Startup companies often struggle with the valuation calculation, and how to determine the number of shares to issue to a new team member.
A good place to start when thinking about this are the Khan Academy’s Raising Money for a Startup, and Getting a seed round from a VC videos for an excellent and thorough discussion on how to value founder equity vs. new investment. Where the investor is investing cash – think of the new cash as the “sweat equity” provided by your new team member.
Suggested viewing:
- https://www.khanacademy.org/science/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/raising-money-for-a-startup (gets interesting around the 1 minute mark)
- https://www.khanacademy.org/science/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/getting-a-seed-round-from-a-vc (relevant to almost the 6-minute mark).
Once you have had a chance to view the videos, consider that the principles of valuation of time vs. money can be extended to new “sweat” investors by adding additional boxes of value to the table, and issuing a corresponding number of shares to match. Think of the sweat and cash in the company prior to adding on the new founder as the pre-money valuation, and the additional value added by the new investor as post-money valuation.
You may wish to “drip” out the vesting of shares over time. Several instruments can be used for compensating the new team member, including a consulting agreement or option agreement, or both, combined.
Be sure to consult your accountant to discuss the form and value of new shares issued (vs. for example options), as there may be a Canada Revenue Agency revenue amount triggered, if this share issuance is treated as compensation or company earnings and not an investment.
For more information, check out these blog posts: