On Partnerships…
Building partnerships is an exercise web entrepreneurs should master. When venturing with someone into a new business, be it an investor, a co-founder or an employee, make sure you are with the right person:
- Trust is important. If trust cannot be established for any reason whatsoever, ditch this relationship and move on.
- If you get frustrated too much too often because your partner cannot appreciate or understand something you’ve done or a decision you made, then it is not worth investing any more time in this partnership…
- …which leads me to this: always have an exit clause on your partnership agreement. Not having one leaves the door wide open for legal conflicts in case stuff doesn’t work out.
- Always consult a lawyer before starting a partnership. NEVER do this alone. This will save you countless dollars and trouble down the road.
A partnership is like a marriage and remember, only fools rush in.
Startups: How much equity should be given when “nothing” is at stake?
Equity as the sole form of compensation is a recurring issue in today’s web2.0 boom. Many software startups need to hire to grow, however many if not most of them don’t have enough funds to hire the necessary talent for the obvious reason that: everyone wants cash.
Now let’s say you found someone willing to sacrifice a few months without salary. How much equity are you going to give? this brings up the issue of valuation. Equity should be correlated with the value of the company and of course the nature of service the new hire will provide.
In my case, since I have nothing but scattered ideas about how my product will be, I would say that at this stage, the valuation of my company might not exceed 3 to 5 hundred grands.
Now, my partner-to-be who happens to have much more experience than I do in startup related matters, wants to gradually get involved in my company. He is not ready yet to commit fully to the startup but he is willing to participate in some initial aspects of product development as well as serve as a mentor/advisor to me.
After several days of thinking, I decided that 4-5% should be good enough.. Normally, most startups give their advisors a little more than .5% – 1%. However, at the stage I’m at right now, I need his expertise more than that 4-5% equity. So I hope he’s going to accept. Of course, the percentage my advisor will get will be vested over a couple of years, and as soon as money comes in, I will start paying him for his time which should normally be a couple of hours a week.
Sure, if I had a prototype in place and had been through one financing round, things would have been different, but given the current state of things, I will be more than happy that someone of his level of expertise and interest in my product is on board.
In my view, there is nothing wrong with raising the bar a little higher than the advised 1% advisors usually get especially when your company is at its infancy. Several posts on the web refer to sub 1% percentages (Check this one in particular), yet they do say nothing about the valuation of the company and the value the advisor will bring.
for that particular reason, I believe there are several things to factor in when deciding what amount of equity a partner (or advisor in this instance) should get when joining a new venture:
- Can he brainstorm with you on product related issues?
- Can he participate in the design?
- Can he be an early beta tester?
- Can he provide you with legal advice?
- Will he be willing to introduce you to his connections?
- Does he have any previous startup experience?
- Does he have any business background?
- and last but not least, is he available to listen to you when you need him?
Will keep you posted regarding what my partner-to-be will say about my offer, and more about my startup.
