Some friends asked me, many time, about startup share distribution. The formula to divid share among founders and investors?
I decided to write the answer public here, so the same question will be answered in the future.
To me, there is no right way to divide share, beside keep it simple, open, and fair. Those who do more will get more. Those who do more now, get more now. If down the road of the company's evolution, they slack-away, have the strength the share the deed with those who capable and could offer more value.
In the end, 100% of 10,000 is equal to 1% of 1,000,000, yet the 1% have the bigger network to grow even more in the future.
In the past, at SmallWorld, we divided up-front of what people should get, but learned that it's generated lot of jealousy and unfair feeling for those who have received the shares, but do not have the time or ability to help deliver result.
At present, we practice share options, someone and all the team will receive the share up-to XX% if they work till XX years and deliver XX progress for the companies. And the share distribution divided in to 3 groups, Founding Team, Early Team, Investors for 2-3 rounds such as seed A, seed B.
We divide a clear cut, for the first 2-5 years, so the team and early investors not suffer from dilution. At SmallWorld Internal Venture Building specifically, we divided as below;
- 35% to Founders/Founding Team for contributing commitment, time, energy and skills
- 10% for Early Team Members, for contributing skills, time and commitment
- Up-to 35% for SmallWorld for contributing seed fund and other foundation support
- The rest of the % reserve for early outside investors. Ideally to be able to raise at least two rounds of funding. After this percentage sold off, if the next round of funding raise, the shares will be diluted proportionally.
We found that this way is a clearer path for team to work and have the drive and incentive to help build an organization they believe and love a success.
This is not the only way. This is one of the way we do at SmallWorld. We are still learning how to do it more fair and opened.
We believe that those who work hard to create more value to the company, shall be reward more regardless they come late or early. In contrast, those who join early but only stay around so they can get something if it’s successful, should get less or be pause the involvement, if s/he disturbed the progress of the organization. It sounds harsh but it’s the fact that is really hard to deny.
I hope this is of some help. If you have more question, please feel free to ask on Telegram channel.