When you raise money, you reserve some pool of stock to be issued to additional employees, and also to founders as incentives and bonuses. So there is a way that you can get some additional shares of the company as a founder, if your Board of Directors agrees that you deserve some additional stock compensation. However, you won’t actually get stock. You’ll get stock options, or the right to buy stock, rather than the stock itself. Hopefully you’ll get the right to buy stock at a price that is lower than the price the stock is selling for when you exercise the stock option.
For example, if you got options to buy 1,000 shares of stock at $1 per share, and after a few years the stock was worth $10 per share, you’d then be able to pocket $9,000—you’d exercise your options for $1,000 total and immediately turn around and sell the stock at $10,000. You’re issued stock options (and not stock) for tax reasons. If you were just issued $1,000 in stock, from the IRS’ perspective that would be as good as getting $1,000 in cash, and you would be taxed accordingly, even though you didn’t have the actual money. A stock option is not taxable as income until you exercise it.
What percentage of the company should each partner in a new venture receive? This is a tough question with no easy answer. In terms of percentage points, what’s an idea (or invention or patent) worth? What’s five years of low salary, sweat and intense commitment worth? What is experience and know-how worth? “Who should get what” is best determined by considering who brings what to the table.
Suppose Bill Gates said he’d serve on your Board or give you some help. What share of the company should he get? Just think about the value that his name would bring to your company! If a venture capitalist thought your company was worth $1 million without Gates, that value would increase several-fold with Gates’ involvement. Yet, what has he “done” for you?
Often, company founders give little thought to this question. In many cases, the numbers are determined by what “feels good,” i.e., gut feeling. For example, in the case of a brand-new venture started from scratch by four engineers, the tendency might be to share equally in the new deal at 25% each. In the case of a single founder, that person may choose to keep 100% of the shares and build by bootstrapping in order to maintain total ownership and control. It may be possible to defer dealing in new partners until later, at which point the business has some inherent value, thus allowing the founder to maintain a substantial ownership position.
So in general, the answer to the question “who should get what” is this: it depends on the relative contributions and commitments made to the company by the partners at that moment in time.
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