Lunch & Learn – Co-Founders and Equity Arrangements

by | May 31, 2021 | Alternative Commerce

Transcript

Are you looking for an equity investor or searching for a Co-Founder?

Think different. That’s our challenge to you. Alternative Commerce is our vision for a better way to do business. One that unlocks all sorts of opportunities for you to grow your business.

Welcome to our sixty:forty weekly live training webinars that we host every single Thursday from 12 noon, Gold Coast Australia time. We want to introduce you to things for you to consider when seeking a co-founder or equity investment for your business. When done well it can be used as an amazing lever to power business growth.

The right team

There are a tonne of different factors that support a successful startup or starting out business. However, finding – developing & building the RIGHT team is an essential of the foundation to making it so.

CB Insights put out a stat that said that 23% of startups fail because they did not have the right team. Now that is something that highlights the absolute importance of building a team you can rely on. (https://www.cbinsights.com/research/startup-failure-reasons-top/)

Improve your chances of startup success by having more than two founders on a team. An older Startup Genome report that was built from data from more than 650 startups found that:

  • a balanced team of one technical founder and one business founder raise 30% more money
  • have 2.9x more user growth; and
  • are 19% less likely to scale too quickly.

This is truly a case where 1 + 1 can be greater than 2.

Seeing some of the numbers floating around on funding it can be easy to be super overwhelmed. Taking on an equity investor is not something that should be taken on lightly.

The goal for today …

The big thing that I want you to walk away with today is a clearer, but high level understanding of just what having an equity investor might means for your business.

Here at sixty:forty we focus on small business because of the impact it has on the owner and on communities. Some of these topics we’ll move through quickly today. Later in the year we will be taking a deep dive on some of these topics..

Considering taking on a co-founder or an equity partner is a major step. It is kind of like a business marriage. It is definitely not something that should be taken on lightly.

One of the things that you do need to develop clarity over is understanding the different stages of funding, where you fit inside them and how you might approach seeking funding.

We will also cover off on some of the different the options surrounding split of equity. That is how much will be issued and how you come up with an allocation.  

You’ll also learn how the structure of your business can literally make or break using equity as an option for you.

Once you have made the decision to actually take on an equity investor, the next big thing will be how to choose a co-founder or an equity investor who complements your skill set.

We’ll also take a look at what are the types of questions you should be asking a potential equity investor or co-founder.

And last but not least we will run you through just how sixty:forty can help you find a co-founder or equity investor for your business.

What we are talking about today is an equity type of investment. This is something you might be familiar with. It is the ownership stake in your business. Equity Investments are those where you are exchanging ownership in your business for money or services.

Although you are often better to have 50% of something than 100% of nothing. Your choice of partner can also have significant bearing on the decision making process in your business so the decision to offer equity shouldn’t be taken lightly.

Let’s take a look at these now.

Co-Founder

If you have fantastic skills in one area and need to bring strength to a different area in the business then you might consider taking on a co-founder who has those skills. You can always hire on for a role but that will generally not bring with it the passion and incentive to really get the job done. However if you find a co-founder that is just as committed to the vision as you are can produce some exceptional results. A co-founder is someone who will take a share in the equity of the business based upon the vision for the future.

Equity

This is about the exchange of ownership equity for services performed or for bringing in strong relationships to the business to enable it to grow into the future.  For an existing company, there are strict capital raising requirements by the various regulatory bodies (for example, ASIC or the SEC).

Let’s now jump into what we are covering today.

The first thing that we will take a look at is the different stages of funding and just where you might need to look to find the cash to grow. But knowing which one is right for you can be a real challenge.

You don’t always have to go to banks to raise capital, there are a bunch of different sources. However, we would challenge you to think more deeply about what is the reason WHY you need the funding. If it is to pay for services there are other, alternative ways that you can get what you need. 

Startup Capital

Let’s start to break down this topic and kick off with just what is startup capital.

This is the seed money that’s raised through investments or bank loans to start a business. This cash can be used for anything business-related, from product development and manufacturing to marketing campaigns and office equipment.

After family, friends and personal financing options are exhausted, then you might need to consider a formal funding round.

Funding rounds are a series of investments that raise capital for a new business. As a startup expands and becomes successful, each funding round serves as a stepping stone toward greater growth.

Funding Rounds

What are the different types of startup funding rounds?

Funding rounds usually begin with an initial pre-seed and/or seed round, which then progresses from Series A to B, C and beyond. Depending on the type of industry and investors, a funding round can take anywhere from three months to over a year. The time between each round can vary between six months to one year. Funds are offered by investors, usually angel investors or venture capital firms, which then receive a stake in the startup.

We aim to add to the sources of funds as well with our sixty:forty platform by having our service providers leverage their skills and experience in exchange for equity and co-founding relationships.

Pre-seed funding occurs at the very beginning of a startup when the founders usually invest their own money. It is here that family and friends might kick in cash as you are starting to get your idea off the ground. And once you are past that, then you are moving into the realms of seed funding.

The seed funding round is when investors, usually angel investors, provide funds before a startup becomes operational. This is the idea phase of a startup when the founders are trying to perfect their product or service. Seed funding investments can range from anywhere between $10,000 to $2 million dollars.

In 2011 only 4% of companies raising a Seed round had revenue. In 2017 a whopping 51% of companies raising Seeds had revenue. That’s a massive jump and is only trending higher. Seed stage investors demand significant traction and material revenue, they demand real  product-market fit before they would invest. What used to treated as Seed rounds are comparatively now A rounds.

Round A & B

Round A is focused more on startups that have an actual business model that will elicit an immediate profit. Investors are looking for a high return on investment (ROI). In Round A, startups need to have an actual strategy for taking investments and turning them into long-term growth.

Round A investments can collect $2 million to $15 million. Typically, Round A investors are venture capital firms.

In an article from 2018, More than 60 percent of startups stall in their fundraising, according to an in-depth analysis of startup survival rates by Crunchbase News. The noted that it was much harder to raise a Series A than the subsequent B

After the development stage, Funding Round B signals growth. At this point, startups are expanding and have a foundation of consumers that is steadily growing. Round B helps startups transition into well-established companies. Round B can generate $7 million to $10 million. However, investments can far surpass that range.

The takeaway from here is that founders shouldn’t seek out seed funding in the wrong place and hit a wall. Just as investors don’t need to waste time on meetings that go nowhere.

Be realistic about where your company is in the earliest cycles of startup gestation and growth. If you’re generating revenue, you’re likely ready for a Seed round. If you are still finding your feet, identifying the perfect customer and building and refining your product… Pre-Seed capital is going to make the most sense for your business.

It is why our platform can help you approach funding in an alternative way especially at pre-seed and seed stages of funding.

One of the other big things to takeaway as well is to look past just the cash and see through to the best partners that will be right for you and your stage of business.

How do you work out the equity split?

This is a common question that comes up and there really is no single answer, every case is entirely different.

There are a number of cited reasons for unequal equity splits including:

  • You came up with the idea for the company
  • You started working before the co-founder
  • Differing experience levels
  • The MVP had already been launched
  • One founder drew a salary earlier

Y Combinator takes the approach that equity should be split equally because all of the work is ahead of you. It is their belief that equal, or close to equal equity splits among founding teams should be standard. If you aren’t willing to give your partner and equal share, then perhaps you are choosing the wrong partner.

If you have a fear surrounding break-ups with a co-founder then develop a vesting schedule. Something commonly done is to have a four year vesting with a one year cliff. By that, it means that while you might own 50% on paper, if you leave or get fired within a year, then you get nothing. After one year you get 25% of your stock and each month after that you get an additional 1/48th of the total stock. It is only then after four years that you can ‘earn’ all of your stock.

Their belief is that if there is more equity is can equal greater motivation. The sad fact is that most startups will fail and the more motivated the founders, the higher the chance of overall success. A larger piece of equity means nothing when there is no business.

Structure can make or break the Offer

A startup is all about execution and not the ideas. Getting the product to the market and developing traction in its use is what a team is about. An idea without action is nothing.

Your choice of business structure will affect how you can actually approach fund raising. It is critical … as the wrong structure will not allow you to even look at equity based issues.

This is a big one as it is fundamental and it relates to Structural Restrictions. The only type of entity that can offer equity is a company.

So if you are a partnerships or sole trader, in your current form, you will not be able to offer an equity based investment. If you wish to retain this structure, then you might need to consider an alternative form of opportunity, such as a Joint Venture or Strategic Partnership.

Otherwise, a company is it.

And with companies there is no one size fits all approach as there are different company types.

If you are seeking formal Australian crowd-funding then there is a special type of company that you must operate through in order to take advantage of the concessions that exist

Getting professional advice from a lawyer or an accountant in this space is essential to making sure that you are setting yourself up for success right from the start.

Finding a co-founder or equity investor with skills.

To start a search for a co-founder you need to be clear on what you are looking for.

Once you have found someone, then the actual hard work begins. That centres around making sure that you make the right choice of a co-founder. This is like a marriage, every decision will start as a joint decision and you have to manage and maintain the relationship and have shared values so that you can move forward. And supporting all of this is Trust. You have to trust your co-founder.

Running a business presents many different ways that can bring out the worst in people. When starting out, questionable ethics can permanently damage a business.

Forming a productive team, either as a co-founding team, or a owners team, is a critical step in the process of building a company – yet many people jump into these type of relationships without making sure that the other party is even on the same page.

And just because someone might be a person you’ve known for a long time, doesn’t necessarily mean that they have the right skills or that they will make the best partner in business. They might not either want the same things that you do either.

So it is important to discuss a number of topics right form the start. There’s a number of way to do this and it might be personality, behavioural, built around priorities or the roles and responsibilities that will be taken on.

Startups require a mix of skills sets. And while you might think there is a rush to bring the product to market, the reality is, choosing a co-founder isn’t something that you want to rush. Take your time. Sometimes  time invested at the beginning can pay major dividends later on.

The questions that we ask in our Team section centre on the matters of why do you want to be in business, and even more specifically why do you want to build a startups.

What motivates the team to achieve the result. And what makes the team uniquely capable of achieving the targeted end result.

These are looking for your view on what your team is bringing to the table. When you are building that team, this is exactly the same type of questions that you should also be asking to ensure that there is cultural alignment and a drive towards the vision.

Some of the ways that you can validate a potential co-founder, especially if it is someone you don’t know, is to treat it like a career interview. There are numerous topics written on this, and we believe that they mostly apply equally here.

You put a lot of effort into hiring key people and could invest days interviewing and checking out the potential employee. If you do that for hiring, why would you do anything less when finding someone to invest in your business.

What questions should you ask?

For that reason, you should ask lots of questions and truly get to know the other potential investor. You have to be comfortable with them. So what sort of questions would you ask?

Well some of the questions that you might think to ask would include

  • Have they ever been in business before?
  • What are they looking for out of the startup? – are they looking for a sustainable long term business, or something short term to scale up and onsell? What are their timeframes around this?
  • Ask them what they do with their free time, how they deal with stress and challenges that crop up.
  • Ask them what might be a surprising thing about them that they think you should know
  • Have they ever failed at something? If they did, how did they handle it and what were the lessons learned.
  • How do they approach something that they’ve never done before? How did they handle it and what were the lessons learned? What was the outcome of that new thing? Was it successful or not? How was the benchmark for success decided?
  • Is it a passive investment (so something that you just get cash for) or is it active, something they will seek to work in in order to be granted the equity?
  • Will the role be a primary activity for them, or will it be something they are doing on the side?
  • If its something on the side, how much time can they commit to the project?
  • What is the expectations surrounding their commitment to the project
  • Discuss how you might practically test a co-founder to ensure that they have the right skills that you are looking for.

On the personal side, will they expect to be paid? Or how will they manage their personal cash situation? Will you go on to raise outside money?

Where will the business be located?

Given the time that you will be spending with a co-founder, if either of you have spouses or partners, you will need to all meet to make sure things will not fibulate relationships. Plus it’s a great second opinion.

We have a whole list available to download if you want to from the hub – but the other things that you would want to explore include their view on working styles and culture and their views on the potential for future allocation of equity .

Ask for references and don’t be afraid to contact them and have a chat.

Above all, be explicitly clear about the roles and responsibilities of each of the co-founders or investors and have all of this documented.

How you divide up the equity and the reasons behind that apportionment also needs to be clearly documented and managed as well. You both need to be extremely comfortable with the reasoning behind the decision to avoid any issues later.

And that leads us directly into our next topic which is about the legal side of the relationship.

Getting the Legals Right

There’s many different situations that can come up and cause conflict. So if you take the time to thoroughly and openly discuss the possibilities before you start, conflict becomes a catalyst for change but that change doesn’t necessarily become negative or toxic.

A founders agreement In itself won’t cause you to be successful, however it can save a lot of heartache and drama along the way.

It is incredibly important to choose a co-founder or equity investor carefully and be super clear about the reasons why you want that investment. You need to be as open and direct as possible because the stakes are high.

It can often be seen as being uncomfortable to raise some of these issues however using our platform when putting together these base agreements means that covering off on the difficult questions becomes just a matter of process. So the matter is very situational, with no emotional attachments.

This type of process helps ensure that expectations are realistic and that both parties agree. Because there is no point in pursuing something where people aren’t happy with the agreement from the outset. Business is hard, there are bumps along the way and you need to have commitment to ensure that the business stays the course in the long run.

There are many great reasons to find a co-founder, especially where money is tight and you need access to strong skills that complement your own.

This isn’t about being negative or highlighting the chances of failure it is just being realistic.

How can sixty:forty help?

At sixty:forty we have our opportunities platform which enables you to find a co-founder.  We will also have the ability to find an equity investor, however this is a very regulated environment and we need to ensure that we are compliant.

At the first stage we will only be able to show equity based investments to those who are sophisticated or wholesale investors. There are strict rules about this and it is not expected that this will be up and running until all of the licensing goes ahead.

In the meantime we are developing relationships with existing firms already operating in this space, such as crowd funders and other venture backed firms. This is a great thing as it means that you can still use the platform to post equity chasing opportunities and we will manually work with these in the background as a matching service. This doesn’t affect co-founders at all, that is all up and running and public.

To create an opportunity for an equity investment or if you are looking for a co-founder, from the main menu, use the left hand navigation bar and choose,

The Opportunity and then select Your Opportunity from the sub menu

Use the drop down menu to select ‘I want to create an Opportunity | Co Founder’ and then follow through all of the prompts to complete the form

Once you hit submit this opportunity will be available in the Opportunity directory. Now because of the nature of this type of offer, it will only be able to be viewed by registered Service Providers.

If you need to edit or update any of this you can do so from the Your Opportunity page, select ‘Open’ under Your Opportunities and you will then be able to view and edit your post.

If you get an offer from a provider, then this will start the next phase which moves it to your ‘Offers’ section. Here you can answer questions, and connect with the other person in order to start putting together a deal.

When the deal is done you will then continue on to form an agreement. Now this is formally called a “non binding summary of commercial terms”. When you both agree to each of the terms then you will be able to complete the agreement and it will ultimately move to being a Project within our platform. However, you can produce this agreement into PDF form in order to get it vetted by a solicitor or legal advisor in order to make it legally binding and complete.

We are currently working with a number of legal firms who will be putting up special offers so that you can everything you need done at the same time – so things like formalising the sixty:forty platform agreement, any other shareholders agreements and anything else you might need to start the business.

Tools & Resources

So there are two major things that I think you need to be able to properly consider whether finding a co-founder or equity investor are right for you.

The big one here is the sixty:forty platform. Being able to post your Opportunity will open up doors to new things. We are big on bringing people together, both digitally and in person so that we can all do great business together.

Finding a suitable co-founder or equity investor will ultimately contribute to whether your startup will be successful or not. When you have an idea but lack technical skills to turn that dream into reality – then getting the right co founder who you can work with to develop your idea becomes paramount. 

It can be challenging to find a great partners or startup co-founder and having an online platform such as ours makes it easier for people with great ideas to find people with great skills sets in order to build the idea together.

The other is education. Understanding just what is possible and the opportunities that exist when you use this as a growth tool is just so important. There are a lot of things that can go wrong when doing this, but just as well, there are a heck of a lot of things that can go right.

We would love to see you using up for our platform and begin to use it to start finding new business relationships. Our platforms offers a bunch of different opportunities, not just co-founding and equity. We also cover Barter, Joint Ventures, Strategic Partnerships, Mentorships, Formally Deferred Payment Arrangements.

In closing …

This comes down to planning and being clear on what it is that you are looking for. In working through our opportunity platform not only can you firm up and become clear about what you are after you can find a match without all of the hard work in cold outreach.

Anyway, that’s it for today.

Have an amazing rest of the day.