One take away from last weekend's Startup Weekend Des Moines is that
capital is not always the fuel that stokes the fire; it's the long days
and nights put in by designers, developers and marketers working towards
a common goal. Surprisingly, many entrepreneurs fail to recognize this
when setting up a company.
First, they focus their equity split on the amount of capital
contributed by each founder rather than the quantity and quality of the
services that each founder provides.
Second, even if they do cast their eye towards services, they often fail
to acknowledge that those services will be provided over an extended
period of time, rather than at or prior to the date their company is
These oversights can create fundamental rifts in a startup. In some
cases, founders that provide material services may start to feel like
they have been short-changed by those who contributed capital in
exchange for a large part of the available equity, and lose motivation.
In other cases, founders that contributed capital can feel
short-changed when services are not timely rendered or are not rendered
To deal with these issues, it is first important to thoroughly
understand your business, its service and capital needs. For example,
you need to examine what services will be needed to bring the product in
question to market and what those services would cost in the open
market. You also need to understand your capital needs and the
availability of that capital in the marketplace. These and other
factors should drive the relative values you place on startup capital
and services. To give structure to this examination, you should develop
a business model and financial projections. A wonderful tool for that
has been developed by Mike Colwell and can be found at http://www.startupmodels.com/.
Once you determine the relative value of capital and services, you need
to address the fact that while startup capital is generally provided
upfront, startup services are generally provided over time. To ensure
that those services are actually provided in a timely manner, we
generally advise our clients to subject service-based equity to vesting.
That vesting can be based upon time or the accomplishment of certain
established milestones. It can also be tied to revenue or anything that
is deemed relevant, although time-based vesting is the most common.
Vesting is technically accomplished through the use of a restricted
stock, unit or a similar agreement. The exact terms of that agreement
will be determined by the vesting metric that is selected, such as:
- whether the equity interest is partially or fully service based;
- how much salary the founder is being paid in cash, and;
- how the business is expected to perform (e.g. if you expect to
have an exit event in two years or to give up on it if it hasn't taken
off by then, a four- year vesting schedule does not really make much
To make these agreements easier for startups to deploy, we have
automated their production through the Start-up Launchpad. For more
information on the agreements, navigate to our client area, set up an
appointment at our next office hours event, or simply give us a call at
(515) 288-2500. We would be happy to discuss these agreements and how
they can be used to the benefit of your startup.