How Much Equity Should I Get In My Startup?

Question: As a start-up with no history and no customers (we haven’t launched yet) how do I figure out how much equity to assign to myself as the founder? I have spent the last one year developing and writing the business plan. I hired two consultants both MBA’s with real world experience to help in polishing the business model and writing the plan. They agreed to do the work on contingency basis to the tune 0f $18,000 so far. I haven’t issued any shares yet. Is it paramount that I issue shares before approaching funding sources. How do I value the company? A company in similar business sold recently for over $300 million and another sold for $1.5 billion. Of course these are mature companies, but still in the same business.

Answer (Brad): If you are the only founder, the answer is simple – 100%.  If there are multiple founders it’s a lot more complex and you may need to resort to arm wrestling or coin tossing.  Based on your question above, it sounds like you are the only founder, so you’ll own the company until the funding event. 

The actual number of shares are irrelevant – you can issue 1 (and own the 1 share – hence 100%), or issue 100 (and own 100 for the 100%), or issue 1,000,000,000 (and own 1,000,000,000 yourself – although I’d suggest this is both unnecessary and can cost you corporate taxes you don’t want in certain cases.)

Regarding valuation – there is no easy and short answer.  We’ve written about this before in How Do VC’s Determine Company Valuations? – I recommend you start there although every case will vary.

  • jasonheidecker

    What if someone is helping me out a few hours per week and wants to be paid in equity? Let’s say we agree on 0.5%. How do we formalize this?

    • jasonmendelson

      Usually in a stock option agreement prepared by your lawyer. It’s a very simple document, but should be formalized.