How do you create a fair equity package for cofounders when one has already done a lot of work?

Leena,

I apologize I have to disagree with you, but why is a 50-50 split fairer than valuing the work that got done and will get done? I feel that you so desperately want a co-founder that you're willing to give half of what you already started to build. After all, co-founder B is taking a risk by quitting his job but so does co-founder A and she took that same risk a year ago. Isn't that worth a premium, especially if something has indeed been built during that period of time?

The Grunt Fund model devised by Mike Moyer (author of Slicing Pie) ensures that co-founders get "paid" with equity rights as if they were working for real dollars. The amount of equity rights they vest each month is based on their fair market salary and it may be indeed fair to agree on the same fair market salary for both co-founders. But co-founder A should start with an amount of equity rights commensurate with the effort he already put in. You can and probably should put a discount on the value of that effort as part of a goodwill effort towards co-founder B, but my opinion is that if co-founder B genuinely thinks or simply agrees that co-founder A's work is worth nothing, then they're off to a wrong start.

With the grunt fund model, you can also accelerate co-founder's equity rights vesting by taking revenue generation into account: for instance, if co-founder B can be credited with generating X amount of revenue above a certain threshold, he can earns more equity rights. So the potential for co-founder B to get to 50% or more exists, but it depends on the value he brings, not on some pre-determined agreement.

If you value your 1-year work to basically nothing or you're willing to give it away, that's your choice, but you can't say that it's the fairest choice for everyone. After all, Bill Gates always had more shares than Steve Ballmer, who joined Microsoft a few years after it was founded and I don't think it affected their business relationship in any negative way. That tells me that smart people value and respect each other's work and are willing to acknowledge that at the end of the day, entitlement feelings are detrimental to any relationship (business or personal).

My 2 cents,

Raphael.

Leena,

I originally devised a long, elaborate response to your comments above, but then I thought: why spend my time for someone who - I quote - "has started a business in the time it took [me] to write this paragraph?"

I think you made a great point here and I intend to follow your words to the letter.

Have a great day,

Raphael.

PS: I still stand by my somewhat provocative opinion, but I do want to apologize if you thought it was an ad-hominem attack. It really wasn't my intention to disparage you as a person at all and I sincerely apologize if you felt hurt as a result.