other schools trying it out.  The New Yorker has a piece on Stanford's StartX. They ask some interesting questions and end with this one: If the university is a farm, do the students become the cows?

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4 Deadly Legal Mistakes That Startups Make

Scott Edward Walker

And if the departing founder has a huge chunk of equity, it is unlikely that the company will find many sophisticated angels or VC’s interested in investing. IP Ownership. Any IP created or acquired by a founder (e.g.,

Should a Founder License IP to a Startup?

The Startup Lawyer

Founder IP License Problem. Even if the founder offers the startup a completely startup-favorable license, the founder IP license scenario should be a non-starter for most startups. The problem is that even a free and exclusive license to the startup falls short of vesting IP ownership with the startup. Founder IP Should Become Startup IP. Founders should transfer their IP ownership to the startup.

The 5 Biggest Legal Mistakes That Startups Make

Scott Edward Walker

Mistake #2 : not buttoning-down IP ownership issues (at 10:20). Mistake #2: Not Buttoning-Down IP Ownership Issues. CA exception – CA Labor Code Section 2870: (i) different space, (ii) not using employer’s facilities and (iii) idea/IP is not based upon work done for employer.

Do It Right The First Time: Avoiding “Janitorial” Legal Work

Gust

Notice what is missing from this list of priorities: The company itself – that is, a business entity, most often a corporation , that will own the entire business (however defined), issue equity to founders, take investment capital , enter into contracts, make sales, pay employees and contractors, and so forth. What: The foundational corporate formation, governance, equity issuance and intellectual property assignment documents. What is a startup really?

The risks of being a small investor in a private company

Chris Dixon

With the passage of the JOBS act , it seems that many more Americans will soon be able to buy equity in private companies. I am no expert on the law, but I have been investing in private companies for about a decade, and during that time I’ve seen many cases where large investors used financial engineering to artificially reduce the value of smaller investors’ equity. Small investors invest in entity 1 that licenses IP from entity 2.

Some Career Advice for Aspiring Tech CEOs

Both Sides of the Table

He wants a chance at changing life’s circumstances with building equity value that might free him and his family from the rat-race of 529 accounts, property taxes, summer-school tuitions and even spending some cash on aging parents. There are many companies with phenomenal IP that is truly differentiated but where the original executive team squandered their opportunity due to inability to sell, market or service customers.

Top Legal Mistakes Entrepreneurs Make

Deimar

Finally, completely understand who owns what as the relationship persists, especially in the case of intellectual property (IP). Not Protecting IP Ownership. Some entrepreneurs make the mistake of creating IP for their new venture while they are still employed by another company.

Corporate Bad Activity Against Innovators

Feld Thoughts

Virtual Legality: Legal Letters Claim Oculus VR Made The Oculus Rift Using ZeniMax IP. Oculus says ZeniMax canceled Doom 3 VR support over equity demands. There’s an amazing amount of bad activity going on in the world of tech right now.

The 5 Biggest Legal Mistakes That Startups Make

Scott Edward Walker

My law firm recently entered into a new partnership with This Week in Startups and sponsored their live fireside chat last month in San Francisco with authors Nick Bilton and Brad Stone.

Dear elizy: How should I split equity with my co-founders?  And how will that affect raising a seed round?

Hippoland

Ada is my professor, and we are using her lab, and the company is based on her research, though the IP is assigned to the company. We are trying to decide how much equity to allocate to each person. I would like to split the equity equally, since it seems only fair. But, Ada wants to split the equity 50% her, 20% Bob and 20% me with a 10% option pool. Dear elizy : I started a company in school with two co-founders. Let’s call them Ada and Bob.

Working with Friends

Non-Linear Growth

Last week I wrote about the value of repeat relationships in the venture capital and private equity business. Well… today, Intel Capital announced a significant investment in Meritage portfolio company IP Commerce. I’m excited that Intel has decided to join us at IP Commerce. Welcome to the team guys and congratulations to IP Commerce for successfully completing this financing.

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When do I need to incorporate a company?

Startup Company Lawyer

If there is more than one founder, the likelihood of an argument about how the equity should be split in the new company increases dramatically. Incorporating a company and issuing stock to the founders will help prevent misunderstandings among the founders about equity splits. Trying to clean up pre-incorporation promises to grant equity in a startup company is a painful task, especially if founders part ways before there are formal documents in place to deal with the situation.

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Top 120 Startup Posts for 2010

SoCal CTO

IP Law for Startups , June 23, 2010 Groupon’s Growth Made Possible by Facebook - Leveraging Ideas , May 5, 2010 Automating Themed Logo Changes by Season - TylerCruz.com: An Internet Entrepreneur's Journey , October 18, 2010 Selling a Business - A Guide for Investors and Entrepreneurs - Angel Blog , February 28, 2010 Minimum Viable Product in practice - Guy Nirpaz , October 17, 2010 Want to Know How VC’s Calculate Valuation Differently from Founders?

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Tahosa’s Summit: 6 Months [Series]

Non-Linear Growth

To my knowledge, no-one has ever done a blog series on the process of building a venture capital or growth equity firm. A big, bad private equity firm that spends more money on lawyers in a week than I’ll spend in a year didn’t like the name I had originally chosen. Hire an IP attorney to help you through the process and some good marketing people if you can afford them.

Key Contracts Every Business Must Use

YoungUpstarts

When selling a business , especially an intellectual property dense business, any potential acquirer will want to know that the business (as opposed to specific individuals) own the IP of the business and having an invention and assignment agreement in place is one way to ensure that.

What Should You Do with Your Crappy Little Services Business?

Both Sides of the Table

The founders could reinvest this in growth (0% tax, focus on future equity growth) or take the profits of $12 million and divide amongst the founding partners. You own the IP you create. In a down market IP can become a huge differentiator.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

” Today I want to talk about how a VC thinks about equity pricing on your round and particularly if you’re coming off of a convertible note. Of course investors care about controls (board, protective provisions, IP assignments, non-solicitation) but these are all pretty standard. Over the years I’ve written extensively about the downsides of convertible notes for startups such as here , here and here.

Venture Debt 101

Up and Running

This sometimes even includes your IP assets, though this is negotiable and should be part of your decision on the lender you choose to work with. Warrant coverage: the lender will request warrants over equity in the range of five percent to 20 percent of the value of the loan.

Startups Need the ‘Why’ Before the ‘What’ to Build

Startup Professionals Musings

Although their book is written for businesses of all sizes, I believe the principles apply especially to startups as follows: Increase return on equity invested. Intellectual property (IP).

Bad Notes on Venture Capital

Both Sides of the Table

“But lawyers will charge much more for equity.” Try doing THAT with equity. This week. On the phone … Me: So, you raised venture capital? Him: Yeah. We raised a seed round. About $1 million. Me: At what price? Him: It wasn’t priced. We raised a convertible note. Me: With a cap? Him: Yes, $8 million. Me: Ah. I see. So you did raise with a price. It’s just a maximum price. You’ll find out the minimum when the next round is raised. Him: Huh?

Bad Notes on VC

Gust

But lawyers will charge much more for equity.” Try doing THAT with equity. This week. On the phone …. Me: So, you raised venture capital? Him: Yeah. We raised a seed round. About $1 million. Me: At what price? Him: It wasn’t priced. We raised a convertible note. Me: With a cap? Him: Yes, $8 million. Me: Ah. I see. So you did raise with a price. It’s just a maximum price. You’ll find out the minimum when the next round is raised. Him: Huh? Last week. At an accelerator ….

Zayo Group – One of Boulder’s Amazing Startup Stories

Feld Thoughts

By the time we sold to Level 3, our total proceeds to equity owners and management were $225M. Instead, we sought to provide raw fiber, wavelengths, ethernet, IP, and technical space to those entities that needed a whole lot of bandwidth. of debt and $870M in equity in three rounds. Our equity IRR has averaged around 50% since inception.

How to Work with Lawyers at a Startup

Both Sides of the Table

You never got around to agreeing exact equity splits but you had many conversations about it. Shame about not getting it in legal writing that you owned the original IP. But if you can stomach that he’s a star and contingency work / risk sharing on IP claims is key!

How to Find the Top VCs for the Investment You Need

Up and Running

According to Pitchbook, the data and technology provider for the global private equity and venture capital markets, the year’s total for this region was a record $2.4 They invest in strong teams, massive market opportunities, and novel IP.

Startup Resources

www.vccafe.com

IP Location Tools. YCombinator Series AA Equity Financing Documents. Founder Equity Issues. Venture Hacks equity section. Legal, Equity, etc. Lodestone Innovation Partners (IP) Ltd are spin-out specialists. Argonaut Private Equity. Infinity Equity.

Why Content Personalization Is Not Web Personalization (and What to Do About It)

ConversionXL

Imagine you receive an email from your bank about refinancing and home equity loans. Secondly, the bank could have paid attention to what I was doing, which was perusing their site and others’ for home equity line options, risks and rewards.

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Startup Founder Agreements

High Contrast

It outlines key points of agreement between founders around IP ownership, equity ownership, vesting, etc. For example, without a clear vehicle (a company) to contribute intellectual property into, a founder who walks away may mean that the future company won’t own its own IP. The number of separate documents may vary but they fall into two categories: Those related to equity, typically a restricted stock purchase agreement (RSPA) and associated escrow and other agreements.

Burnham's Beat: Fortune Magazine Fight Fest: Private Equity vs. VC

Burnham's Beat

Fortune Magazine Fight Fest: Private Equity vs. VC. A few quick take aways: Surprisingly, it seemed like the biggest debate took place not between the investors and the Professor, who was outright opposed to any capital gains break for carried interest, but between Roux, a private equity guy, and Mortiz, the VC. My guess is that it wont work and all the NVCA will have to show for it is a lot of pissed off Private Equity guys, but I also hope that I am wrong! Burnhams Beat.

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