Startup-Sutra-4.1: How to manage your equity?

Opening a startup teaches you many things and researching over some taught me many things. Equity sharing is one of those learning. Let’s start a hypothetical startup called “DiscoverYou”. It has been started by you and you have done some initial work on it like some market research or initial product designing. It looked amazing and you thought about going forward with it with whatever money you have right now.

Let’s us discuss the stages involved in my first article of two article series- How to manage your equity?

Stage1: Your Company is still un-registered, but you have started gaining some value out of it. You look happy and have not thought about equity yet. Don’t worry just chug along for some time and enjoy the feeling of being your own boss. :-)

Stage 2: Phew! It’s harder than you thought. What to do? Idea, let’s get a co-founder. You find someone who can help in making the prototype little better and is as crazy about your idea as you are for it. You find someone and discuss the idea with that person. She gives you a lot of input and you know she is the one for your company. You ask her to join, but the issue is that you can’t pay her, so you tell her that she is 50 percent owner of the company and whatever company will earn in future, she can keep 50 percent of that value, if required.

Soon you realise your breakfast is cornflakes with milk, lunch is only cornflakes and dinner is cornflakes with beer. And after few days instant noodle becomes your perfect partner. Man, you seriously require some funds to run the business.

Stage 3: Since you are still private, you can’t ask money from public and that to for a prototype that is still not finished. So, you welcome your family members. Your elder brother approaches you with some of his savings of around Rs.50, 00,000 and decides to give him some equity of your company, let’s say 5%. Now you can afford some food, space and time to develop your product.

But what happened to the equity which you shared with your co-founder?

It gets little diluted now. You have already given 5% to your elder brother and you decide to keep aside 20% equity for such investments in future or for your employees and investors as you have decided to register your company. You name this share as Option pool. You are left with 80% of share, which is equally split between you and your co-founder.

Stage 4: It’s time to approach an angel investor. He looks like a nice person and want to invest in your company, but he just wants to know how much your company worth. You give your best case scenario and tell you see the valuation of Rs. 10 crores. Whoa! That’s huge. He makes some mental calculation and shows his importance and tells he is ready for investment and seeing your valuation decides to invest Rs.2 crores into your company. 

So technically, is he asking 20% of your share?

No, actually you give shares after you receive money so he gets 2,00,00,000/12,00,00,000 i.e. 1/6 of the shares are given to the angel investor.

And, your share contains the option pool which has now become 16.7 percent of the total valuation from 20%. So, you and your co-founder is actually left with 62.3% share i.e. approximately 31 percent each.

Equity shared by You+Co-founder, Angel Investor and Elder Brother
Right now, you have enough money to make your prototype into a final product, hire some workforce and work on your market which you are targeting. Marketing about the product won’t hurt and will create some awareness. Your website should be up and running in near future and you if you are too tech savvy, you and your team should be working on an app.

Till you do all these things, let me take a break and come up with other steps to follow in the next article. Till then work hard and #DiscoverNewInYou. 

If you missed any of the previous parts:

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