Advisor Equity · Entrepreneurship

Four(4) Co-Founders and Equity Drama!!

Saquib Khan A real hero, don't need a mask, cape or special dress - All you need is DupDup App - Saquib Khan

July 24th, 2019

Greetings,

We are embarking on a new idea - The idea was presented by me to these individuals to make them investors ,and spark their interest. They got really excited and want to become part of the team as Co-founders. They are pouring $5K - $10K personal funds, also will be bringing in $30 from other investors (friends and family). They will be spending 8-10 hours per week on this venture to reach MMP(Minimum Marketable Product)/MVP milestone.


Now, how much equity I should Offer each one of them? Here`s my thought process


1) After Pre and Post valuation and Market size - let`s say we are okay to share 10% equity for $100K investment. I will do the math, and depending upon how much they are investing I give them an equity %.


2) If they are bringing in investment up-to $30K + Spending 10 hours per week I will give them additional 3-5%.


None of them, including me is capable to code or design the product.


There`s one person in the group he is saying to share 25% equity with each of them. This doesn't make sense at all -

Looking at bigger picture - ( Seed, Series A, Series B rounds) post MVP/MMP (Minimum Marketable Product). You don`t want to give up the entire company.


I should at-least have 80% when we open seed round.



What you guys think? What`s your take?


Best,

Khan





Jay Madrigal Co-Founder | Product Officer @ Esports Labs, Inc.

Last updated on July 24th, 2019

To be honest, ideas are a dime a dozen and being the "idea" guy can only get you so far. If the others are willing to put in capital and sweat equity then I'd highly suggest to give them a fair amount of equity in return, they're coming in as your co-founders after all.


Couple of suggestions:

  • Vesting Period - This is always overlooked and I myself have made the mistake early on with my first startup to just straight up give everyone fully vested equity. Vesting enables everyone to put in the hard work and create value for the company while equity is vested over time. Even if a co-founder leaves early on they won't take all the amount of equity allocated to them since it hasn't fully vested.
  • Slicing Pie - Mike Moyer's Slicing Pie is also a good way to go if you REALLY want to be fair. You issue equity based on the value they create or add into the company. So with this, it isn't just the "idea" but it's actual work/value that converts into equity. Example, If they're putting in an equal amount of time into the startup as you but adding in capital as well, shouldn't they be getting more equity than you?


Remember that as a startup, you have a long ways to go and your team, other than the product idea will be the most important part, especially in the early stages. If you have them come in as co-founders, I highly suggest to sit down and hash everything out before moving forward especially if you've never worked before as a team.

Paul Garcia marketing exec & business coach

Last updated on July 25th, 2019

So if you don't have a business plan your pitch deck is a fantasy and therein completely without value. You still only have an idea. While it's great that you have several people who are interested in coming onboard for your idea, you don't want 4 co-founders. For every single head you have as a co-founder, the process of making decisions is likely to double. Two heads, twice the effort, three heads four times the effort, four heads, eight times the effort.


Being the first (employee) in a company does not grant founder status. Even contributing funds does not make a person a founder. And equity is never given, it's earned. 8-10 hours a week is very, very little. Actual founders often pour 60-80 hours a week into their enterprise. At 1/4 time, this is a hobby for the others. Perhaps a hobby they put some skin (money) into, but a hobby nonetheless.


Please do not fall into the trap of giving anything away. Ownership should be earned, in whatever distribution scheme you choose. And, right now you have the opportunity to set how decisions are made. For example, you can own 40% of the company but be 100% in-charge. It's all based on what you agree to. The fewer people involved in making decisions the better off your company will be. That doesn't mean you can't build consensus, get opinions, seek feedback, and discuss things, but someone, preferably just ONE person, needs to hold ultimate decision-making power. Otherwise as I said at the beginning, giving votes based on a percentage of ownership multiplies the challenges in arriving at a decision, can drive people to create clusters of power, and slow down progress because there's disagreement.


Congratulations on getting an offer of money when you don't even have a business plan. I'd never go for that. Nor would I listen to a pitch that didn't have a plan available. You have however started with the validation steps, so that's great. Now follow through and turn validation into a strategy and write your plan, and then validate again.


As a side note, whatever deal you make with investors now it should be the same deal for each of them, not necessarily the same amount of money, but how to attribute value to the monetary contribution and labor (if any) that comes with it. Additional investors will want the same deal later. If you distribute equity now, then you have none left to distribute later and that may be hard to wrestle away from early investors. And if you dilute early investors, they may be very unhappy.


You have a full head of steam right now, so I'm encouraging you to think about the negative consequences that may haunt you in the future from making bold decisions too quickly. For example, what happens if one of your four friends gets killed in a car crash? What happens if one loses interest and wants to leave? What happens if there's a difference of opinion on how things should get done? What happens when one more person wants to join the group? What happens when you've given someone an inflated title, but now actually need a more qualified person to sit in that role? These are parts of what you need to consider in your plan, which is best to be written before you take on any partners, investors, or hire employees.

David M

July 24th, 2019

Positive is you have investment. Negative....your scenario seems riddled with future problem areas. Is there a business plan? If all you have is an idea and you are cutting corners to this discussion I would highly recommend putting together a better plan....1...because there is too much irresponsible unplanned "entrepreneurship" occurring presently. It greatly increases the chances of failure. 2. If these investors are investing in an idea alone..they are highly inexperienced...that brings a plethera of complications including future rounds of investment not to mention potential infighting and lawsuits down the line. Get the business plan. Then sit down with an experienced lawyer to properly structure and contract a competent vesting schedule.

Saquib Khan A real hero, don't need a mask, cape or special dress - All you need is DupDup App - Saquib Khan

July 24th, 2019

@Jay great suggestions!

Peter O'Leary Serial startup guy. Maker and builder.

July 24th, 2019

I agree with what Jay said with some caveats. I haven't downloaded "Slicing Pie" yet so I don't know if the book makes the same points.


I agree 100% with Jay that coming up with a new idea, while important, is only a very small part of a company's overall success.


I am concerned that your "co-founders" are putting in only 8-10 hours in per week. Is that because they will continue to work full-time jobs or perhaps be involved in other ventures as well as yours? If you are giving 100% to this new venture and they are not, then I would consider them investors not co-founders.


You should probably start out with Convertible Promissory Notes for very early stage investors. This offers early investors a lot of protection as debt holders and also defers the conversation about valuation until you get to a Seed or Series A round with more investors. Don't try to give your company a valuation at this stage, it's too early.


Common shares, with appropriate vesting schedules, are then given out to people working for the company full-time. I've personally seen small grants given out to contractors and part time workers but I do mean small.

Saquib Khan A real hero, don't need a mask, cape or special dress - All you need is DupDup App - Saquib Khan

July 25th, 2019

Good morning all,


@ Jay and Peter - We had a meeting last night, and I did some research before hand. Those tips really helped me to drive the conversation, and set realistic expectations and equity. We all have been working in I.T. for past 20+ years, we have worked and known each other since 2013.


We will not move forward until we will have pre-seed round expected $funding to start project.


@David


We have a


1) Pitch Deck - with market validation/size and survey

2) We have user stories focusing on Phase - 1, Phase-2 and 3.

3) I have sent the pitch deck at-least 5+ Angel investors.

4) A great development team which is ready to sign contract.


We don`t have a business plan yet. I don't want to commence this project unless we have a good pre-seed funding. I don`t want build something partially and half backed. We will be focusing on MMP/MVP - The idea is something related to https://www.sap.com and we all have been working in the field of SAP for 20+ years.


Best,

Saquib Khan



Arsalan Amdani Founder of Fourball and LiveWire Apps

Last updated on July 25th, 2019

@saquib I would love to hear about your startup. I own a development agency and we often work on code-for-equity so we could potentially build your product in return for equity. You can reach me at arsalan@livewireapps.com. It is a lot easier to raise capital with a functioning MVP!

Ajané Hinton Co-founder Now Open App, Inc.

July 27th, 2019

I think it's awesome that you have people excited about your project, but I would be a little cautious when making a deal with investors that want to be co-founders. As a founder, I would ask several questions to myself before considering there offer to be co-founders:


1. Do I need co-founders or investors?

2. What does being a co-founder mean to me?

3. Do these co-founders have the experiences and knowledge I need to grow?

4. Is money the only real value that they bring to the table?

5. Is 8-10 hours per week truly adding value to the company?

6. What are my expectations of them in the 8-10 hours of work they will provide per week?


Based on the information above and percentages that you are providing them, I believe that you truly don't believe that they should be co-founders.


I think an investor/adviser role is more appropriate than a co-founder role for these individuals.




Saquib Khan A real hero, don't need a mask, cape or special dress - All you need is DupDup App - Saquib Khan

July 25th, 2019

@Paul - I liked your approach , and I am going to take time to put something which is in the best interest of Company. I will also include SOW, and reserve equity % for any future recruit. I will make sure, as you state I have the ultimate power to make the decision, and planning to hold at-least 70%+ equity. (this will include future rounds e.g. Seed,Series A, and B)


I will give them equity with vesting period.


Best,

Saquib Khan