Startups · Founder equity

How much equity to give my technical co-founder?

Joe Trumph Co Founder at Far & Beyond

November 29th, 2015

I have been the non-technical sole founder of my startup company for 8 months since it first started earlier this year from an idea and developing it into a ready product.

I have been looking around for a suitable technical co-founder for a while and recently i found one.

He is currently working in another startup for 3 years and was one of the founding team member. He is currently the VP in charge of development efforts in both local and overseas offices.

I was impressed by his resume as he has both the experience and technical skills which i am looking for. I asked him what makes him want to leave his current startup company now as it is well funded and has expanded overseas.

The reasons he gave were that company is now running smoothly and he feels that he has done his job and he is not needed anymore and it is getting boring for him. Another reason was that the amount of equity give to him was not significant.

He also told me that he was approached by some other funded startups but he declined as he doesn't believe in their ideas. He said that he believed in my idea and my vision.

He said that he requires a monthly salary but knows that my startup is still bootstrapping and couldn't afford it. So his suggestion was to stay in his current company while helping me with all the development efforts of my company and planning.

My question is how much equity should i give him and how should i structure it in order to protect myself better.
More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Joe Emison Chief Information Officer at Xceligent

November 29th, 2015

If you can't afford to pay the salary of a technical co-founder, then you need to raise that money. The number of quality technical co-founders you're going to get on a pure equity basis is so close to zero that it might as well be zero. (Exception: you know each other outside of this and want to work together).

You should also be very worried about your company's legal right to what someone is producing who is full-time employed by another company. Many employment agreements will require that anything developed by an individual while they are employed full-time by the company are the property of that company. Even if you get legal paperwork in place that makes the work product your company's, that's no guarantee that you'll actually own it, and you presumably don't want to get locked up in an IP lawsuit as you're trying to start a company. The fact that you know he's full-time employed elsewhere is a significant impediment to you winning that lawsuit.

Mike Moyer

November 29th, 2015

The Slicing Pie model for equity splits will solve your problem 100%. It will allow you to create a prefect split that not only reflects the time and money you have invested to date, but also the fact that you are paying him a below market salary.

Unlike every other equity split model in the world that basically requires you to guess. The Slicing Pie model allocates equity based on relative risk.

When people contribute time, money, ideas or anything else to a startup they are taking risk. The value of that risk is equal to what they would have otherwise been paid for that same contribution to a company that could pay. They are, in effect, betting the fair market value of their contributions on the future value of the company. You have bet eight months of forgone salary and he will be betting the unpaid portion of his salary.

Slicing Pie allocates equity based on the relative value of each of your risk. Your share = your risk/all risk. It is a dynamic equity split so it changes over time to stay fair.

The Slicing Pie model will not only give you a perfect split, but also tell you the right buyout price when someone leaves the company.

I've written several books on this topic and you may have one if you contact me through SlicingPie.com.



Bruce Carpenter Co-founder and Principal, Harbour Bridge Ventures

December 5th, 2015

Allocating Equity in a Startup


Building a business is not unlike constructing a building, except that the required materials aren't tangibles like bricks and mortar, but intangibles such as a great idea, strategy, execution and most importantly capital. However, with multiple founders showing up with varying contributions at different times, it's hard to know how to divide the ownership of the company. This is particularly difficult when the company is in its early startup or development phases. However, before outside capital is sought, the division of equity ownership amongst the founders is a matter than must be settled. How much should be given to the entrepreneur bringing the idea versus the individuals required to execute? What about the investors contributing the initial development and launch capital?


Fair and equitable allocation of equity ownership is a question frequently asked of Harbour Bridge Ventures. While leaving this question ultimately to be settled by the entrepreneurial founding team, we have always suggested that a winning business partnership is built on compromise and fairness. But to split up equity fairly, all founders must agree on exactly what "fair" is. The option we most often suggest is for founders to think like investors when determining the value of their contributions, even if they have no plans to raise funds. As there is a significant volume of information and experience of valuations conducted by investors, this can be useful in providing a market-tested, third-party framework for equity allocations. By relying on such market-driven criteria, no party needs to prove the value of his or her particular contributions.


So let's take a closer look at how professional investors value founders' contributions in a Series A round, when a young company closes its first phase of financing. Typically, after such a deal, founders will be left with 30% to 50% of the total equity. That represents the product, the strategy, and other noncash contributions. The investors will get 30% to 50% of the equity in exchange for 12 months to 24 months of operating capital. Some 10% to 20% is reserved for future hires, including key managers.


Of the 30% to 50% set aside for the founders, the idea alone commands little payout. If contributing nothing more, the person who came up with the idea--no matter how brilliant--can expect to hold on to less than 5% of the company. After all, ideas are bound to evolve many times during the life of a startup. Even the principals of venture successes such as Google and Facebook only began to see a premium after the Series B and C rounds, once the businesses started to gain traction.


Instead, the bulk of founders' equity is granted for developing the product, building a viable business plan, and leveraging relevant experience and contacts. Founders responsible for the product or strategy should be compensated for their efforts, with a premium paid for a proprietary, working product. Founders who join the company full-time deserve more equity than those making early, one-time contributions. Opportunity costs are a factor, too. Equity should not only compensate founders who are giving up lucrative careers but also motivate them to propel the startup over the next four to five years.


Then there's the importance of cash. Even companies launched through bootstrap capital generally require some working capital to finance day-to-day operations until the company can support itself and its employees. This may be far less than a venture capitalist is likely to invest, but that's partially offset by the fact that the company, and any investment, is much riskier in the early stages. And these days, capital is frequently scarce and difficult to raise for early stage companies. In a tough fund-raising climate, cash commands a premium. In the current financial climate, Investors are valuing potential portfolio companies at 40% to 60% less than they did in 2007, when private equity flowed relatively more freely.


A final point is that, as time passes, the company will become less risky, and those who take on less risk deserve less equity. So later investors in a business that is cash flow-positive will receive far less for their contributed capital. Similarly, a founder or senior manager who joins a startup after it already has some traction should expect less equity -- the foundation, after all, for later success and growth has already been laid -- than an early founder who took potentially greater risk.


Vladimir Edelman Chief Executive Officer at HEROFi

November 30th, 2015

I'd echo quite a few of the thoughts already made here. While I don't find the idea of someone working part time on your company while they continue at another as offputting as some - I don't have enough visibility into your needs to understand if that is sufficient. If he treats your needs as a hobby, you will get hobby-level work. 

What I would be far more concerned about is the issue brought up about intellectual ownership. It is standard today for companies to have rights to everything produced by technology personnel while working for them. Proving that he worked on your project only during his own time is time-consuming and a dangerous distraction should it get that far. 

I also find his boredom after 3 years with a start-up and as one of its founders a little off-putting. If he doesn't have enough equity, he should be in a position to negotiate for more if he is valuable to the enterprise. As the technical leader and co-founder, the boredom feels self-created. You don't get bored if you are engaged and control your own destiny. 

In terms of equity - its hard to say without knowing how critical he is to your start-up. The standard answer of 10-15% is likely in the ballpark, but that can be heavily influenced on how critical he is at this junction, whether you are raising money, how key he is to that money-raise, how complex the technology is, and how much of this complexity continues long-term (building a team, managing, etc).

-V


Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

November 29th, 2015

Ask yourself - What is the role of a co-founder?

Co-founders drive the direction of the planned organisation. Instead of it being one person's vision and idea, it becomes a stronger, shared vision, made up of two brains which see the problem and opportunity from a different viewpoint. Together you create a 3D view. And since you create the view and the opportunity together, you both share in its success - and share the financial and operational risks of its failure.

That's not what you're describing here.

You're describing someone you see as an employee, hired to do the specific task of developing your product. Now you're quibbling over what that task is worth to you.

You have a 20th century attitude to technology. That you see the product and technology is just a tool to make it.

The reality is that, in a world where every business is made up of pixels and bytes (images and data), how well you manage those pixels and bytes decides how good your business is going to be. And in a world where pixels and bytes are easy to change - and thus change constantly - it is not enough to create a product once. You will be judged on whether you can change your pixels and bytes faster than the market and get into a position where you drive the market, rather than it driving you.

This person is thus more than 50% of your company. You're creating the "starter for 10", he is going to create the rest - with systems which take feedback from the market, turn it into the insight for your product revisions, build the relationships which take you forward and manage the costs to ensure profitability. Yes - it really is that important.

So arguing over shares here is bald men fighting over a comb. There's no pint because the company isn't going to be successful. You're still stuck in the twentieth century with the wrong attitude to build a modern company.

Michael Blicker Trader

November 29th, 2015

Joe my advice is you need to take a long hard look to determine whether this guy is actually the right co-founder for you. If you have some technical friends with a similar programming background, I would get their advice on this situation. Also, if this guy truly believes in your vision, he should quit his job and join your company.

how much time per week has this person decided to provide to your company?

are you sure that his technical abilities are what you need to build this platform / app? If so, do you have a friend who has the ability to evaluate his skills? 

What type of vesting schedule are you thinking about? 

What are the conditions you are thinking about including as part of this co-founder agreement? Do you have a lawyer to draft this agreement?

Is the guy based out of the same city or is this a remote correspondence sort of thing? What are the conditions for termination of the contract?

I understand you want a technical co-founder, but you need this guy to commit to your company. There's no half way in the door. He either commits and becomes your co-founder or stays at his other company.

I'd sooner pay someone who can fulfill what you need technically then to enter a situation with a potential co-founder who can't fully commit to what i'm assuming will be a lean methodology approach. 

Anyway my 2 cents.

Kevin Carney Content Marketing works, but needs better tools.

November 30th, 2015

Joe... I strongly recommend you buy a copy of the book "Slicing Pie" by Mike Moyer. http://www.amazon.com/Slicing-Pie-Company-Without-Funds-ebook/dp/B0096EFHBI It describes what looks like a great system for dividing equity based on contribution. For what it's worth I'm in the exact same position you are. I've been working solo on my startup for just shy of 2 years and now I need a technical cofounder, whom I'm in active search of. Kevin Kevin Carney *Inbound Marketing University * kevin@InboundMarketingUniversity.biz 650-444-1318

Anonymous

November 29th, 2015

Assuming you are the only founder currently, give him 45 % with 4 year vesting. Or 30 % with stating that you will look for a 3rd cofounder. Pay him the same amount in salary as yourself (if none then none). And require him to quit his dayjob at once.
If he is not willing to quit, move on. 

Oh and btw I agree with Joe, his current company probably owns the right to everything he develops right now, even for your company. That is a massive risk

Megan O'Neill Founder/CEO, oodfay

December 1st, 2015

Definitely talk to an attorney before you bring him on and be careful how you structure.  Always should involve an attorney so everything is clearly spelled out in writing.  

California law is favorable re: moonlighting but still has limitations and you want to be extremely careful, as others have said.  

Agree that the equity largely depends on whether he is joining you in the boat (meaning giving up his day job) or just "helping out."  

Adam Wohlberg

December 2nd, 2015

How about a 4-year vesting schedule with a 1-year cliff.  Isn't that standard?  If he doesn't work out you have the 1-year cliff in place and the equity vests over 4 years so if he's great, he has incentive to stick around. As far as %, it depends, greater than 0 and less than or equal to 49.999999999999999999. ;)