Co-founder compensation

Reuben Piryatinsky Tech Entrepreneur and Product Manager

December 11th, 2012

Hi FDers,

I\'m discussing a founder agreement with a person who wants more equity than
I am able to give up. Therefore, I\'m looking for ways to compensate this
person with a combination of equity and other incentives.

I brought this person on board a few months after I founded the startup. By
that stage, I did some business development wrote the prototype on my own.
We\'ve worked together for a trial period on an informal agreement, where no
equity was discussed. I would like to retain him since he\'s a talented
software architect and also someone I\'ve worked with in the past. The
challenge is compensating him appropriately and fairly. My startup is not
yet profitable, but one solution I thought about was agreeing on bonuses
once certain revenue targets are reached.

I\'d appreciate any advice on handling this situation.

Thanks,
Reuben

Shahab Layeghi Software Professional

December 11th, 2012

Hi Reuben,

I suggest taking a look at this book called "The Founder\'s Dilemmas". �It\'s a very good reference for startup founders, it\'s a bit long at times, but you can skim through the parts that feel�repetitive. �There\'s a chapter on equity splits and compensation. �You can do your research and thinking, and have a dialog with your potential co-founder (maybe even give him the book to read as well). �As you know it\'s very important to make sure all the founders feel they\'re fairly compensated , otherwise problems will arise in future.

http://www.amazon.com/dp/0691149135/

Best,

Shahab

________________________________
From: Reuben Piryatinsky <rpiryhttp://groups.google.com/group/founderdating?hl=en.

Thomas Knoll Executive Advisor & Business Coach. I help entrepreneurs survive and thrive at building their teams and businesses.

December 11th, 2012

My favorite resource for learning this equity thing:
http://refer.ly/aVJqis also free for amazon prime members to read.

Ajay Kori Co-Founder at UrbanStems

December 11th, 2012

I second this rec- was lucky enough to take the course with Professor
Wasserman and he covers a lot of these situations (including the equity
split question you originally asked) through the lens of the data he\'s
collected from hundreds of founders in the past.

Mohamed Alborno Director / Producer @ The New Country Film Project

December 11th, 2012

Hello Reuben and awesome founders,
It\'s a tough question and I always wish that people share their actual numbers. I asked a related question in a conference and got this answer/or what I remember :-): "shares mean nothing if the company isn\'t successful", you can have 80% of a company that\'s worth 0. So my advice is to give him whatever will make him happy to contribute and consider this his baby, of course you can use 4 years vesting, 1 year cliff, or whatever. It\'s really hard to find the right one but each situation is different, depends on your position now.
I heard that there\'s a general direction of giving about 15% shares/equity.
Hope things work well with you.

Mohamed Alborno, CEO who can do a 3 meters high kick (Orange Belt Jiu Jitsu + Hoping to become a Black Belt Ninja who can disappear)

Crowdsway, Inc
crowdsway.com
Creating inspiring videos through aspiring filmmakers.
+1-778-288-5554
Vancouver, BC, Canada.

On Dec 11, 2012, at 9:53 AM, Reuben Piryatinsky wrote:

Mark Peden Advisor (former CDO) at CommutePays

December 11th, 2012

Hi Reuben,

As Mohamed points out, the numbers are critical in order to answer the
question.

"Wants more equity than you are willing to give up.." You mention the
company is pre-revenue. Have you raised any money or do you own 100% of the
company today? Even if you haven\'t secured outside investment, you may wish
to seek an informal valuation of the company in its current state. If and
when you raise money in the future, you\'ll need to be able to justify any
valuation to a potential investor. So, even if you gave him or her 40% of
the company today it is subject to future valuation and dilution subsequent
to additional investment.

If you place a lower valuation on the company today (i.e., $100k), then 40%
would only be $40k (but subject to a 4 year vesting schedule). If you place
a $1M valuation on the company, then 40% would be $400k but still fully
subject to any subsequent valuation. And the next part is where the guidance
of a good attorney can really help. If you are not considering this person a
founder of the company, then both future dilution and vesting schedules
could be different from your own.

In other words, subsequent to additional investment, in a 60/40 model, your
60% could drop to 30% (as a founder), while non-founder shares could be
further diluted resulting in a 40% equity position (pre-funding) translating
to 10% or even 5% equity stake post-funding. Perhaps a few of you are
running to review your founder documents at this point?

Some companies choose to identify total shares outstanding, placing a par
value on each to where equity compensation is approached from a cost/value
standpoint. Meaning, you could have 10M shares, with a .10 cent par value on
each, and offer vesting on 400,000 shares (which would translate to a
significantly lower equity stake, but have a higher perceived value). Make
sense?

Best of luck with your venture,

Mark Peden, CDO

CommutePays, Inc.

Jeevan Koneru Software Developer

December 11th, 2012

Rueben,

A few months ago I read an insightful yet simplistic answer to the (perpetual) co-founder equity split question --
http://answers.onstartups.com/questions/6949/forming-a-new-software-s...
I especially like how the post begins by saying "Fairness, and the perception of fairness, is much more valuable than owning a large stake".

There are also a few calculator out there -- http://foundrs.com/

Obviously, all of these answers are (at best) generic. If I were in your shoes, and assuming everything else (skills, motivation, contribution etc) is equal between the co-founders, I\'d attempt to determine the percentage by which you have reduced the risk to your potential co-founder.

Best,
-Jeevan

From: Reuben Piryatinsky
Sent: Tuesday, December 11, 2012 2:11 PM
To: founderdating
Subject: Re: [FD Members] Co-founder compensation

Thanks for all the suggestions! I\'ll check out the resources you\'ve recommended. Of course it\'s of utmost importance that all founders are fairly compensated. I\'m aware of the "rich vs. king" dilemma.

Mohamed, although every situation is different, 15% sounds like a very low number at the co-founder level.

Daniel, would you be able to point me to any examples of a hybrid equity/options model? That sounds like the type of solution I\'m looking for.

R

On Tue, Dec 11, 2012 at 5:01 PM, Mohamed Alborno <malbo...@crowdsway.com> wrote:

Thomas Knoll Executive Advisor & Business Coach. I help entrepreneurs survive and thrive at building their teams and businesses.

December 11th, 2012

More thank you\'re *able* to give up? Or *want* to give up?

On Tue, Dec 11, 2012 at 9:53 AM, Reuben Piryatinsky <rpiry...@gmail.com>wrote:

Daniel Eberhard CEO, Koho

December 11th, 2012

Hi Shahab,

In my experience a hybrid model of stock buy options at full or discounted
FMV based on certain revenue goals is best. It ensures your direction and
objectives remain closely synced, provides additional incentive to your Co
and mitigates both of your risk. This is all based on the assumption that
you have found the right Co. Best of luck.

On Tue, Dec 11, 2012 at 1:45 PM, Shahab Layeghi <shah...@yahoo.com> wrote:
> quity splits and compensation. You can do your research and thinking, and
> have a dialog with your potential co-founder (maybe even give him the
> book to read as well). As you know

Reuben Piryatinsky Tech Entrepreneur and Product Manager

December 11th, 2012

Thanks for all the suggestions! I\'ll check out the resources you\'ve
recommended. Of course it\'s of utmost importance that all founders are
fairly compensated. I\'m aware of the "rich vs. king" dilemma.

Mohamed, although every situation is different, 15% sounds like a very low
number at the co-founder level.

Daniel, would you be able to point me to any examples of a hybrid
equity/options model? That sounds like the type of solution I\'m looking for.

R

On Tue, Dec 11, 2012 at 5:01 PM, Mohamed Alborno <malbo...@crowdsway.com>wrote:

Mark Peden Advisor (former CDO) at CommutePays

December 11th, 2012

Two requests this group may be able to assist with..

Need assistance in tracking down a merchant welcome kit from Yelp! or any of
the other companies that you might see identified when you walk into a
restaurant. I\'m specifically referring to the window sticker, POS display
card and any other materials a merchant would get when they sign up for
something like Yelp, the Chamber of Commerce, Google, Groupon, etc.

We also have two openings for some Portland (Oregon) based salespeople if
anyone has a recommendation on a go-to source. I\'m hesitant to post
something on CraigsList without asking the network first. We are
specifically looking for someone with existing relationships and
demonstrated success in selling into one or more of the following retail
verticals:

. Auto Care

. Gas Stations

. Fast Food

. Fast Casual

. Sit Down Dining

. Shops

. Dessert Shops

. Bank/Credit Unions

. Book Stores/Coffee

. Dry Cleaning & Alterations

. Salons/Tanning

. Entertainment

. Electronics & Rental Stores

This could be someone in merchant services that is able to add to their
existing product(s) or service(s) with complementary product, or someone
that may be open to joining the company in a full-time (or part-time)
capacity. We have a lucrative, front-end loaded compensation package for the
right individual.

Thanks in advance,

Mark Peden, CDO

CommutePays, Inc.