Startup Stalled: Confrontation Between Algorithms and Funding

In 2020, three entrepreneurs with dreams of technology stood at a crossroads in their lives. They were ready to launch their entrepreneurial journey with a self-developed artificial intelligence algorithm – a thrilling start that nonetheless fell into a two-month deadlock over equity distribution.

Two Factions in Opposition, Neither Willing to Compromise

• Technical Party: The core code developers insisted that the algorithm is the foundation of the project and demanded a 50% equity stake through technology contribution.
• Funding Party: The two fund providers emphasized the importance of initial capital investment and demanded a combined 67% controlling stake to hold decision-making power.

The two sides clung to their positions and refused to back down, leaving the project stagnant for a long time. More regrettably, during the deadlock, the enterprise missed an important opportunity to showcase itself at an industry exhibition – a crucial window for a fledgling tech company to break into the market.

Professional Intervention: Three Days of In-Depth Communication to Identify the Crux

Upon receiving the commission, the equity design team of our firm immediately launched three consecutive days of in-depth communication with the three founders. Instead of rushing to propose a solution, the team first delved into understanding the special laws of the software industry:

Industry Characteristic Insights

• Rapid Technological Iteration: The leading cycle of an algorithm may only be 6-18 months, and the ability of continuous R&D is more important than the initial code.
• High Talent Dependence: The continuous input of core developers is a decisive factor for the success of the project.
• Intellectual Property Risks: Unclear definition of ownership of technological achievements may become a "time bomb" for subsequent financing.

Based on these insights, the team established three core principles for the solution design:Incentivize Continuous Contribution, Ensure Stable Control, and Prevent Ownership Risks.

Innovative Solution: "Dynamic Equity + Option Pool" Composite Structure

1. Dynamic Equity Design: "Phased Vesting" for Technical Contributions

The core algorithm was valued at 2 million yuan, corresponding to a 40% equity stake, with a 4-year vesting period (10% vesting annually):

• Vesting Mechanism: 10% vests automatically each year, with full ownership after four years.
• Exit Repurchase: If a founder resigns midway, unvested equity will be repurchased by the company at cost price.
• Incentive Logic: The value of technology must be "earned" through continuous contribution, rather than being locked in one-time.

This design not only recognizes the initial value of the algorithm but also deeply binds the interests of the technical party to long-term contributions through the phased vesting mechanism.

2. Option Pool Reservation: Making Room for Future Talent

The two fund providers contributed a total of 3 million yuan, accounting for 60% of the equity, with 15% reserved from this as an option pool:

• Clear Purpose: For the future recruitment of senior management talents and technical experts.
• Reserved Ratio: A 15% option pool not only does not affect the control of existing shareholders but also leaves sufficient space for subsequent incentives.
• Grant Mechanism: To be specified in detail when formulating the "Equity Incentive Implementation Rules" later.

3. Intellectual Property Lock-In: Ownership of Technological Achievements to the Company

We also assisted in customizing the company's articles of association, specifically adding a clause on "conversion of exclusive license of technological achievements to ownership":

• Ownership Attribution: Clearly stipulate that the ownership of the algorithm belongs to the company.
• Subsequent Improvements: Any improved achievements based on the original algorithm shall also belong to the company.

• Dispute Prevention: Eliminate potential disputes over intellectual property ownership at the institutional level.

Efficient Implementation: Company Establishment Completed in 10 Working Days

Solution design is only the first step; implementation is equally crucial. The team accompanied the founders throughout the entire process of completing various establishment procedures:

• Industrial and Commercial Registration: Communicated with government departments in advance to confirm the list of materials and prepared all documents in one go.
• Bank Account Opening: Assisted in preparing account opening materials and coordinated with banks to speed up the review process.
• Tax Registration: Completed tax registration and invoice application simultaneously.

Thanks to thorough preparation, all establishment procedures were completed in only 10 working days, and the enterprise officially commenced operations.