The starting point of our venture journey requires leaders who are irrevocably committed. And demonstrate their commitment.
We’re glad to respect this sacrifice by assigning equity to this group of co-founders (as well as stock options to a broader employee base) which will cumulatively be between 35-50% at inception of a company. This is without any expectation of investment of their own risk capital. And a salary (though significantly lower than corporate levels) which is assured through the kick-off stage.
How’s the rest of the equity assigned? Roughly 5% for Prototyze CXO’s collectively, roughly 5% for CXOs at Innerheads (our business services company which serves all ventures) collectively, and between 40-50% for Prototyze. [Why? See Chapter 4.1: How is Equity Distributed For a New Venture?]
This equity assignment is NOT a rigid number we are fixated on. But is based upon a forecast of who contributes what. So the actual estimate could be different based on facts specific to a venture.
On what basis could this change?
- The number of venture co-founders. Example: 4 very experienced co-founders could have equity of 10% each (or 16%, 12%, 8% and 6%…or whatever) Counting another 8% for ESOP pool makes it 48%.
- The credentials of the co-founders. Example: A set of relatively less experienced co-founders would mean that we may need to provision for a higher ESOP pool to factor-in having to hire experienced Business Heads to scale later. This may mean that co-founders have 14%, 10%, 6% and 5% but the ESOP Pool is say 15%.
- The risk that the venture co-founders are taking (and commitment they are displaying) in terms of a percentage cut from their previous salary. For instance, one co-founder who was getting paid Rs 45 lakh per annum may join at Rs 24 lakh, but another who was getting paid Rs 75 lakh may also join at Rs 24 lakh per annum, clearly signaling a deeper financial sacrifice.
- The equity for venture co-founders may also be ratcheted-up post-facto based on performance. Or ratcheted down in case of a premature departure.
The numbers above are assuming that all key CXO co-founders join from inception of the company at its earliest, most uncertain stage. But what if a CXO joins much later? Then we need to factor-in the much lower risk that a CXO is taking when they enter the venture. Such a ‘late-joining’ CXO mitigates their risk and consequently as a percentage gets much less.
For instance, if she would have been assigned say 10% equity at inception, she may perhaps be assigned 2% if she joins two years later. However, happily enough, that 2% may not in value terms be one-fifth of what it would have been to get an 10% at inception. Because the value of a company since inception may have grown 2X or 4X or even more.