Me and my friend are starting a company. We are unable to decide on the equity split. He is putting in the seed money and is not withdrawing any salary. I am not putting in any seed money and would be withdrawing a small salary from the company. How can we account for this in the equity split. We both are leaving our jobs and working full time. Consider all other facets relatively equal in terms of product knowledge, network etc.. Is convertible equity a good option where in we split equity equally now and decide on a time frame or event at which his seed money and salary foregone gets converted to equity?
If you leave this for later you may have issues. What is the total value of the business and what value are both contributing individually? If your partner is investing the seed funding and paying you a salary then technically you are an employee in the company/startup. Think of it - if you had funds and had to pay someone to fulfill their duties without paying yourself then how would you term it?
In such a scenario is debt a better way to raise finances. We expect the business to be breaking even in 18 months. Besides expenses are more opex in nature
38000 + 18000 + W = Investment + lost pay + Work
-18000 + W = Salary + Work
If we add another $18000 to his contribution this allows us to see your contribution as work only so we get.
Total == 2*W + 74000
If your valuation after a year is 300k then you have
300k = 2*W+74k
therefore your work contribution comes in at:
226/2 = 113k
113/300 = ~37%
So you get 37% and he gets 63%.
The above ignores things like opportunity cost and time value of money etc which would likely reduce your percentage but if you start splitting hairs at this stage you would probably not work well together anyway.
To begin with, I wish you good luck with the new company.
As far as I understand, everything is equal except that he gives the seed money and foregoes salary. From a neutral point of view, it would be more logical if he gets more equity than you as he takes a bigger risk.
There is always a risk that a new company will fail and if it does, he will lose everything you lose + his money.
Convertible sounds like a clever option. However, if the company does not succeed, it won't be worth anything. And if it does succeed, he will get more equity whatsoever. So in both cases he gets more equity, just in one of them the risk is higher. And from your point of view, what is the difference whether he gets the equity now vs later?
I'm not an expert. That is just my opinion. Keep us up to date with your decision.
Sumitesh, you have to also look from his perspective: if he puts that much money in, plus his time (with no salary), that's kind of adding another $18k that he would add in work hours, in the first year. From my point of view this would be somewhere around a 70% - 30% split in your partner's favour (depending what role each of you will take).
It's not necessarily a good thing that you both have the same knowledge, domain of interest, etc. It's important for each of you to know his role and what impact does that role have.
You can consider vesting a part of the equity (maybe start with 60 - 20 and add some objectives and who works harder can receive a bigger chunk of the remaining equity?)
Hope this helps. Best of luck!
Approximate Value would be $300,000. My partner is putting in $38,000 as seed. I would be withdrawing $18000 for the first year. Both of us are putting in 100% of our time and all the other factors are equal.
Dear Sumitesh - equity split is one of the most important decisions that you and your cofounder are going to make - and you want it to be a fair one. For bootstrapped startups you can have a look on the slicing pie method (where the cofounder contributions are accounted for and then translated into equity share) or go more traditional way of fixed split (always with vesting!). The cash contribution differential should certainly be taken into account - but only as one aspect! I go more into detail on the equity splits in my book on Cofounding The Right Way