Questions

Need an expert advice on budgeting for a startup and equity allocation in the startup.

I am trying to build a marketplace concept in travel domain. I have received $ 100K in funding from an angel investor. The product development has not been started yet. I have come up with wire frames for the product and now need to start engineering execution of the product. I am following the "Lean startup" approach of developing an MVP first to achieve product-market fit. Want to know how much budget should be used to bring a product to launch and how much money should be budgeted for paid marketing. Our goal here is to achieve Series A funding within 18 months without running out of money. Also, an additional question will be, I am trying to get somebody as a technical co-founder, how much equity should I be giving him? Please shed your thoughts and would like to jump on a call with you.

5answers

1. Before you dive into building out marketplace software you might find it easier to quickly test your MVP using a SaaS product like https://near-me.com/. I am NOT affiliated with them. But in a previous startup explored the marketplace concept. Spend 12K for a year on a SaaS product then spending so much more doing it from the ground up. If you gain momentum then start to build out your own platform.

2. Technical Co-founder is the person who will help bring your idea to life so enough skin in the game to keep them motivated and keep him/her hungry.

3. Remember 100% of 0 is 0. So if the CTO wants 20%-25%. Does it really matter at this point? No it doesn't.

4. Make sure you understand how to tackle the marketplace problem of the chicken and egg. You have supply on one side and demand on the other. What comes first? You should think through that as well.


Answered 5 years ago

You need to plan various phases of your product launch and allocate budget for each and every phase. As far as paid marketing is concerned, the budget for the same could only be decided after knowing your customer segment, geographical span, and your business concept. The cost of paid marketing varies to a great extent per above criterion.

Invest some time to review your launch vehicles with focus on integrated marketing strategy. Make sure you plan for 6 months to a years time to avoid getting caught unguarded down the line.

Meanwhile, have you worked out your estimated development cost? If no, then you should do that on priority.

As far as equity sharing is concerned, we had published a blog titled "Happy Equity Index" a while back. You can read the same to get further clarity around equity sharing dilemma. All you need to do is to type "Happy Equity Index, 366Pi" in Google's search bar.

Hope above helps!!


Answered 5 years ago

This is a fairly simple exercise in cash management/budgeting.

You know you have $100K, it has to last 18 months, and you probably have a good idea of what it is going to cost you to get to the next milestone.

Now you just need to put that down on paper and see if everything pencils out.

Would be happy to discuss with you how to make that happen.


Answered 5 years ago

The lean startup methodology teaches customer development over product development, yet everything here is talking about product development.

Two things to quickly note:
1. Everyone says they use the lean startup approach
2. Very few people actually use the lean startup approach

Does the product have to launch in 18 months? Can you show your progress to the next round of investors and get more funding that way, without a full scale launch?

Paid marketing should be one of the last things you do. Paid marketing is meant to put people into the top of a working marketing funnel. There are other ways to get your first few hundred customers that I would recommend before paid. Blogging, Social, word of mouth, and doing startup speaking, etc.

I would also recommend finding your first customer before writing one line of code. Go to the mall and ask around for people looking to travel (or whatever specific niche you are in), give them your value proposition, and judge their reaction. If you are B2B this is a little bit harder, but you can still do it. This will save you $100k. I am not exaggerating. And yes, peddling at the mall is slightly embarrassing, but telling your angel you just built a travel site for mice (or something else that flops) is much more embarassing.

As for equity, it ALWAYS depends. You got $100k, you are the original founder, that's worth something. Would your technical co-founder be forming the concept of the business, or would he really be "employee #1" but with a larger role than your real employee #1?

Think of it this way, if he put in $100k and worked side by side with you to develop this, he should have 50%, right? At least 40% I would think. Who had the original idea, wireframes, and forming a business entity barely account for anything. If you tell me, "Well, the idea is worth 5% alone," then I would tell you, "OK build the entire business yourself and keep that equity," and when you can't, you will see why the idea is worth nothing, the execution is worth everything... Unless you have a patent on the idea, but most ideas are just ideas, not patentable products.

So back on topic, you have to get the tech co-founder on board with the concept and the idea of not getting paid for a while. You have to sell your business to them! That's the hard part.

After that, I would offer up a large chunk of equity, vested over 3 or 4 years (same as yours). Maybe 10-25%. And of course if they are the other half to the business, you both accept that that equity will become diluted upon hiring the next 10 employees, etc.

So the "founding" team might look like:

You: 40%
Angel: 35%
Co-founder #1: 25%


Answered 5 years ago

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