Finding cofounders · Hiring

Advice needed concerning on-boarding a Co-Founder

brent burton Entrepreneur, founder TourCast Technologies

September 9th, 2020

Hi everyone!


I'm in the process of interviewing candidates for a cofounder role at my startup. I've been working on the business for 2 years and invested about $110K to bring the idea to BETA stage with a working prototype and signed customers.


With so much time and money invested from my end, I'm wondering what type/amount of equity I should consider giving to a cofounder, and if there are structured terms or templates (like deferred equity) I can use to set up an agreement and protect myself incase the business relationship goes sour.


Any assistance or recommendations would really be greatly appreciated, thanks team!


Brent

Paul Garcia marketing exec & business advisor

September 9th, 2020

The short answer is that equity is never given, it is earned.

You can find dozens of references to the book "Slicing Pie" which discusses how equity is fairly distributed, and a lot of other discussion about how to compensate a co-founder.

If you have been working on the business 2 years alone, you are not seeking a co-founder. You're looking for your first employee. A co-founder is only someone who shares an identical vision of the company, not just someone you add to fill in skill gaps.

Mohi Sanisel Student of Entrepreneurship | Founded couple of startups

Last updated on September 9th, 2020

Hi Brent,


You should consider 2 facts when you want to divide the equity of your startup with your cofounder(s):


1. The amount of resources (time, energy, money) you've invested in your business before they joined. In other words, you shouldn't give them much equity

2. Your cofounders won't have enough motivation if they have very few shares. (Unless your startup has a considerable valuation)


As you can see these 2 facts have conflicts somehow, but you should take both into account.


For me, the best way is to convert everything into a quantity-based metric (money for example) then divide shares based on that.

Take this example:

  • Your input:
    • $110K investment
    • 2 years of time = 2*$90K (your fair annual salary in the market)
    • $100K (your salary -market value- for the upcoming year) - You're not receiving this salary, it's just an indicator of the value of your time.
  • Your (potential) co-founder input:
    • $0 investment
    • $120K (his/her salary -market value- for the upcoming year) - for example he is an expert technical guy
    • $30K He has a valuable network of people (you should spent $30K to build the same network if you want to do it yourself)

So the amount of your input is $390K versus the co-founder's input which is $150K. So the cap table could be 27% for your cofounder and the rest for you.


In this example, 27% is relatively fair equity and also gives enough motivation to your cofounder, but if the calculation comes up to 97% for you and 3% for your cofounder, you should add a little bit to his/her equity to make sure he will remain motivated. (for example 90% & 10%)


Another thing I have to say is that there are many ways to protect your equity in case after a couple of months you find that this is not the right person for being a co-founder. I advise you to search for these terms: Vesting and Cliff, Preferred Stock, Anti Dilution.


Wish you success in your venture :)

David M

September 9th, 2020

Don't "give" anything. Exchange value. If your cofounder's network is only worth "30k" you have done a poor job recruiting a cofounder. Everyone tries to apply some formula to it, and that can be a dangerous proposition in many cases. Applying numbers only can be extremely nearsighted despite everything in business coming down to revenue and expenses ultimately. Role and purpose play into it as well and the weight of those and co-founder actions to total operational plan will ultimately mean far more than an approach to base equity amount on something so simple as deferred salary. In other words approaching it from a simple numbers at the onset (differed salary, amount invested, potential contacts) and formula perspective could leave you contracting out a very reduced and unfair stake, or an extremely overcompensated stake. So before you approach it, figure out exactly what you need the cofounder to do to supplement your work already invested. Keep in mind you could have multiple co founders.

Wahab Salaam A biz professional, a Writer and an Entrepreneur

September 10th, 2020

You may have to follow this pattern to determine individual equity in the business. In project creation, development and financing, the following areas are usually attract significant consideration. 1. Project idea generation/birth 2. Project development 3. Project financing 4. Project execution Allocate the equity to be shared in the following ways: Project idea 20% Project development 20% Project financing 40% Project execution/ growth 20% This template is typical for a project require significant financial involvement. The Application to Your Request: If your co-founder is coming up with a significant skills required for the successful development of the project, he or whoever will be entitled to 20% of the equity. But if he/ she is a versatile person and will still contribute to project growth and or financing the proportion of their contribution will be considered in sharing in the above equity structure. It's only 20% for project birth that will be reserved for you alone except if someone joined you in conceiving the idea of the project. And you will equally considered amount you had spent in proportion to total money required for the whole project to know what will be your share for financial contribution. I think you will find the above advice useful.

Dane Madsen Organizational and Operational Strategy Consultant

September 10th, 2020

What you have spent is not relevant to this calculation, only the value of the outcome.


Clipping the job-spec from your bio: "... fundraising, project management, and possibly with tech development. ". You will not find a single person with all those skills as a co-founder; if they do have them, they are usually on their own projects. You have not really articulated what skills your current search is focused upon. Each of those has a different skill set and network (or no network) required, and each is incremental with experience. Each will have a different compensation profile (current versus equity only, terms & conditions on the earn-in/out, rights and privileges, not to mention future expectations).


There are tons of templates available to draft and craft nearly any agreement you think you need. However, they are just that; a template. They are not a one-size-fits-all-solution. One of my consulting clients has encountered an issue with a now-former "co-founder" where the template-NDA did not include a non-disparagement clause. Awkward. Make sure you read, edit, and think through each agreement and not just download and sign. In my experience, there has been magnitudes more capital wasted litigating and settling disputes of all sorts than has been saved in DIY legal.