On Equity…

One of the interesting discussions that came from our announcement a few weeks ago was whether or not the equity split we proposed for companies that spin out was, in fact, equitable.  We mentioned that although nothing was set in stone and each case would be unique, it could be expected that on average the lab would retain roughly 40% of the equity in these startups.  There were a number of comments on blog posts following the announcement in this general vein:

“seems like a bad deal. losing 40% before series-A is crazy. really you are giving 40% for seed funding.”

And it’s true.  Giving away 40% of your company for seed funding would be crazy. The thing is we are not looking for companies that need seed funding. There are plenty of incubators or seed funds for seed stage companies to find funding and help.

Churn is not an incubator or a seed fund.

Rather, we are a startup lab looking for entrepreneurial people who want to work at the lab and spend time iterating on ideas and businesses we come up with, build, and market together.  So at least in the beginning, the lab will own 100% of the equity in the the companies that are built here.  They are conceived, built, launched, and iterated upon all within the lab.  However, in order to achieve their full potential, they must eventually spin out, and the founding team that goes with them will have to take them the rest of the way.  We realize that even after a successful launch and a promising start, there is an immense amount of work to be done before a company realizes its potential, and we want to provide equity commensurate with that responsibility.  The best way to think about it is that the lab (collectively) is like a cofounder who contributed greatly to the formation and early stages of a company, but steps into a supporting role as the company matures.

So people generally need to flip this notion on its head.  We’re not looking to find companies and take 40% to help them through the early stages.  We’re looking for great people and planning for them to get roughly 60% to take the companies we build together the rest of way.

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