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Background

I'm doing some due diligence regarding a US registered (Delaware C-corp) tech startup in Europe, where the founders are located and living in the EU. Although the business idea is very good, there are already operating competitors, while this company is still in the development stage.

As I provide VC access and some decision say, I am a bit concerned about the "team" as the founder and major shareholder has a great fear of share dilution and thus not willing to give his 3-5 team/partners more than 2% after 5 years with a SAFE agreement. This seem quite extreme as the company's present share value is only $100, does not have any products, has not yet been funded nor have any capital. As a European, I seriously doubt someone can remain motivated enough to drive a company forward under these terms.

Question:

What are the typical/acceptable share distributions for these types of contracts?
(Assuming the initial core team of the company will have 3 people.)

not2qubit
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2 Answers2

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If you watch episodes of shark tank, you might gain some insight into the uniqueness of deals that are dependent upon a myriad of other factors.

Having to choose, the three will typically split the equity in the company equally. That is smart because if you are a 40%, 20%, or 10% owner of a failed business it really doesn't matter. Also, on the flip side, if you build a business that is worth 100 million are you good with owning 10% of it? Probably although feelings might get hurt. So independent of percentages, all the partners win, if one wins all lose if one loses. So it is best just to be equal.

However, what if three people start a company where each brings a necessary skill but only one provides funding? That person that provides the funding should probably own more of the company. What if one person brings in existing business and desires the other two to help expand? What if one person cab generate more revenue?

There are many factors that can influence a different split then an equal one. Having it all in writing with contingencies is a great first step in making a startup a success.

Pete B.
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Often, an equity agreement is based on whoever will contribute most to the company’s ultimate success.

For example, if Bill Gates were to do absolutely nothing other than invest a nominal amount of money attach his name to the company so that you could capitalize on his name and clout, that would still be worth a substantial chunk of equity, probably even a majority stake.

If the science and technology is so esoteric that the scientist or technical founder is the key to everything, and the company could raise capital from numerous sources, then the VC money is not worth as much equity as the technical founder’s share.

If they can’t get money anywhere else, then VC money is worth more when you’re the only one willing to invest.

So ask yourself and everyone who will ultimately ensure the success or failure of the venture and decide accordingly. Basically, it’s whatever you can agree on.

Rocky
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