Small Business

Divvying up Stock


Divvying up equity, where entrepreneurship courses fall short, standing out among tourist traps, and the key to ongoing innovation

How Do We Divide Our Company's Stock?

OmniMedics is a Newton (Mass.) startup aiming to produce a cardiac medical device, and its three founders are grappling with what Alan Cohen, one of the founders, describes as "that most thrilling, terrifying, and grueling" issue of divvying up equity. The issue has become urgent because, "We have a few people who would like to put money into a seed round."

So he posted a query on an e-mail list, Harvard Startups, seeking "suggestions on the equity split between founders, directors, advisers, and an option pool."

Among the suggestions from the venture capitalists, lawyers, and entrepreneurs who responded:

Don't be afraid to divide equity unequally among founders, depending on their experience and expected contributions. "If you have a very experienced entrepreneur, for example, that person might receive substantially more than other inexperienced people at the same level, because investors like to invest in experienced people," stated one respondent. If everyone is fairly inexperienced, then a more equal division is appropriate.

Set aside about 20% of stock for employee options and allot 5% to 10% of stock for advisors and directors. Each member of an advisory board can be granted 0.5%. All such stock should vest in two to five years, and founders should consider buy-back provisions for people who depart.

Anticipate the founders being diluted substantially by an angel and initial venture capital round, likely winding up with 20% or less of the company (vs. 50% or more for investors).

Above all, capture everything in writing as early in the process as possible, and use an experienced lawyer to get the paperwork right.

A Gap Between School and School of Hard Knocks

Courses in entrepreneurship are all the rage at business schools around the country, but a new study questions whether the textbooks used in these courses focus on the topics entrepreneurs really need to know about. What textbooks are focusing on and what entrepreneurs focus on are often two different things, it argues.

For example, more than two-thirds of the texts examined devote considerable space to applying for a patent, while fewer than a fifth of startup entrepreneurs concern themselves with patents. Similarly, two-thirds of the entrepreneurs studied were concerned with purchasing or leasing equipment, yet this topic is covered in only 14% of the texts.

All of which "suggests that entrepreneurship textbooks may not present the scope of activities involved in starting a new venture in its completeness and may overemphasize certain start-up activities at the expense of others," concludes the study by professors Linda Edelman and Tatiana S. Manolova of Bentley College and Candida Brush of Babson College.

Tourist Trap or the Real Thing?

The restaurants on the main drag of a tourist area can blend together, as travelers try to find that occasional diamond in the rough. Moby Dick's Restaurant is just one of a seemingly endless line of seafood restaurants on Route 6 in Cape Cod's Wellfleet, yet it has discovered how to stand out.

One way is to have throngs of people waiting outside for a table, and for the chance to order $22 clambake specials. Another is to emphasize the restaurant's family ownership. On its menu is The Story of Moby Dick's (not Melville's), which tells how the Barry family came to own the restaurant.

Books: The Key to Ongoing Innovation

Smaller companies that succeed in growing quickly are usually the beneficiaries of the innovative thinking of their founders. But over time, innovation and growth can fade. How can you rekindle it? A new book argues that such traditional assets as experience, expertise, and knowledge can be impediments to ongoing innovation by growing companies.

The Innovation Killer by Cynthia Barton Rabe makes a strong case that phenomena like groupthink are more common, and threatening, than most entrepreneurs fully appreciate. She calls on executives to seek out "zero gravity thinkers"—individuals unencumbered by conventional approaches with a history of innovative accomplishments and a passion for learning. Unfortunately, the book implies that such innovators must come from outside the company. More helpful would be lessons on breeding innovation from within.

David E. Gumpert covers business/health issues and also writes the biweekly What Entrepreneurs Need to Know column.

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