Cofounders for low equity, make sense?

Anonymous

December 18th, 2015

I have got several offers to join new ventures as a business cofounder (BD, sales, marketing etc.); but typically the first founders have hard time releasing meaningful equity (above 10%), and eventually its not enough for me to join. How do you solve that, assuming that I prefer joining a pre-seed team?

Bruce Carpenter Co-founder and Principal, Harbour Bridge Ventures

December 18th, 2015

Virtually every startup with a real runway is likely to have multiple rounds of financing where the investors will have a strong say in valuation and structure of the capital stack. It is also unlikely that you will be able to obtain and retain non-dilution clauses related to any seed stage equity stake granted. Therefore, whatever stake is granted during seed stage growth is likely to be seriously diluted over time. Unless you are truly one of the controlling co-founders of the enterprise you are unlikely to have much control over your stake. Having said all of this, remember that much depends on the eventual growth and success of the company. Many early stage employees of Apple and Google are millionaires many times over based on what were initially very small equity positions. Also remember for every Apple and Google there are tens of thousands of ventures that went to a zero valuation pretty quickly.

So, what is the answer to your question? In my view, you need to look at the opportunities presented like an investor. If you decide to take a stake in a seed stage company, you will be making an investment of time, energy, and also a financial commitment of some magnitude either out of your own funds or by virtue of opportunity cost. After considering the risks entailed in that investment, do you feel that there is a sufficient potential return to justify your investment?

Braydon Moreno Co-Founder/CEO at ROBO 3D

December 18th, 2015

Honestly, I would not give equity to anyone unless it is vesting over a period of time anyways.

Tell them you are willing to work on a vesting period so you can show the performance. If it vests over a period of a year or two you can EARN your equity every month or every quarter and the founders will feel more comfortable. We have this with one of our consultants and he earns a small amount of equity every quarter capped at a certain percent. If we do not feel he is doing the work he said he would or is not providing value, we can get rid of him- however he still would have the equity for the period of time he did work.

Dimitry Rotstein Founder at Miranor

December 18th, 2015

Say that you agree for 10% (or less), but you expect to be paid a salary in addition to the equity. If they don't want (or, more likely, unable) to pay a salary, okay, then they can give more equity in exchange (a trade-off - less pay, more equity). If they disagree, then I would start looking for another startup (or create one myself) - working for such low compensation will not be motivating enough in most cases. Anyway, in my experience, such unfair demands usually indicate that the founders are highly inexperienced and don't know what they're doing, which greatly increases the risk of failure, so what's the point.

Hai Habot Growth | Business | Marketing

December 18th, 2015

Agree with the suggestions above + there are tools (like Slicing Pie and others) that can help bridge the gap between the expectations of both sides and used as a neutral way to evaluate the worth of your potential contribution. After running this by the team they should be more open to discussing a "fair" share, if they are not open, it's a bad sign for other things that can (and likely will) come in the future.

John Currie ITERATE Ventures - Accelerating Science & Technology Ventures www.iterateventures.com

December 18th, 2015

I live in your shoes, a good question.

You need to be clearer in your upfront networking about your goals. How are you finding these startups, or how are they finding you? All of your network should know that you are a business co-founder type, looking for your next big thing. If you are a serial entrepreneur, it should be very easy to qualify quickly the teams that #1 NEED your skill, and #2 VALUE your skill (with a fair equity stake).

If you are getting a lot of low offers, that sounds to me like your are coming to the party too late. You may want to find earlier stage ventures, so you can be at the table with the very 1st conversations. Coming in later, it's natural for the initial founders to push hard to be sure what your value is. Most discussions take 2-4 months, with many meetings and proposals about scope of work and value. They're very serious partnerships if you haven't worked together in the past.

Depending on the venture, the potential, how many founders, your role, etc. .... the right number can be all over the map. And your vesting should be the same as everybody else's.

Faisal Memon iOS Department Technical Lead at Citrix ShareFile Quick Edit

December 18th, 2015

Based on your characterization, I think the problem is that you consider yourself as a cofounder (nothing wrong with that) but there are already founders so in their perspective you're not really a cofounder so you won't be getting +10% stake. The way to get around this is by varying your discussions to both earlier foundational stages, and later stage companies. Then you can get a sense of how the earliness factor plays into the equity offered. Its like looking to buy a house, you see houses above and below your range, and then intuition develops from experience, so when you see a house you like, you're already judging it appropriately for its price.

John Maloney Internet of Things Executive Consultant, IoT Engineer

December 20th, 2015

What? How many 'founders' do you think there are? There are not 'first founders' then 'business cofounders' the 'whatever cofounders.' There are only founders.

Sounds like pure chutzpah to invent a term like 'business cofounder.' You may need some fresh air, a walk outside.

Look, 99% of successful startups are driven by passion to change-the-world. If you are sooo great, e.g., "I have got several offers...", then take your greatness and become your own 'business cofounder' (?) at your own startup. Then you can play equity games all day long.

Typical equity share for key vocational players is .01-1%; for executive leadership it's 1-5%. Even that is rare. Expecting 10% or more is insane. Bonne chance.

Hugh Macfarlane Originator of "the buyer's journey", author of "The Leaky Funnel" and Founder & CEO of MathMarketing.

December 18th, 2015

Slicing pie specifically deals with this as Hai mentioned. Every startup thinks they are worth millions when they are only an idea, and every new contributor thinks they're worth a mint just for turning up. By having a candid discussion about fair market value (not hoped-for, "if it all went well" type values) for each contributor's time, and slicing based on income forgone, you get a fair reflection of the changing value of each contributor's share. As a sales guy, the potential is that your fair market value is higher than for a senior developer, and that's a tough discussion, but the 'normal' market has already worked out the relative values for this.

Caution though: "I have this amazing network and can sell" is a promise, not a reality. A good sales person puts a fair share of their income at risk via commissions, and you might need to double dip. That is: risk your 'income' in the cals, plus have any income paid in equity. A double dare, perhaps. Your share of the slicing pie would be based on a notional base pay plus commissions you earn from sales actually delivered.

If, after 12 months you have delivered nothing, then your share should be less than your tech counterparts (assuming a normal base for you would be less than their salary), and you should be sacked for non-performance - leaving with a small share that declines as they continue to contribute.

If, after 12 months you have crushed it, then you might end up as majority shareholder. Both of these extremes are fair, or at least as fair as can be achieved. The tech with the "idea to kill all ideas" and the sales guy with the "roladex to die for" get nothing for vacuous puffery, but get fairly paid in a new economy way for their contribution based on old-economy values.

Greg Welch

December 18th, 2015

Another great topic! I think all the posts here have really valuable information. I have had this same scenario when a founder was asking me to come in as the CEO, investor and Chief. What I would say and focus on here is all conversations around equity show you who the founder or founders are. Here are situations I have been involved in, founder commits to an equity stake, that iI thought was "fair ", soon after they came back and reneged on the deal, this is a major red flag the first time it happens, if there is a second or third time, run away. If a founder feel that their equity stake is worth so much on an idea, ok, I get it but as a few people above have said, it will vest over time. I good founder, along with your help should be able to put meaningful milestones together for you to earn your piece.

On the flip side, you have to be realistic, you cant earn more equity than your worth unless there are other circumstances behind it. If a company is in need of revenue for a financing or for the mere survival of their venture then maybe you are in a better position here, that isn't the usual situation.

As a startup guy, every single conversation with founders and team about equity shows true character on both sides. I have said in other posts that founders, co-founders and core team members are like marriages, you need to really get to know all the parties and players in the workplace and out of it to make these relationships last. Good Luck!

Knut Gaskjenn CEO at Spacily

December 18th, 2015

There is no straight answer to this question, as multiple factors must be considered:

At what stage of the venture are you joining the business? At the idea stage, MVP stage, or later? Because, the amount of work, time and resources already invested will be a key factor
Are you investing anything into the venture, except your time? (i.e. cash) Have the other co-founders put in cash, for example? If they invested cash and you wanted more equity, why not invest some cash yourself? That would show that you are truly committed to the cause and willing to take the risk
Are you asking for both a salary and equity? Because most joiners want both, thus taking no personal risk. The answer is that you can't have both.
Have the current founders paved the way for success? i.e. secured funding or future clients? If yes, then potentially you don't have that much leverage in your negotiation

Contrary to Dimitry's answer - no equity offer is "unfair". That's the total wrong way to look at it. Because, finding an actual startup that you believe in and has true potential is difficult to come across. Plus, if a lot of resources have already been put into the business then 10% is pretty good. Now, if this is venture is at the idea stage, then you could probably aim for more than 10%.

What I would suggest is to consider the 10% to hit XXX sales targets. If you hit above that within a certain time period, then agree on an extra 5%-10%. That proves your value to the venture.

All the best!

Knut

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