So, you have a great business idea.
You grab your two best friends, get all excited, and then start a company together.
In your haste to get started, you and your two cofounders decided to divide the equity evenly in thirds--it seemed the obvious and fair choice then.
Two months later, just as you're starting to get some traction, one of the "friends" changes his mind and drops out entirely. But for the work that he did, he believes he should still keep his 1/3 share of the company.
The two of you left are now essentially doing all the work, but for only 2/3 of the company. Still worth pursuing? Maybe. But you definitely won't be happy.
With 'deadweight' cofounders with significant equity stakes, you'll be lucky if you could attract any new team members or investors.
Don't make this dumb mistake. My course and my calculator will allow you and your cofounders to have a collaborative and transparent conversation how much of the company each person should get.
Look, starting a new venture is hard enough, but having to figure out what is fair for each cofounder shouldn't be the hardest thing.
By taking this course and using my easy to use startup equity calculator (UPDATED May 2017 to handle up to 7 cofounder slots--more than what 99.99% of you will need), you'll learn some ways on how to avoid this unfortunate, yet preventable situation. And you and your team might even have fun with the pie slicing exercise!
Through the course, you'll learn what you should into your equity pie considerations and how to use a systematic approach for calculating each founders fair share, collaboratively and openly.
While this course isn't intended to provide you with the THE "correct solution", it will give you and your team a great starting point.
And it'll make easy an often awkward conversation about who should get how much and why.
Deciding and agreeing on how to divide the initial equity pie is no trivial task, but this tool will definitely help get the conversation going on the right path by forcing you and your cofounders to decide on what are the key milestones for your venture and how each of you are going to be making your contributions.
What if your starting a more traditional business?
Whether you're going for a high growth type of startup or a more traditional startup with known benchmarks for revenue and cash flow, I've got you covered.
I'll explain to you which of the TWO frameworks and tools you should use depending on the type of venture you're starting up.
Take a look at the preview lectures to check out the calculators in action and you'll see how they can help you and your cofounders with having a smart and equity conversation about splitting the pie.
Good luck and happy slicing!
This is the TLDW (Too Long Didn't Watch) Summary Lecture.
What this course WILL and WILL NOT do for you.
Whatever you do, DON'T divide by N. It's almost certainly going to be the wrong approach for you and your team.
Where are you from? What kind of startup are you working on or will be working?
The calculator in this course is inspired by an article by Frank Demmler, which you can find here:
For the model in this course, I've made some additions that allow it to take on more use cases.
Tech, venture funding, IPO, apps, etc...? Go with the Founder's Pie Calculator.
Traditional brick & mortar startup? Go with the Waterfall Framework.
Overview of the section.
Should the idea be worth something? How much? Find out.
How to treat cash contributions.
Discussion on skills for the founders pie calculator.
A list of common contributions teams may want to consider as part of their equity pie slicing exercise.
Milestones and how they're used in the founders pie calculator.
Discussion on vesting--don't use the calculator for that.
Old version handles up to 5 cofounder slots.
New version can handle up to 7 cofounder slots, which you could use for things like setting aside employee pool, accounting for late co-founders/early key hirers, etc...
A quick walk through of the founder's pie calculator and how to use it.
A walk through of the founder's pie calculator with a tech startup example involving 3 founders.
If distributions of cash flows are expected and there's a need to reward sweat equity, then the waterfall is a great fit.
Download the waterfall framework file, with all of the formulas. You will be using this for the rest of this section.
Walk through of the waterfall model and how to use it.
The lectures in this section were originally geared towards real estate but the concepts apply to any business with cash flows out and cash flows in (i.e. traditional business startups).
Quick overview of the topics to be covered in this section.
If you aren't comfortable with discounted cash flow, it'll be difficult to fully utilize the waterfall model.
The Net Present Value determines value of all future incoming and outgoing cash flows in today's dollars.
In this lecture you will learn about NPV and what this measure says about your project.
Demo with Excel to show IRR calculations and comparisons.
The Cash Multiple measures and compares the magnitude of your investment without taking time into consideration.
Which measure do you use?
Demo showing use of IRR & Cash Multiple.
Watch this before you jump into the rest of the section.
Using the same scenario (a real estate investment) to evaluate and compare the results of 4 different waterfall scenarios.
DOWNLOAD the file here to follow along for the rest of this section.
Using the same example to compare the various waterfall structures, we explore what the returns for each party would look like in a no waterfall scenario.
Using the same example to compare the various waterfall structures, we explore what the returns for each party would look like in a 3 tier waterfall scenario.
Using the same example to compare the various waterfall structures, we explore what the returns for each party would look like in a 4 tier waterfall scenario that uses a catchup.
Comparing the four waterfall scenarios shows that depending on what your role is and what your expectation for the overall venture return will be, the ideal waterfall could be different.
Hey, thanks for checking out my course.
I am a real estate and startup business consultant based out of Los Angeles CA.
I currently help startup founders and small business entrepreneurs build financial models and projections for their businesses and private real estate investors with their acquisitions analysis and deal structuring. Please message me directly for consulting requests.
Previously, I was Head of Marketing Analytics at the Panda Restaurant Group after first serving as a senior financial analyst leading real estate and new store underwriting efforts.
Prior to that, I worked on over $400M in commercial real estate investments at a private equity real estate fund. Before that, I worked as a manager of a global M&A unit for a Fortune 80 company.
I am also a cofounder of LearnAirbnb, a consultancy and research group specializing in the home-sharing economy.
I graduated Magna Cum Laude in Computer Engineering and Economics from UC Irvine and hold an MBA from Stanford University.