Entrepreneur Office Hours - Issue #105
Entrepreneur Office Hours - Issue #105
What's the right amount of equity?
Entrepreneurs love to obsess about the amount of equity they get in their startups. And I can certainly understand why. After all, if you’re successful, you deserve to have your hard work and efforts properly rewarded.
Unfortunately, there’s not always great answers for the best way to divvy up equity or the right amount of equity to ask for when joining a startup. Then again, lack of a definitive answer has never stopped me from giving some sort of answer, which is the case in this issue’s Q&A where a reader wanted my advice on how much equity to take for a startup he’s considering joining.
Also, since this is a Tuesday issue of Entrepreneur Office Hours, it means you’re getting a new episode of Web Masters. Hooray!
I promise, it’s a great one. It’s a conversation featuring Mike Davidson, founder of Newsvine. We talk a lot about what he built, and we also talk a lot about the relationship between journalism and social media, which, obviously has its… umm… challenges.
-Aaron
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The Designer Who Re-Built Journalism for the Digital Age
Before people expected to get news straight from social media, there was Newsvine, a social news platform where anyone could get paid by being a citizen journalist. Hear the story of how Mike Davidson built it on the new episode of Web Masters.
Listen now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
FROM THE ARCHIVES…
The Trick Question Investors Love Asking Entrepreneurs
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Office Hours Q&A
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QUESTION:
Hey Aaron,
I am new to your newsletter, but it will certainly be a great piece of advice for my future start-up.
Talking about startups, I am going to start some talks with one which proposes that I become a Tech co-founder without salary but receiving equity instead.
For me it is ok, but I was wondering which percentage of equity I should aim for, knowing that the founder(s) built an extended landing page presenting the project, explaining how it will work with some basic options to demo their marketplace app.
I would appreciate it if you can point me to some links on the subject to explore my options.
Best,
Christian
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I don’t think I need to point you to any links. The answer to this question is quite simple. Here it is:
Don’t take a fraction of a percentage less equity than the amount of equity you think is reasonable in exchange for your participation and efforts.
OK… I admit this answer might seem like a cop-out, but I genuinely believe it’s the right answer. If you’re not getting compensated with an amount of equity you believe you deserve, then you’re not going to be satisfied and, at some point, that dissatisfaction is going to cause problems. And it’s not just going to cause problems for you. It’s going to cause problems for everyone in the company. Better to sort out those potential issues early rather than wait for them to fester and cause bigger problems later on.
To be clear, the other people in the company might disagree with the amount of equity you believe you deserve. As a result, you all might not be able to come to an agreement, and you might not be able to work together. That’s OK. In fact, that has to be OK. You have to determine your minimum, and then you have to be prepared to walk away if the startup won’t meet your minimum.
If it’s helpful, before I finish my answer, I will offer one somewhat concrete piece of advice. That’s to warn you that people in your situation tend to ask for more equity than they should. It’s not because they’re bad or don’t deserve more. It’s because they aren’t fully considering how the equity splits within companies actually work. If you get too much equity, it can prevent the company from doing the things it needs to do in order to be successful down the road. Longterm, that’s not in your best interest, especially if you’re taking a significant chunk of equity.
Still, the only person who can determine how much equity you’re willing to accept is you. Choose your number, and stick to it. You might be disappointed in the short term if you and the company can’t strike a deal, but I promise you’ll be happier in the long run.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!