US Corporate Law 20 Episodes (2)
How should the equity distribution be divided? The shareholding structure of Microsoft, Facebook, Amazon, Xiaomi and Luo Jisi has dropped! The difference between American entrepreneurship and Chinese entrepreneurship equity allocation, a golden rule to avoid equity allocation stepping on pits.
Welcome to Lecture 20 of American Corporate Law, focusing on the necessary legal knowledge for startups. In the last issue, we talked about a structure that must not be chosen in the distribution of founders' equity - equity sharing. In this issue, let's talk about how the equity of startups should be distributed.
Basic Theory
There may be many people who will put forward three and five elements on this issue, such as contributing time, investing money, network resources, etc., and then ask everyone to synthesize a percentage based on these factors. But it should be said that when the company was first established, even many years of friends and colleagues were uncertain about how much they could contribute to this new company, and it was difficult to measure the actual utility of each factor.
So here I will tell you a golden principle for equity allocation. You can ignore the other three and five elements, as long as you grasp one, that is, the degree to which each founder is irreplaceable to the company. In fact, the contribution time, investment funds, and network resources mentioned above are also irreplaceable extensions. Whoever is the most irreplaceable to the company should have more shares.
After understanding this, it is necessary to implement specific numbers. In terms of numbers, I can say without exaggeration that the more biased, the better. If you can really achieve 99%: 1%, then it is your ability. Of course, this is a bit extreme. If 99%: 1%, then it is not a founding. The ratio between people is the ratio of employees. For founders, the general recommendation is 70%: 30% or 80%: 20% and 90%: 10%.
If it is 60%: 40%, it is also possible, but it will be slightly dangerous. Because each round of investors usually dilutes 10%-20% of the company's equity, if it is 60%: 40%, it is very likely that the founder's major shareholders who originally held 60% after the angel round will lose absolute control. . With a relatively biased structure, it is easier to ensure that your company can still have a founder and a major shareholder of more than 50% after the seed round and A round.
And from the cases of the more successful startups that we have done that were acquired by large companies in the A or B rounds, their largest founder shareholders often still hold more than half of the equity in the A round or even the B round.
In addition, there is a difference between China and the United States in this place, that is, many American companies can go to a relatively late stage until they are successfully acquired and listed, while Chinese-owned companies tend to be highly concentrated and more likely to succeed.
Case
Let's take a few cases to talk about how important it is to have an obvious absolute controlling shareholder in equity distribution. In corporate America we'll talk about Microsoft and Facebook, and by the way, I'll mention Amazon, but that's not our focus today. Among Chinese companies we will mention Xiaomi and Luo Ji thinking.
Microsoft
In 1975, Bill Gates and Paul Allen co-founded Microsoft. At that time, Microsoft founder Bill Gates accounted for 60% and Paul Allen accounted for 40%. You will find that 46K is the type that I said was a little dangerous at first, but they quickly corrected the ratio.
Because two years later, Bill Gates and Paul Allen signed an informal agreement. In this agreement, the shareholding structure of the two people changed. Bill Gates and Paul Allen's share of equity 64% and 36%, respectively. This is slightly better than the previous four or six.
Later, after introducing more co-founders, a relatively stable structure was formed:
Bill Gates accounted for 53%
Paul Allen accounted for 31%
The other four together account for 16%
Well, although Bill Gates has not achieved a particularly high control of 80 to 90 percent, he still has the absolute right to speak among the founders. And we just mentioned that one shareholder has a high degree of control in terms of two people starting a business. If it is like Microsoft with six people, it is indeed unlikely that a major shareholder will get 80 to 90%. Therefore, it should be said that Microsoft has done a very good job in equity distribution, which also laid the foundation for Microsoft's subsequent success.
At the beginning of the business, Zuckerberg accounted for 65%, Saverin accounted for 30%, and Moskovitz accounted for only 5%.
However, because Saverin was unwilling to suspend his studies and devote himself to the new company like the others, he also owns 1/3 of the shares. So as Moskovitz and Parker, who later joined, contributed more and more, it was only possible to dilute Saverin's stake, and Saverin responded by freezing the company's accounts. After the completion of the A round of financing, Saverin's shares fell to less than 10%, and he was so angry that he simply sued his former partners to court.
This situation is often caused by the fact that the founders did not really decide their blessings based on the irreplaceability of each person to the director at the beginning. Although Saverin has a lot of business acumen and entrepreneurial experience, he is willing to invest not much time. , so his irreplaceability to the company is not so high. If you only give him 10% at the beginning, you will avoid a lot of trouble later.
To this day, Zuckerberg holds 24% of the shares, several major investors hold 10% and 10% of the shares, Moskovitz 6%, Saverin 5%, and others have some scattered shares. Not listed one by one.
So from the perspective of today's shareholding ratio, it should be said that Facebook has done a good job in maintaining a major shareholder.
Amazon
Amazon should be said to be the best example of the centralization of major shareholders in American companies, because in the early days of the company, Amazon had only one founder, Jeff Bezos (and of course his wife). Amazon can also be regarded as the only one of all the big cash companies in the United States. At the beginning, the founder was married and it was such a giant company as a mom-and-pop shop, but this also led to the issue of equity distribution between Bezos and his wife when they later divorced. We will publish a video on husband and wife holdings in detail in the future.
Xiaomi
Xiaomi is a relatively successful example of Chinese product manufacturing. We don't need to mention anything else. To this day, Lei Jun still holds 77.8% of Xiaomi Technology's shares. We can understand how important it is to have an absolute controlling shareholder to the company's success.
Luo Ji thinking
Luo Ji thinking can be regarded as a good representative of China in the field of knowledge payment. Knowing that today, Luo Zhenyu is still a 30% shareholder, while the second shareholder after him only holds 16%. Because Luo Ji Siwei has many shareholders, it is difficult to achieve as high control over Xiaomi as Lei Jun, but 30% is already an absolute control over the company compared to other shareholders.
Summarize
The most important thing in equity allocation is to look at the irreplaceability of each founder to the company. Specifically, in terms of numbers, taking two people starting a business as an example, 37, 28, and 19 are better choices. American companies tend to have more successful companies in the case of four or six openings, while Chinese companies tend to be more successful with more concentrated power.
In addition to the founder, the company has to recruit employees later. When it comes to employees, we have to talk about option incentives. Then we will talk about option incentives in the next issue.
Here are 20 lectures on American company law, the necessary legal knowledge to focus on startup companies, I'm Liu Xiaoxiao, see you in the next issue~
