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How do we divide equity?

I have the built a software product which needs to be sold to enterprise B2B customers. I have bootstrapped the business myself and I’m incurring all expenses. I’ve spent more than 10 months in building the product. To reach to the marketplace, I’m working with more than 10 to 15 people to help me reach the contacts so that we can sell the product. Many of these people are good with getting a revenue share of the sale.

However, many of these people want equity in the company for helping me win business. I’m thinking that the potential revenue for my company is around $5 million.

How should we divide the equity from these influencers? I want to divide the equity based on the performance of the individual?

My current thinking this that we will allocate 30% of the equity for sales/customers/revenue. So, if someone gets $50K deal, they will get $50K/$5M multiplied by 30%. Is this a fair approach?

Is there a better approach?

  • Think of it this way. It’s like hiring a vp of sales that closed a 5m deal and then he walks away with 30% of the company never to work again. Is that worth it to you?

    In general equity should only be given for long term commitment although in strategic cases it can be used to incentive. IMHO 30% is way too much. Perhaps 5-10% and only for deals that put you on the map.

    Reply

    • Following up on my comment above. The guy who mentioned % of the profits below has it right. Its the best way to align incentives. You could even give them an “outsized” percentage of the profits for being an early advocate, but the business that they brought in that initially brought in 50K of profits could eventually bring in 50M of profits over its lifetime and make the guy who brought you the deal rich.

      Of course its not as clear cut as what is the definition of profit? Hollywood is a text book case of making tons but yet manage to show no profits on the book.

      Reply

  • Don’t give outright equity, it gives the salesperson an enormous incentive to close the deal even if it’s a bad one for your company. Instead, promise the salesperson %X percent of net profit for the customer, for the lifetime of that customer. That way the salesperson also has a big incentive to keep the customer happy.

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  • Make a LARGE poster board with 1,000 squares on it.

    You take your portion of squares what you think you’re worth

    before the contest starts.

    Let the other people earn squares of equity through sales

    performance over the next 6 months. After 6 months ,

    the equity game is over.—— Next problem ?

    Reply

  • You are doing the bulk of the heavy lifting, are you not? Let’s say you find an advisor/mentor who can open his Rolodex and get you some serious financing? They deserve a taste of the pie. The maximum I would offer would be in the .05% – .075% range. Anything more than that, and you are giving away the farm…

    At the end of the day, all you’ve got is your equity and your IP. Don’t spend it like a drunken sailor on his first shore leave.

    Reply

  • Couple of points to add onto the great answers here – Create a pool of Phantom Shares in the company equaling maybe 15-20% of the equity. They don’t have voting rights nor can cannot be converted without an event (buy-out, vesting, go public, retiring, etc.) – these are to be distributed to you long term valuable players as others commented. For non long term but valuable players create a commission structure averaging 5-10% for initial sale (minus hard costs of customization etc.) and 2-3 % for lifetime of customer as long as they are employed or contracted by you. Would have a sales contract for both employees and partners outlining this as well as details of sales rules of engagement to keep bad sales out.

    Just a couple of thoughts

    Reply

  • Frank Demmler at CMU has a very interesting means to quantify equity calculations – I’d look at that to get a guideline on what sales are worth.

    Hint: it isn’t zero, but it isn’t very high either. Unless the salesperson is connecting into huge, must have customers which are not accessible in any other way, it simply doesn’t make sense to give out any substantial portion of equity for sales.

    Reply
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