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Understanding Equity Splits: Insights from TechStars (Part II)

Understanding Equity Splits: Insights from TechStars (Part II)

Nov 18, 2011

By Carlos Desdema, Audra Bowcutt, Avi Yaar, Tom Rose

Part II

6. Is equity (stock or options) an incentive you have offered or are willing to offer to hire critical (non-founder) people?
A staggering 79% of respondents indicated having offered equity to non-founders. No respondents were unwilling to do so. This indicates a very strong tendency of TechStars companies to use equity for critical hires.

In contrast, only 54% of the Y Combinator teams used equity for making critical hires. This could be explained by differences in locality or in the maturity of the companies in the sample. Interestingly, the Boston-based TechStars companies only offered equity to their hires in 67% of cases (much closer to the Y-Combinator proportion.)  Respondents in Boulder, Seattle, and NYC offered equity to critical hires 91% of the time!  It is this extreme response that creates the disparity between TechStars and Y-Combintor.  It appears that non-Boston, non-Silicon-Valley companies are the ones giving equity with high certainty to critical hires.

 

7. With regard to key hires (i.e., not the original founding team), how important were each of the following factors when considering how to assign equity?
The results of the key factors influencing employee hires getting equity were quite surprising to us. The question was structured such that instead of allowing free text answers, we used the buckets that the Y Combinator survey identified as the possible answers to this survey, and allowed people to rank each answer from most to least significant/deserving of equity. Of the top four results (those most important in assigning equity to the employee), all but one (‘Date employee joined the team’) are forward looking metrics (ie. metrics that depend on future value), and of the bottom four results (those least important in assigning equity to the employee), all of them are backward looking metrics (ie. metrics that depend on past contributions).

This question, together with the previous one, reveals one of the most surprising and important results of this survey. It indicates that while founder equity is assigned according to past contributions, employee equity is assigned according to future contributions. Ideally, equity should be provided as an incentive for future performance for both founders and employees (which is why vesting equity is so important as an incentive for continued contribution). From the results of this survey, we would advise founding teams negotiating equity to look at each other as future hires, rather than as an already-existing team. Contributions prior to the equity split can be compensated monetarily once the company earns cash. We recognize the difficulty of instituting this type of policy, but that difficulty should be weighed against the common problem of absentee founders and the possibility of lawsuits based on disagreements over equity.

8. Were stock options presented in terms of dollar value to potential employees?
Similar to the Y Combinator’s results, with 72.4% of the respondents selecting ‘no’ the vast majority of ventures did not present stock options in dollar value terms.  

In the optional text field respondents mentioned that they had discussed presenting the equity in dollar-value terms, but were not able to accurately define an agreed upon value at their early venture stage.  Others commented that the benefit of providing employees equity is the future upside, not the current value, presenting the stock options in dollar-terms did not make sense to their founding team. Lastly, if the venture is an LLC, they are required to use “Profit Units,” not dollar-value.

9. What percentage of pre-series A equity do you think should be allocated for employee (non founder, non advisor, non investor) incentives?
As the bar chart above highlights, the answers to this question vary significantly; this result may be due to the free-text entry standard which allowed for answers between 0-100%. This entry standard was selected by the research team to avoid a potential survey anchoring bias.

Like Y Combinator, the most popular survey response by far is an equity option pool of 10% for employee incentives, with half of the respondents entering this specific percentage.  There are a few outliers, including an extreme 75%, as well as a 1% and 2%.  

10. Please describe as much as you’re willing to share about your equity split history.

* To the best of our knowledge, TechStars does not negotiate the 6% equity they take as entry into the program. Values below 6% in our survey were from dilution due to follow on investment.

Our findings for this question largely mirror those of the Y-combinator survey. We were also able to identify the average equity stake investors took (for thoese companies who had already raised some money). Although this value seems fairly low, it may be reflective of the fact that TechStars companies tend to be early stage, and often require pre-seed and angel funding before moving to the larger equity stakes involved in VC funding. We also got data for how much equity was assigned to non-founder employees for companies that did not maintain an employee options pool. These were mostly CEOs, but also included development and technical partners.

11. In retrospect, was there anything you would have changed about how you split your early equity?
Most respondents said they are happy with their equity split arrangement and would not make changes.  A few mentioned they would like to have included a vesting period, with one even mentioning a drop-out founder who held equity due to the lack of a vesting agreement.  Others felt they should have negotiated harder with their VCs to get a bigger piece of the pie. 

The most surprising were two responses debating over the whether or not to equally split the equity among the founders.  Specifically, one respondent said “Yes. NEVER EVER EVER spilt equity 50/50 in the beginning. Or at least, if you do, make sure you are both on the same page Re: risk appetite and commitment level.” The other respondent was more tentative and said “tempted to say I would have just split evenly and not negotiated with other founders at the onset.”

 

 


 

Acknowledgments
The team would like to thank David Cohen (CEO and Founder of TechStars) for his generosity in posting our survey to the alumni Facebook page; as well as all the TechStars companies that participated in the survey. In addition, we’d like to thank Jeff Vyduna, Manuel Duenas, and Alexander Angerer, for offering us access to their paper on the Y Combinator results. Finally, we’d like to thank Prof. Matt Marx and Miro Kazakoff (TA) for providing us with useful cases and insight into the entrepreneurial dilemmas and giving us the framework through which we analyzed and reported on our results.