I got an email this morning asking a question that I have heard several times over the years:
"Recognizing that much depends on the particulars of each case, wondering if there would be any rules of thumb or other market guidelines to determine how much extra founders' equity should go to the founder who was the source of the "idea" for a startup?"
I immediately fired back a very brief answer (more on that later) but continued to think about it and figured it might warrant a blog post. The problem here is that the answer depends on who you ask and what their vested interested is in the answer. It could also depend on the nature of the 'idea' but that is a different story (a revolutionary new cancer drug is worth more than a new way to photograph your naval).
If you are the 'founder who was the source of the "idea" for a startup' you likely think the idea is amazing. If you don't think it is amazing, you should find something else to do because doing is not easy. And, as amazing as the idea may be, having an idea is not all that special. We all have ideas. Still, this one is yours and you think it is great. Having an idea, from your perspective is worth the lion's share of equity, of course.
If you are the other founders you likely also think the idea is terrific. Again, if you do not, then move on and make room for someone who brings enthusiasm to the project. This is where things get tricky. You need to find a balance between loving the idea, giving credit where credit is due and making sure there is enough pie for you to share in the upside when you execute on the idea. At this point it is just an idea. There is doing to be done and, hopefully, that is where you can contribute to turning the idea into a reality. Do you deserve less for your role of making this into something? Maybe, if you can deliver, you should get more than the guy with the idea.
If you are an investor you might be inclined to point out that an idea without the financial resources to get it done is worthless. However, if you want to do business with the founders you better believe in the idea to some extent or why throw your money at it. This is the first test of the idea and its value. The investor wants to keep the value down in order to get a good deal. So, as an investor, you attach the smallest possible value to the idea and are likely more interested in the team that will bring it to life than the guy who dreamed it up.
Then there is the outsider, which is what I was when the question was asked of me this morning. I have no stake in this. I am not interested in exploring the idea as a co-founder, as an investor or as a partner. I was asked for an opinion on the value of "ideas" without any specific details about the actual idea or anyone involved with the idea or the team working on it. My reply was:
"0%. Value is in execution. Everyone has ideas."
It was early and I was a little bit distracted so I may have come off sort of flip but the underlying message holds true. Everyone has ideas. The question is, what are you going to do about it? I was in a startup a few years ago that was my co-founder's idea. He was terrible at execution and quickly backed out of the company, keeping a large chunk of equity without contributing anything to execution. In fact his presence slowed us down initially and almost sank the company. That became a problem when I went to raise funding. It plagued the company and me for years. In retrospect I might have been better off doing something else. The idea litterally cost me- an opportunity cost. Firing off ideas then letting someone else run with it is great work if you can get it. When they succeed with your idea just show up and collect your winnings. It served the Winklevoss twins.
Elon Musk was not the first person in history to imagine a private space agency. Bond Villains and eccentrics have talked about doing the very same thing for years. The difference is that Elon Musk executed. He worked. He did it.
Tim Westergren was not the first person to suggest streaming music online. He was not even in the first 1,000 people to try. Rumor has it that dozens of investors laughed in his face when he was pitching Pandora. Was it a bad idea? No, it was a good idea, but as an idea alone it had no value. Tim and his team built Pandora into something interesting; something different; something valuable. Then the money came rolling in.
Having an idea is a good first step. Convincing someone else that it is a good idea is a solid second step. Getting a non-family member to invest is a great third step. And then comes the hard part: making your idea into a reality, hopefully a reality that people are willing to pay for. Ideas are a dime a dozen. And even then ideas may be overpriced. Doing is the difference.