Dynamic Equity Split Model

We observe a lot of founders who have good product ideas but no technical expertise to build a product.

More often than not, it gets difficult for them to hire professional app design and development services because by definition, startups (and especially bootstrapped startups) never have ample funds.

Is there a way to solve this problem and still build a Product?

Certainly there is a way. Good news is that the way is win-win. The way is based on Dynamic Equity Split Model.

Unlike fixed equity split, which is a more traditional way, in dynamic-split model entrepreneurs are able to determine exactly how much equity each person – or technology partner organizations like ours – deserves with a level of precision not possible in fixed-split model.

Fixed-split model is based on anticipation whereas Dynamic-split model is based on contribution.

How Dynamic Equity Split Model Works

equity_split_model

In this model, a relative value is assigned to the various “contributions” the each participant carries out. Time is one of the main contributions.

The value of an individual’s time is calculated relative to other members. For example, if the startup is about creating and iOS app, a senior iOS Developer’s time is more valuable than fresh graphic designer’s time.

Other contributions include facilities, supplies, equipments, tools, relationships with potential customers or investors and the most important – cash.

A relative value is set to each contribution. Here is a relative value cheat sheet.

Let us consider this example to understand this model in action:

Jake is a senior marketing veteran with 25 years of experience, a strong network of contacts and a promising mobile app idea.

Jack knows how to market the app once it is built but he does not have skills to build the app.

So he hires Space-O Digicom as his technology partner. Digicom dedicates an App Designer (Vikas) to work with Jake as if she is the co-founder of the startup. Jake and Digicom decides that Jake’s market value is probably thrice what Vikas would get. So, hourly rate of Jake would be $90 and hourly rate of Vikas would be $30.

Additionally, Jake invests $6000 cash into the startup to pay ongoing misc. expenses. Cash has a higher relative value than the time. So the relative value of cash is set four time the actual value. This considered the importance of cash and the risk that Jack might lose it.

At the end of first two weeks, Vikas has worked for 80 hours and Jake has worked for 20 hours. So, Digicom’s contribution would be ($30 x 80) $2400 and Jake’s contribution would be ($90 x 20) $1800.The total value of the startup is Time ($4200) + Cash ($24000) = $28200.

In this example, Jake owns 91.48% and Digicom owns 8.52%.

Please note that dollar value isn’t actual dollar value but a way to track startup’s relative value.

At the end of first month, if a new skill-set is required and digicom makes it available then the value will be again calculated dynamically to reflect newer person’s contribution.

Eventually, as more skills are required to launch the product, Jake’s share would decrease but overall startup’s relative value would increase.

The split will continue to adjust during the formation stage of the startup. By the time, the startup is ready for a significant investment, it will be more balanced and friendly. If the company chooses to seek outside funding then the investors would love the fair system and will use to invest.

In case if the startup does not seek outside funding then the same system can be used to distribute profits transparently.

The main benefit of the dynamic equity split model over hiring a sub-contractor would be ownership of the work. In this kind of engagements, the product development activity is not just a “project” that has to be delivered by the scope but something more meaningful.

Also the applicable design and development rates would be on cost-to-cost basis unlike professional technology services firm.

Contact us and find out how Dynamic Equity Split model can help you launch your mobile app even if you do not have any technical expertise.