Author: Arnau Roige, Business Analyst, and Patricio Hunt, Managing Director of Intelectium Startup Accelerator.The dilemma of distributing capital is one of the most controversial issues when it comes to starting a Startup, and there are plenty of reasons. The resolution to this question will mark the future of the company, so it is important to clarify a series of basic parameters before making the decision. Below we offer you a selection of 9 tips for a better approach to the distribution of capital of your Startup among the founders:
1) Don't go half way: When the founding team is made up of two members, it is usually common to see a 50% distribution of the capital between the two with the sole objective of being equitable and avoiding arguments. Although it may seem like an equitable and fair average for members, in the future it may generate situations of blockade due to tensions between them, completely paralyzing the Startup. Therefore, one of the two should always have more equity, ideally the one who will perform the functions of CEO.2) Don't give away equity: It is very common that when things start going well, founders dedicate themselves to distributing small parts of their capital to friends who have helped them with financing, to employees with whom they have started the business, mentors, advisors, etc. To prevent founders from losing part of their participation due to commitments, they must put clauses that force all these figures mentioned above to earn that capital, in other words, they commit to promoting the company in the future. Thus, the entrepreneur ensures that giving up shares increases the value of the company. In Spain, the best format for making this type of agreement is a Phantom Shares contract (ghost shares). The advantages are several, especially fiscal and easy to implement.3) Plan distributions according to objectives: When pacts such as the one in the previous point are established, shares must be transferred based on objectives achieved over time. For example, if one of the partners achieves an “x” objective and has also stayed in the Startup for a minimum of “x” years, the latter will increase their participation, otherwise, if they leave the project before that period, they will lose a% of it.4) Make a good partnership agreement: Making a detailed partnership agreement, taking into account all future possibilities, is of vital importance. This document, which includes the rights and obligations of partners, advisors, etc. can prevent one of them from leaving the company in a hasty manner, raising serious doubts about the future of the Startup. One of the main factors that the founders must agree with each other in this pact is a “vesting” agreement, in other words, the rights to the shares that each one has in the company actually become “firm” in tranches depending on time. This means that, if one of them decides to leave the company before a certain period of time, they are not entitled to all the shares they hold. It is very important to consult an experienced lawyer to establish exactly the conditions that govern these pacts, because if the contractual clauses are not well defined, their legal implementation is often very difficult and this can lead to conflicts that end the social peace of the startup, making it vulnerable at key moments in its development.5) Each Startup is a world: Similar companies or experiences of acquaintances in the Startup world can help to distribute shares, but they should never be copied or used as templates, since each Startup has its peculiarities.7) Contributions: Partners can do them differently. These can be:
- Intangibles: Mainly, in this category, we find the business idea. It is common for the founder who has contributed significantly to the development of the business idea to have a larger share of capital. On the other hand, in Technological Startups we find software or technological development in this category, which, as in the previous case, those fundamental partners in the development of these intangibles should have certain privileges when establishing their participation.
- Tangible: There are many partners who make contributions in the form of assets either machinery or technical equipment necessary for the performance of the business or even the place where the activity is carried out. Therefore, these contributions must be taken into account in the shareholder distribution.
- Capital: The capital provided is the starting point for making the distribution, from there, other contributions and the factors surrounding the Startup must be taken into account.
8) Opportunity cost and level of commitment: When the entrepreneurial team decides to create the Startup, part of it may be giving up their previous employment, implying a full-time commitment to the project, especially in management positions. These factors must be considered in the proportion of capital, since human potential can sometimes be much more valuable to the Startup than capital contributions.9) Motivation of the “lead entrepreneur”: The “Cap Table” or capitalization table, as the shareholder distribution is usually called, is of fundamental importance for investors. According to the more traditional view, an investor will want the company's “lead entrepreneur” to have a significant share of shares before entering the startup's capital. The definition of “relevant” varies depending on the company's stage of development, but it is common for startups that are looking for their “A” rounds for the entrepreneur to have kept at least 30% of the shares. In this way, the dilutions due to subsequent rounds will not significantly erode your position, which will make you maintain your level of motivation in the future. The distribution of shares among founders is one of the most important aspects in creating a startup, and probably one of the least analyzed and understood by entrepreneurs. [bctt tweet="The distribution of shares among founders is one of the most important aspects of a #startup "username="intellectium"] But... what would an ideal team and an ideal distribution of shares between them be? In our opinion, the ideal team is a Business Developer with experience in their industry, a CMO and a CTO. Under ideal conditions, the “lead-entrepreneur” should be one who, through their knowledge, contacts and “drive”, holds the key to the company's success. The latter should keep +50% of the shares, with the rest being distributed between the two other figures. In this way, it is guaranteed that the “lead-entrepreneur” will maintain a sufficiently significant participation to maintain their level of motivation very high despite the following dilutions. And it should be very clear that, if the partners leave earlier than agreed and if the value they add to the company is not as expected, the proportional part of their “unclothed” participation must be set aside and transferred. Achieving a very clear understanding of these issues since the founding of the company and establishing the milestones that clearly objectify the contribution of value, and the moment when someone has to be separated without generating conflict, is very difficult, but it is well worth the effort.Keywords: Startup, cap-table, entrepreneurs, partners, funding, capital, founders.Fuentes: Startupexplore, Zacchaeus, Expansion and own experience.
