Don’t forget the “sweat” in sweat equity…
Before dividing up the ownership amongst your team, step back and think about the future.
Yes, all the work done to date has been important. Without all that work, there wouldn’t be a company to be talking about. However, the company right now has very little value. It’s all about the potential of what it may become, not what it is now.
To make this company valuable is going to take years of effort, likely by a team much larger than the one sitting around the table.
It typically takes three or five or seven or ten years for a startup to “exit,” turning the theoretical value into actual cash. Hypothetically, let’s say it gets acquired in year five. That wouldn’t happen without all the sales from year three. All the marketing in year two. All the product creation in year one. All that work, from Day One through Year Five is just as necessary as the work done to date.
The value of the equity is thus not a division of what has been done to date but rather is a split of all the effort, from start to finish.
RULE 4:
Creating a valuable company takes years. The value within the equity includes all that effort.
Who from this founding/early team is still going to be working at the company in year five? Full time? The whole time?
Everyone asking for equity should be asking themselves that question and thinking about what value they will be bringing for all those years, rather than just about the value they have brought to date.
