How to make equity distribution for a start-up team

In the entrepreneurial team (this article refers to the small team of 2-10 people), usually take stock ownership form. How to assign shares to individual members is a very important and seriously considered issue. If a member's shares are too low, his motivation cannot be fully played; If one's shares are too high, it is too expensive to make mistakes. In fact, all questions about the distribution of interests and voting rights are big problems for small teams that affect the overall situation.

Because recently launched an Internet project, organized a four-person team. There are some thoughts on the issue of equity allocation. Here is a brief introduction.

Let's talk about what a stake means.

From the perspective of ownership, the shares you hold represent all the amount of your team's assets, which is usually tradable.

In terms of voting rights, shares represent the weight of your speech.

From the point of view of profit distribution, the shares represent the amount of dividends you receive.

The purpose of a team member to assign shares is to link the interests of the members to the interests of the team, so as to motivate the members to consider the long-term interests of the team so that the interests of each member can be maximized in the long run.

The distribution of shares shall, as far as possible, achieve the above objective.

Therefore, the basic principle of share allocation is that the higher the assets you invest (assets not only contain physical assets and funds, but also the "soft capital" of investment, that is, labor). This is often said that the capital shares and technology shares, your share should be higher; the more you understand the industry, the more you can bring the team to the right direction, the heavier your words should be, and the higher your shares should be.

The above discusses the basic principles of equity allocation, and below more specific.

This paper assumes that the direction of the formulation (the CEO, usually the initiator) in the industry is a senior person, the basic ability to grasp the market trends.

Based on the insights of other members of the industry, we have two different situations.

1. Other Members do not know much about the state of the industry

In this case, the CEO should make up more than 50% of the equity. Because we have to follow the people who can lead the team to succeed.

2. Other Members have a deeper understanding of industry development

In this case, the CEO's personal ability is relatively weak, it is necessary to emphasize that many people vote to make decisions. In other words, large shareholders should not be more than half the shares.

In one case, the CEO didn't invest much, but he had to get a high share in order to hold a stake, and he got a very handsome dividend. This is very unfair to most small teams.

One of the solutions is to cut off the relationship between voting rights and equity, so that voting rights and equity are no longer 1:1 relations. For example, the right to vote: The equity set to 3:1, while revising other members of the voting rights ratio.

In another case, the CEO invested a lot of capital, and the other members put less. For example, the CEO accounted for 80%, the other members accounted for 20%. In the long run, it is likely to reduce the motivation of other members.

One solution is to make equity incentive plans. The essence of incentive operation is to release the stock, thereby reducing the CEO's equity and increasing the equity of other members. For example, the team initially gave ceo80% shares, then set up the evaluation indicators for each member, when a member reached his target, he assigned shares, options and so on.

In fact, I think, as a small entrepreneurial team, especially to emphasize small, flexible and adaptable, on equity issues do not have to adhere to the Orthodox. For example, we can completely abandon the term equity, instead of using ownership, voting rights, dividend right to accurately hit. Take our team for example:

A: Initiator, responsible for the front-end and back-end development of the site, a deeper understanding of the product

B:android client Development, general knowledge of the product

C:java client Development, general knowledge of the product

D: Investment and Assistant, general knowledge of the product

Members	Ownership	Voting	Dividend right
A	60%	70%	60%
B	15%	10%	15%
C	10%	10%	10%
D	15%	10%	15%

When team members have a deeper understanding of the product or industry, or have made large changes such as recapitalisation, they can discuss the allocation of these rights again.

Finally, note that the rules of the game must be clearly printed out, one by one, lest the future may harm the air and centripetal force.

I hope this article can give you entrepreneurs and prospective entrepreneurs to play a role, but also welcome feedback and discussion.

Source: Strongwillow submission, original link.