Singapore Startup Company : 3 Tips to note when negotiating founders equity at the start

Each Singapore Startup Company founder has asked us this question many times and we have decided to write a short article on this very pertinent question.  We have spent some time thinking hard about the question and feel that sometimes equal equity between the founders is not reasonable given the differing amount of effort that each founder intends to put into a new venture.

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”  –Steve Jobs, Co-Founder, Chairman and CEO, Apple

#1: Planning for equity for the internal term versus investors

When planning for your startup as a founder, you should assume that you have 80% of the equity left for the founders and 20% of the equity to be given to a seed/angel investor. 

For the founders, one idea that has been advocated should divide up the equity as follows:

• Half for shares that are actually paid for by the founders in cash;

• Half for shares that are in the form of sweat equity and as a result subject to a vesting clawback if founders leave the company during the vesting period.  For this portion, you should also spend some time thinking about roles and responsibilities.  I would suggest that everything in this bucket be KPI driven such that if a particular founder does not pull his weight, then the rest of the founders should acquire that founder’s shares. 

Key Tip: Draft a vesting agreement or include a vesting provision in your shareholders’ agreement to allow for the founders to acquire shares of the other founder that does not pull its weight.

“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life and that is why I succeed.”  –Michael Jordan, NBA Legendary Basketball MVP

#2: Planning for equity for the founding team

You need to spend some time brainstorming on what are the key roles for your startup.  For a VC investor the key to investing will be a mixture of: (i) the business model of the startup – i.e. whether it can mark money and grow fast; or (ii) the operational talent of the startup.  If your startup does not require deep technology, for example a CTO co-founder is not necessary as you can clone or outsource the technology development.  These are business model innovation driven startups like Tokopedia and Grab at the onset where they could use clone websites/apps to launch their business. 

#3: Planning for equity for the internal term versus advisers

Many people spend hours arguing with their advisers on what amount of sweat equity to give to them for advising their Singapore startup company.  You also know that some advisers can be helpful in opening doors to investors and strategic shareholders. 

One quick tip that I would suggest would be to look at the FAST Adviser Agreement.  If you need help tweaking it, do contact us.

In conclusion, dividing up shareholder equity is important as it together with team formation will determine whether your startup will grow or die quickly.  The process of discussing shareholder equity split will also tell you a lot about your co-founders.  If they do not agree to a fixed key performance indicator (KPI) to get the startup off the ground for their contribution to the startup, it is likely they may not pull their weight for your Startup Company.

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