OpenCoffeeClub

Distributing Equity in Start up – OCC

Today, we had another Open Coffee Club meeting at Thought Works campus. The theme for this meet is to discuss “Distributing Equity in Startup”.

We had a good gathering of 24 enthusiasts coming and it was a good distribution too – 60% first timers and remaining being the old gang including Ramjee, Himanshu, Sidu, Pratik and of course me 🙂

The discussion started with speaking about the equity distribution in a free-lancing kind of organization.

Ms. Manjula, who owns a startup in training and consultancy shared her experiences in distributing equity in her startup:

  • We share revenues among ourselves.
  • If I am involved in the contract, then I usually go for 70%-30% split.
  • If I am not involved, then the person gets the complete share.
  • They decide they stake at the agreement level itself.
  • We usually make decisions on case-to-case basis.

People spend more than 60% of their time in office, and if you can be happy for that amount of time, then most of life’s motive is accomplished, which is irrespective of the salary and perks you earn is what Jayant Tewari, of Out Sourced CFO thinks. In India, we do not do architectural work and concentrate more on implementation work which reduces technical career path for people and this is where Entrepreneurs come from is what he had to say.

Let the stakeholder pay the employee directly, do not be a middleman and also build trust with employees, this brings results. You can also retain people with your projects for longer time. Startup’s do not put enough thought into ESOP’s. Usually, ESOP is not a good way of employee retainment, but ESOP is for people who are making things work in the organization.

How do you evaluate a one year old organization?

Ans: Look at your business plan, discount the financial projection by 50% straight.

Looking for a “Startup Capital” is being difficult in our scenario, only “Growth Capital” is being available to a large extent.

Sidu spoke about YCombinator, an organization focusing on seed funding for startup’s. YCombinator just helps entrepreneur’s with bare minimum fund for starting up their organization. The fund usually does not go beyond $20,000 with expectation of stake in-between 2%-10% from the startup.

Book Referrals – Here are few books for reference in Entrepreneurship and Innovation – Founders at Work, a compilation of stories of startup days is a fantastic read; The Art of Innovation – by Tom Kelley is an amazing read for understanding how Creativity pays and how you can innovate from the simplest of things in life; 37 Signals is a team which builds simple and focused software which help people collaborate and be organized.

Look forward for another OCC Meet in Bangalore.

7 thoughts on “Distributing Equity in Start up – OCC

  1. Hi Hari,

    First of all — ‘thanks’, for posting your notes from today’s OCC. This was one which I was eagerly looking forward to, but couldn’t attend eventually, which is why I was looking out for the next best thing, i.e. such good notes.

    Glad to read what Manjula and Jayanta had to share. We had a very interesting thread of discussion on the mailing-list about 6 weeks back. Obviously and as it turns out, there are several models in which people work, and there is as-one-might-suspect, no single silver-bullet.

    However, what I was hoping to see some discussion around were the following points:
    1) New ‘start-up’ valuation, and especially so in the Indian context. Maybe a bit of scientific / concrete method of doing so.
    2) Equity distribution between founding members, of a new ‘start-up’, i.e. before any ’employee’ comes on board.

    If you feel some of it was discussed, and missed in the 1st version of your post, would be glad to read about that part as well.

    Anyhow, the mail-thread from 6-weeks back had some excellent thoughts around it, much of it concrete and from people who’ve been-there and done-that!

    OCC rocks!! And thanks to all who continue to make this a success.

    best regards,
    Banibrata

  2. A Couple of Points I’d like to Add:
    1. Its important to prepare & sign a Shareholder’s Agreement between the Promoters which must specify:
    a. Starting Shareholding Ratio between the Partners.
    b. A Right to earn equity, maybe not in terms of issued shares, but certainly in terms of a right to subscribe at par, for a certain number of shares per month as long as they remain involved with the Company on a full time basis.
    c. A similar right to subscribe for a lesser number of shares per month as long as they’re involved on a part time basis (part time to be defined)
    d. The fact that they shall continue to hold their shares as Financial Investors after they cease to be operationally involved.

    2. The starting shareholding and each of the above is a matter of sheer negotiation, but since all of them are great pals at start-up it can be easily put in place.

    3. An attempt to rectify this, either post or as a part funding or growth will lead to a mess of mammoth proportions.

    4. Only if you’ve done the above, are you in a position to structure and implement an ESOP of any real value.

    5. ESOP’s are a waste if they’re too small to be meaningful, and committing them to all employees will make it meaningless to all.

    Hope this helps ….

    Jayant Tewari

  3. I am unable to attend the last 2-3 due to new born child at home meetings but really miss the value the forum brings in for new entrepreneurs.

    Can we have these meeting on Saturday afternoon – leaving at lest one day in a week for family time?

    Thanks and regards
    LN
    Founder, Adaptive Processes Consulting

  4. Thank you for the valuable inputs Jayant.

    LN, it is a good suggestion and let us try to hit the group for the feedback. One of the prime reasons we do on sunday’s is that we get some place to peacefully sit and speak (either some office space or coffee shop). People are usually out on Saturday’s and all places are crowded and also our forum which comprises of entrepreneurs works on Saturday too. This is just my thought, we will shoot to the group and take suggestions.

    Hari

  5. Interesting reading all these points hari. I recently got married and therefore havent been able to attend previous meets. I shall be available fr the next meets.

    Cheers
    Vaibhav

  6. Dear All
    First of all my sincere thanks for integrating me into our new family. It is really wonderful experience to interact with diversed group and get different dimension about the same thought.

    Incase if I can able to help you in any way I am more than happy to do that.

    Feel free to keep in touch…

    Have a great weekend.

    Thanks and Regards
    Manjula
    9880544200
    http://www.hcsindia.com

  7. Hi can you plz tell me when will be the next OCC meeting planned in bangalore….i am new to the city and wanna join in..

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