Reflecting on my 25 years of entrepreneurial endeavors, I’ve experienced the entire spectrum of business outcomes with numerous startups. Some ventures flourished, others lost their appeal, and many failed.
However, each one taught me invaluable lessons that shaped my approach to future ventures. One pivotal insight I’ve embraced centers around equity sharing. Should you hold it tightly or share it generously?
The question of equity distribution is a key factor in the success or failure of a startup, as it influences the motivation, engagement, and commitment of all parties involved.
Key Takeaways (TLDR)
- Sharing equity as a valuable strategy: Generating vested interest in your company’s success boosts the likelihood of thriving.
- The significance of proof of concept: Maintaining 100% equity can impede a startup’s growth, especially when founders bear the entire workload.
- Dispelling the myth of infallibility: Equity sharing entails recognizing that you may not be as brilliant as you think and encourages seeking validation from others.
- The fallacy of the mastermind: Success stories of solitary geniuses can be misleading; many thriving businesses involve teams of dedicated and invested individuals.
- Differentiating between needing and wanting help: Acknowledge the worth of various talents and expertise within your team and be receptive to sharing equity.
My Personal Experience with Equity Sharing in My Own Startups
In my early days as a startup entrepreneur, I jumped in with both feet, immersing myself in the vibrant ecosystem of ambitious, like-minded individuals.
I attended local meetups, visited the This Week In Startups podcast studios, and participated in major organizations and accelerators such as Y Combinator and Techstars.
As a novice among seasoned professionals, I absorbed their wisdom like a sponge, treating their advice as gospel.
The adage “It’s better to have a small piece of a big pie than a big piece of a small pie” struck a chord with me, and it has since become one of my guiding principles for startups and businesses alike.
The underlying concept is simple: sharing equity with others creates a vested interest in your company’s success, increasing the likelihood of prosperity.
Conversely, hoarding equity and offering little incentive for others to invest their energy and skills may hinder your startup’s growth—especially when operating on a tight budget.
The story of Google’s early employees receiving equity shares that turned into millions of dollars exemplifies the power of equity as a motivator for success.
Proof of concept.
A recurring theme I observed was founders who retained 100% equity in their startups, often shouldering the entire workload themselves.
This trend was particularly prevalent in software and tech startups, where founders with programming and engineering skills could single-handedly manage the entire process.
Take, for example, the early days of Facebook, where Mark Zuckerberg initially retained a significant portion of the company’s equity.
I found solace in this approach as I was handling everything—from branding and marketing to business plans and development.
My motivation was two-fold: a clear vision of what I wanted and a frugal mindset to save money until I had a proof of concept or working demo.
I believe many founders cling to their equity because they feel that they deserve the entire reward since they conceived the entire idea.
Reflecting on my experiences, I’ve had my fair share of small, unsuccessful ventures where I retained 100% equity, i.e., a big chunk of nothing.
If I could turn back time, I would approach these startups differently. I would certainly share much more equity where possible.
There’s a strong possibility that many of these ideas may have progressed further beyond their initial stages if I had been more open to sharing equity from the outset.
Distributing equity isn’t as simple as handing it out like candy and expecting people to show up, tools in hand, ready to bring your ideas to life.
One of the initial challenges is convincing talented individuals that your equity is worth their time and effort. People are generally willing to work for equity, working for free initially, only if they genuinely believe in the idea.
If you struggle to find individuals passionate about your idea and willing to work solely for equity, it may signal deeper issues with your concept than you initially realized.
This brings us to the second challenge: the illusion of infallibility.
The infallible genius
We’ve all experienced that moment when we believe we’ve come up with a groundbreaking idea that doesn’t yet exist. It’s easy to think, “How can I be the first to conceive this idea? I must be a genius.”
Once this thought takes hold, it’s tempting to seek validation exclusively and subconsciously avoid criticism or opposing viewpoints. This mindset can lead to defensiveness when others question your idea’s feasibility or likelihood of success.
The worst-case scenario occurs when you proceed with an idea that has either not been critically examined or has already been met with skepticism.
In an even more troubling situation, you may surround yourself with people who aren’t candid about their true feelings, leading you down the wrong path.
Sharing equity also means you’ve come to terms with the fact that you may not be as brilliant as you think, and it compels you to seek individuals who validate your idea’s potential.
Secondly, it ensures that people are willing to sacrifice their time and resources to help transform your concept into a thriving business.
By embracing the concept of shared equity, you can create a strong, dedicated team that propels your startup towards success, or you might find that you’ve saved yourself from wasted time and effort on an idea that was unlikely to succeed.
If you ever find yourself sharing your idea and end up having to say, “But my idea is different,” it’s the first sign that there is a problem you have yet to uncover. That doesn’t mean it’s a bad idea.
However, you likely need the help of others to flesh out what truly makes your idea uniquely different.
Trust me when I say that, out of the hundreds of ideas I’ve pitched, most have ended with me arguing just that, and thankfully, my trust in the opinions of others has pulled me out of the murky depths of the infallible genius.
The problem with the idea of masterminds
Some of the greatest success stories—Zuckerberg, Jobs, Gates, and Musk—involve lone geniuses transforming their ideas into world-renowned brands and creating some of the most wealthy and powerful individuals in the world.
The actual success stories are less glamorous. They involve armies of dedicated, invested individuals working together to build successful businesses.
The story of the mastermind who led their startup to global success is either very rare or often not what happened and can become a misleading example to follow.
Looking back on my earliest startups, I recall the monumental challenges I faced as a one-man show.
Eventually, the workload becomes too much for one person, and opportunities slip through the cracks.
With each new venture, I gradually shared more equity with key contributors, and, like clockwork, every business grew larger and more successful than the one before.
Needing help vs. wanting help
Embracing the wisdom of sharing equity may initially seem daunting as you weigh the pros and cons of seeking assistance versus handling tasks independently.
Many startup founders believe that if they genuinely need help, they’ll take action to find it.
On the other hand, if they merely want help, they’re willing to sacrifice it and manage tasks alone until assistance becomes necessary.
The issue arises when, in the interest of retaining equity, founders convince themselves that their needs are mere wants.
A prime example of this mindset, particularly among engineers and designers, is the belief that they don’t require salespeople.
It’s a misguided assumption to think that because you intimately understand your product and technology, you’re the ideal salesperson for your business.
Drawing from my experiences, I’ve discovered that individuals who may not possess the same depth of knowledge as founders can still have a natural ability to sell the product or business more effectively than those intimately familiar with it.
When considering the value of sharing equity, it’s essential to recognize the diverse talents and expertise your team can bring to the table.
Doing so can foster a collaborative and dynamic environment that drives your startup’s success.
Don’t let the fear of relinquishing control and equity cloud your judgment. Instead, embrace the potential for growth from pooling your team member’s unique skills and commitment.
The strength of collaboration and shared motivation will propel you forward, transforming your entrepreneurial dreams into reality.
Equity for Funding
Sometimes, it’s not about finding people who will work for equity but finding people who can fund your ideas into reality.
Pitching to investors who can fund your idea can be substantially more difficult than finding partners because investors have a greater understanding of the markets to determine the feasibility of your idea and its potential for success.
For instance, the story of WhatsApp showcases the importance of equity distribution.
Jan Koum offered generous equity shares to his first co-founder, Brian Acton, who convinced five ex-Yahoo! friends to invest $250,000 in seed funding.
The funding allowed them to approach WhatsApp as a business rather than a product by hiring staff to help develop the product and grow the business.
This was the first initial step among many that contributed to WhatsApp’s phenomenal growth and its eventual acquisition by Facebook for $19 billion.
I myself have faced the dilemma of choosing between $25k for 5% equity from one source vs $300k for 60% equity from another source.
At the time, I probably did value my business properly at $500,000 after all, I did manage to convince two investors to invest $50k total in our first round, but as it would turn out, $50k would barely last 6 months which would lead to a cascade of other problems, eventually leading to the collapse of our startup.
Understanding the value of shared equity means recognizing that a company’s success is a collective effort.
As a founder, attracting and retaining top talent is crucial to offering an equitable stake in the company.
This incentivizes your team members to invest their skills and energy into the business and creates a sense of camaraderie and shared purpose.
Effectively leveraging the talents and commitment of your team members involves acknowledging and rewarding their contributions.
By offering equity, you give your team a tangible stake in the company’s future, inspiring them to work harder and smarter towards the common goal of success.
Once you have an idea or business where people are actively knocking on your door desperately looking for a piece of equity in trade for their hard work, you can rest assured that you probably have a great idea.
In conclusion, a startup’s equity distribution plays a crucial role in its success or failure.
By sharing equity with your team members, you create an environment where everyone is invested in the company’s success, fostering collaboration, innovation, and growth.
By studying the examples of successful startups, understanding the value of shared equity, and effectively leveraging the talents and commitment of your team, you can turn your entrepreneurial dreams into a thriving, sustainable business.
Frequently Asked Questions
What is the average equity share for a startup?
The average equity share for a startup varies significantly based on the stage, industry, and region, but in the early stages, founders typically retain 50-100% before raising external capital.
How should equity be split in a startup?
Equity in a startup should be split based on factors like contribution, roles, risks taken, and future commitments, ensuring fairness and motivation for all parties involved. It’s important to remember that equity can be a great motivator and increase the productivity of key contributors.
How much equity should a founder get in a startup?
A founder’s equity in a startup typically ranges from 50-100% initially but dilutes over time as they raise funds from investors and onboard key personnel. Founders usually never go below 50% to ensure they have majority voting rights regarding board decisions.
Do all startup employees get equity?
Not all startup employees receive equity; however, it’s common in early-stage startups to offer equity as part of compensation to attract and incentivize talent.
Branding & Marketing Evangelist Namanh Hoang is a business, startup, marketing, and branding blogger with over 30 years of experience working with today’s top brands across all industries, from luxury fashion to consumer electronics. He has published research papers in the field of branding in Sociology Scientific Journals. His lifelong passion for gaming and anime led him to serve as an industry advisor for Intel, AMD, NVIDIA, and Microsoft as a youth culture marketing and branding expert.