Hank Williams has a fun post on his blog asking what is an idea worth?, a favorite topic among folks that have too many ideas and not enough time or leverage to pursue them all.
The way I like to think about this is to frame the question in terms of equity and ask “what would I pay for a great idea?” Here’s the scenario:
Your colleague asks you to sit down and discuss an idea for a new product and company that he is thinking of launching.
After a few days of research it’s clear the idea has potential: the core idea for the product is compelling, the market is large with near-term timing, the company would have some sustainable technology, clear competitive advantages, and there are reasonable barriers to entry. The idea already includes a credible idea for a business model, a good go to market plan, and the company would control its destiny with reasonable capital requirements. A bit of market testing on Vizu or SurveyGizmo corroborates this.
Your colleague is already running a company, so he can’t practically leave to start this company, and is looking for you to run the company. He’s a smart executive, but not a brand name. He envisions sitting on the board and contributing lightly, but the execution will be up to you. He can invest a few dollars, but he’s not rich, so the bulk of fund raising will be up to you. He’s got a certain ownership in mind he’d like to retain, and is discussing the idea with others that are also in a good position to run with it.
What scenario would you consider reasonable, in terms of equity at the onset, for the opportunity to run with this idea?
In the scenario above, I’d personally be comfortable in a scenario that offered the inventor 10-15% for the ‘idea’, and as little as 5% if the idea still needed major vetting in terms of product, business model, go to market model, etc. I’d support a scenario where the inventor got markedly more (even up to 80%) if they contributed major funding, added value in terms of networks, name value, etc. But for a robust idea alone, 10-15% seems right.
Update: The comments in Hank’s blog note academic work done by Noam Wasserman that corroborate a 10-15% number.