Calculating startup value
How to calculate sweat equity amongst co-founders in a clean and simple way.
I love this book by Mike Moyer. After consulting over 71 startups at the Impact Hub LA, I found myself recommending this book over and over again. The reason is because when you're a founder trying to create a new company from scratch, you're biggest obstacle is trying to create value. Once you create value, things get easier because you'll quickly notice that people will want to help you. Once you get people trying to help you, then you're well on your way towards building enough social capital to exchange it for funding. To be fair, not every start-up needs funding but most of the time, they do.
Going back to creating value; the tricky part is that before you can create value, you sort of need to understand how to calculate value. For example, if you are an iOS developer and you make a prototype app, how do you calculate the value of that prototype? Most developers will probably pull out their calculator and multiple the number of hours they spend by their professional hourly rate. The problem is, is that the right way to calculate value of a prototype? If a Swift Developer makes spend 40 hours making an iPhone app at $75/hr, is their prototype really worth $3000? Or is it worth more? Also, let's not forget, the prototype may simply be an expression of an idea. It may not have a brand, a marketing campaign, a business model or a customer support pipeline. Therefore, the app may not be ready for the marketplace so is it still worth $3000?
To make the previous example more complex, what happens when you, the developer, suddenly want to hire a UIX designer but cannot afford to pay cash. Will they be willing to share their idea in exchange for equity? Let's not forget, you can't really go from prototype to small business unless you have a business model and marketing plan therefore you'll probably also want to add a few more people on board.
The minute you start discussing equity, at the pre-seed stage, this is when you should consider reading Slicing Pie.
Microeconomics has proven than pie's do grow. Therefore, we no longer live in a world where if someone takes a third slice of pizza, someone else has to live with one less slice. Pie's grow as long as we work together to build value. The challenge therefore is creating a fair system where as more and more people begin to participate on a single project, at different stages, yet everyone can be rewarded for fairly for their contributions. Again, Mike Moyer is the only person whom I know has figured out how to calculate sweat-equity fairly.