Ask HN: How much equity is a business plan worth?

[nickh]

Say one person comes up with the idea for a startup, and spends a significant amount of time over 2 years developing the business plan. That person then asks others to join the startup as co-founders to help build the startup.

When allocating equity to each co-founder, how much equity is that existing business plan worth?

-- Edit 2011-06-22 17:23 GMT

This is a pretty open-ended question. I should've included more details:

The person who wrote the business plan is the startup's CEO.

The business revolves around a website marketplace.

The business plan includes:

- multiple lucrative sources of revenue - a basic plan for user acquisition - identification of additional roles that will need to be filled - financial projections - detailed, yet incomplete, explanation of the website's functionality - some validated learning[1]

The other co-founders are the CTO, the front-end designer and coder, and the artist.

[1] http://lean.st/principles/validated-learning

[trevelyan]

My suggestion is zero. A formal business plan simply isn't useful unless it can be used to get funding. And it really doesn't matter how much time this person has spent on it since the plan isn't likely to survive first contact with the market. What is needed is the hard work of building the product and iterating it again and again while getting users and traffic.

On the other hand, taking the initiative to get a project off the ground is actually worth quite a bit. But that work doesn't stop with handing a business plan over to someone else to execute.

[nickh]

The CEO (who had the idea and wrote the business plan) has validated the idea in the market. Also, we have a direct, funded competitor now, which has also validated the idea, and one of our revenue streams.

So the idea is valid and lucrative. I'm just not sure how much equity should be attributed to that.

[trevelyan]

Your CEO hasn't validated anything. Your competition has, and if you aren't giving them equity it isn't clear why this guy deserves anything. Factor in that the idea isn't original and I don't see what value is being provided here.

[aspir]

I'm a contracted business plan and grant writer on the side as I work at a startup. I've also entered and placed in / won a few national biz plan competitions in multiple industries (biotech, pharma, semicon, ren. energy, B2C software, B2B software) so I feel like I may be able to gauge this.

Odds are strong that your plan, if in the consumer space, is already outdated. Unless you have real, long-lasting IP (not just 'patent pending', but literally a process that is revolutionary and incredibly hard to reverse engineer, typical with university tech) the market has likely shifted away from your assumptions. Unless this is true, the business plan is only worth the paper and ink it's printed on.

That said, if you have been able to secure the first partnership, funding, or start carrying out the actual plan, you have something much more valuable than 30 bound pages and a spreadsheet. That deserves equity, and a lot of it.

Also, and I apologize if this sounds rude, 2 years of writing a biz plan is about 15-18 months too long. I can bang out a complete draft sans graphics in ~4 weekends. Any more time that that, and I get into the "law of diminishing returns" space. Whatever you do, don't rewrite it -- you've already sunk enough time into it. Fundraise full time, line up partners, presell the product with your next time period, but another day tweaking that plan is another day lost.

For the record -- I'm not a fan of writing business plans at all, but it pays the bills, and organizations are happy to write me big checks so they don't have to write them either. Some big industries require them (bio, semicon, green energy), but those same players also want ironclad IP, so its a completely different world than the modern web space.

[aspir]

After reviewing the edits in your post, I'd say that your best actions are to just split equity evenly 3 ways, unless someone writes a large check/maxes out their credit card for whatever reason, and leave the business plan alone for 6-8months while everyone works.

Biz plans are often a double edged sword -- when you need to adjust or move quickly, they become anchors to the past plans. They aren't worthless though; to paraphrase Eisenhower, "Plans are nothing, planning is everything."

Your CEO has done everything right to earn the title, powers, and prestige of CEO, but not extra equity.

EDIT -- wrote this before I saw your reply below :)

[nickh]

Thanks for your insight, aspir. Much appreciated.

Despite the CEO having worked on the business plan for the last 2 years, it's actually not out of date. This is because it's been updated as time has gone on, and a direct, funded competitor just launched, which validates the idea and one of the planned revenue streams.

Since I and others have joined the startup:

* we've just barely begun looking for our first round of funding.

* the CEO's been successful in obtaining a few beta testers to generate our initial content.

* we've built 70% of the MVP.

[aspir]

Factoring all of that in, I'd still say that if there were equity for the plan, it would be small. A lot of this planning work is within the CEO's job description by default. It takes the bruden off the technical team so that they can do their best work. In my opinion, if you can convert the beta testers to paying customers (even if they are for tiny amounts of cash) your valuation is significantly higher, with or without a plan (with is always better, though).

[nickh]

That's a very good point: this planning is part of the role of the CEO.

[Travis]

Depends on the business plan ;).

If the plan is excellent, and actually describes the problem, solution, and route to profit, then it's probably worth a lot.

However, if it's like most business plans that I've written or read, then it's probably not accurately describing the problem. A ton can change in a market in 2 years, so I would guess that parts of that plan are pretty out of date.

I probably wouldn't ever assign more than 5-10% of a business' value (equity, here) to the b-plan. That would be for a world class, how-could-we-not-have-seen-this, b-plan.

[nickh]

I realize that I didn't include much information, so I've added more details to the question.