One of the materials for My Entrepreneurial Journey (MEJ), an education program for aspiring entrepreneurs in Mawar Sharon Church (Surabaya, Indonesa). This is the material for Week 5 of a 10-week program. -- dated Apr 1, 2017

1. find co-founders and financing
for your startup
how to

2. Founder’s Dilemma
by Noam Wasserman
1. Career Dilemma
2. Founding Team Dilemma: Solo vs. Team, Relationship,
Role, Reward
3. Beyond the Founding Team Dilemma: Hiring, Investor,
Founder-CEO Succession

3. Rich vs King Dilemma
by Noam Wasserman
1. Rich: greater financial gains, but lesser control
2. King: greater control, but lesser financial gains
3. Rich and King: exceptional cases only, but watch out for
shift in motivation

4. Evan Williams
Blogger, Odeo,Twitter, and Medium

5. Decision Area King (Control) Rich (Wealth)
Solo vs.Team Remain solo to attract weak co-founders Build founding team, attract best co-founders
Relationships
First look to immediate circle for comfortable co-
founders
Tap strong and weak ties to find the best (and
complementary) co-founders
Roles Keep strong control of decision making; build hierarchy
Give decision-making control to co-founders with
expertise in specific areas
Rewards Maintain most or all equity ownership Share equity to attract and/or motivate co-founders
Founding Team Dilemma
by Noam Wasserman

6. Decision Area King (Control) Rich (Wealth)
Relationships
Hire within close personal network (friends, family, and
others) as required
Aggressively tap broader network (unfamiliar
candidates) to find the best hires
Roles Keep control of key decisions Delegate decision making to appropriate expert
Rewards Hire less expensive junior employees
Hire experienced employees and incent them with
cash and equity
Hiring Dilemma
by Noam Wasserman

7. Decision Area King (Control) Rich (Wealth)
Self-fund vs.Take
outside capital
Self-fund; bootstrap Take outside capital
Sources of capital
Friends and family or money-only angels; tap
alternative sources (e.g. customer prepayments or
debts) if possible
Target experienced angels or venture capitals
Terms
Resist investor-friendly terms (e.g. refuse any
supermajority rights)
Be open to terms necessary to attract best investors
(e.g. supermajority rights)
Board of Directors
Avoid building official board; when built, control
composition and makeup
Be open to losing control of board if necessary to get
best investors and directors
Investor Dilemma
by Noam Wasserman

8. Decision Area King (Control) Rich (Wealth)
Trigger of
succession
Avoid succession issues until forced
Be open to initiating succession when next stage of
startup is outside one’s own expertise
Openness to
succession
Resist giving up the CEO position Be open to giving up CEO position to better CEO
Desired role after
succession
Prefer to leave than to remain “prince”
Want to remain executive in position that matches
skills and preferences
Succession Dilemma
by Noam Wasserman

9. Decision Area King (Control) Rich (Wealth)
Preferred rate of
startup growth
Gradual to moderate Fast to explosive
Capital intensity Low capital intensity High capital intensity
Core founder’s
capital
Well equipped to launch and build startup without
much help
Important gaps that should be filled by involving
others
Other Factors
by Noam Wasserman

10. Startup Equity and Financing
1. Co-founders vs first-year employees
2. Equity split among co-founders
3. Vesting periods
4. Stock options for employees
5. Financing options: bootstrap, loan, investors
6. Seed funding for first-year working capital
7. Funding rounds: seed, angel, series A, series B, etc.
8. Exit strategy for investors: buyback options, M&A, IPO

11. Startup Equity and Financing
Co-founders vs first-year employees
Co-founders First-year employees
1. Working full-time, 100% only on the
startup, quitting every other jobs and
side-hustles.
2. Take more risks.
3. May be willing to postpone payable
salary for later.
4. Will receive equity with vesting
periods.
1. May include part-timer workers, still
working on other jobs/businesses/side-
hustles.
2. Take less risks.
3. Requires a monthly paycheck paid in
full.
4. May purchase stocks as options with
vesting periods.

12. Startup Equity and Financing
Equity-split among co-founders
Equal-split Unequal-split
1. Everyone receives an equal-split of the
equity.
2. Everyone receives salary according to
their contribution (roles,
responsibilities, experience, and
network).
3. Salary is not convertible to equity.
1. One or more co-founders receives a
larger split of equity due to non-
financial reasons.
2. Everyone receives the same amount of
salary regardless of their contribution.
3. Skipping a paycheck may cause
someone to receive more equity.

13. Startup Equity and Financing
Vesting periods
4-year vesting periods No vesting periods
1. Co-founders will receive their fully-
entitled shares after the full 4-year
vesting periods.
2. When a co-founder resigns, she will
receive only portions of her vested
shares (25% for the first year, and 2% for
each following month).
3. Non-vested shares will be re-distributed
to co-founders after the first 4-years with
an additional 1-year vesting period.
1. Co-founders receive their fully-entitled
shares from the first day.
2. When a co-founder resigns, she will
receive her entire shares — even though
she may not be entitled for it — while
the other co-founders continue to work
and contribute to the startup (long)
after she resigned.
3. There is no additional shares available
for co-founders who stay longer.

14. Startup Equity and Financing
Stock options for employees
Co-founders Employees
1. Shares are earned by working and
contributing during vesting periods.
2. Have shorter vesting period compared
to employees (e.g. 4 years).
3. Shares are split equally among the co-
founders.
4. Non-vested shares will be re-distributed
to co-founders after the first 4-years
with an additional 1-year vesting
period.
1. Vested shares need to be purchased with
cash while being an active employee.
2. Have longer vesting periods compared
to co-founders (e.g. 5 years).
3. Stock options are split equally with other
employees who join in the same year.
4. When an employee resigns, any shares
she’s not purchasing will be returned to
the options pool for employees joining in
after the first 5-years.

15. Startup Equity and Financing
Pre-money equity split illustration
Co-founders
(50%)
(10%) First-year employees
(10%) Second-year employees
(10%) Third-year employees
(10%) Fourth-year employees
(10%) Fifth-year employees
(-%) Options pool for 6th-year onwards
50% distributed equally
among co-founders,
with 4-year vesting
periods. Non-vested
shares will be re-
distributed after the first
4-years with an
additional 1-year
vesting period.
10% distributed equally
among the employees
who join in the same year,
with 5-year vesting
periods. Non-purchased
options will go to the
options pool — available
for employees who join in
the 6th year onwards.

16. Startup Equity and Financing
Financing options: bootstrap, loan, investors
Bootstrap Loan
1. All of the first-year working
capital comes from the co-
founders who have no
intention of getting a return
on their investments within
the first 5-years.
2. Equity are split only among
co-founders (and
employees).
3. No need to establish a
formal board of directors.
1. Some or all of the first-year
working capital comes from
external investors (who are not
co-founders) who are committed
to postpone receiving dividends
after the first 5-years.
2. Equity must be shared with
investors.
3. A formal board of directors must
be established which includes
representative(s) from the
external shareholders.
Investors
1. Some or all of the first-
year working capital
comes from a loan which
has a fixed monthly loan
payment.
2. Equity are split only
among co-founders (and
employees).
3. No need to establish a
formal board of directors.

17. Startup Equity and Financing
Seed funding for first-year working capital
Co-founders
Employees
Investors
100% pre-money
equity split among
co-founders and
employees.
100% of first-year working
capital (CAPEX, 1st-year OPEX
and salary) are provided by
investors. Co-founders may
contribute to this working
capital and will be awarded with
shares from this pool.
50 — 50

18. Startup Equity and Financing
A sample illustration — Year 0
Co-founders
(500,000 shares)
Employees
(500,000 shares)
Investors
(1,000,000 shares)
Each co-founder will get equally-
split shares vested in 4-years.
(e.g. 5 co-founders will get each
100,000 shares)
1st-year working capital (CAPEX, 1st-
year OPEX and salary) is pre-calculated.
(e.g. Rp 1,000,000,000.)
Each investor immediately gets shares
according to their financial contribution
(e.g. a co-founder’s dad who lend the
place for Rp 50,000,000/year x 5 years
will get 250,000 shares immediately)
1 share is worth Rp 1,000.
Valuation at Rp 2,000,000,000.
5% of the shares are available as stock
options for first-year employees with
5-years vesting periods.
(e.g. 10 first-year employees will each
get 10,000 stock options)

19. Startup Equity and Financing
A sample illustration — Year 1
Co-founders
(500,000 shares)
Employees
(500,000 shares)
Investors
(1,000,000 shares)
Each co-founder earns her first-
year vested shares.
2nd-year OPEX and salary are
funded by the gross operating
profit.
Employees can purchase their
fully-vested stock-options
anytime they’re an active
employee.
Valuation at Rp 4,000,000,000.
1 share is worth Rp 2,000.

20. Startup Equity and Financing
Funding rounds: seed, angel, Series A, Series B, etc.
Co-founders
(500,000 shares)
Employees
(500,000 shares)
Investors
(1,000,000 shares)
Valuation at Rp 4,000,000,000.
1 share is worth Rp 2,000.
Total shares (issued/vesting) are 2,000,000.
New round of
investors
(500,000 shares for
Rp 1,000,000,000)
Each new round of investments:
+ may include co-founders and/or some of the
initial investors.
+ will be awarded shares according to the pre-
investment valuation.
(e.g. a new investment of Rp 1,000,000,000
with a valuation of Rp 2,000/share will get
500,000 shares)
+ will dilute the %-own of current
shareholders (co-founders, investors, and
employees), but will increase the stock pricing.
+ may be used for growth or survival

21. Startup Equity and Financing
Exit strategy for investors: buyback options, M&A, IPO
Buyback options Merger & Acquisition
1. Within the first 5-years,
investors must only sell
their shares to other
shareholders.
2. The startup may
buyback the shares, and
use them as options
pool.
1. When the startup goes
public, all shareholders
can now sell their shares
publicly (according to
the market price).
Go Public (IPO)
1. When a larger
corporation merges/
acquires the startup,
investors get cash or
acquirer’s shares.
2. Co-founders and
employees may be
required to stay for a
period of time for the
cash/share to vest.

22. Startup Equity and Financing
1. Co-founders vs first-year employees
2. Equity split among co-founders
3. Vesting periods
4. Stock options for employees
5. Financing options: bootstrap, loan, investors
6. Seed funding for first-year working capital
7. Funding rounds: seed, angel, series A, series B, etc.
8. Exit strategy for investors: buyback options, M&A, IPO

23. any questions?