Equity · Convertible note

How to do equity splits with unequal upfront cash?

Matthew Campbell General Purpose GO Hacker at DigitalOcean

January 10th, 2015

So I launched a prototype after a few months of development. I developed this myself (I'm a developer) and with the help of two other paid resources. Going forward i'm going to have three fulltime people that I'm paying for out of pocket. I'm trying to bring on a very strong founder, who wants a 50% split. I normally wouldn't mind this however I'm sinking significant capital into the company. How would you normally handle this? I'm considering offering up that all the capital I put into the company turns into convertible notes on non voting equity, so I would have a higher upside, but he wouldn't have to worry about me overturning decisions. Anyone have a similar situation? This product has launched and has some users using it, but its certainly pre market fit and pre revenue.

Michael Barnathan

January 11th, 2015

"Who is this person, that simply joining your company is worth what you've already put in throughout its entire lifetime?"

If you can answer this question seriously, then give him the 50%. Otherwise, reconsider the split.

Val Tsanev Founder at CityRaven

January 11th, 2015

Hi Matthew

My personal view is that if you are putting yourself all the capital especially for paying full time employees and you have already developed the MVP by yourself and have some customers using it, you have done a lot of work already by yourself. You have de-risked the company substantially. Also the fact that you will keep on bootstrapping the company with your own cash you should get much more than the 50% equity, in my view, or to put it differently the other potential co-founder is getting too much at 50% especially if he/she was not involved in building the prototype, in getting initial users or in injecting capital into the business. Unless that founder is of the caliber of Jack Dorsey and I really doubt that is the case, I would reconsider the equity split. 

Good luck!

Judit Fabian Seasoned Finance Professional

January 11th, 2015

Hi Matthew,

 

My understanding is that you value whatever you have put into the company (money and effort) equal to what your cofounder brings to the table. If you plan on raising money in the future from outside investors, I would be cautious about how you value the upside on the shares to be converted to in exchange for lack of voting power when you put additional capital into the company in exchange for a convertible note. Make sure it doesn’t backfire at your next fundraising round.

Matthew Campbell General Purpose GO Hacker at DigitalOcean

January 11th, 2015

Thanks for the responses, I believe the co-founder is at a point where they only want to join at 50%. I agree its not totally worth it on my side contributing multiple full time resources. I'll go back to them with a lower equity share. Otherwise I'll just press forward and hire more people instead of taking on a co founder.

Steve Simitzis Founder and CEO at Treat

January 11th, 2015

The way I've seen this done and how I've structured this for my own startup: your contributed time is your equity (vested over four years), and your contributed capital goes on a convertible note. Any cofounder who wants to level up and contribute capital can have the same deal. Keeps it very clean and fair. If one of you leaves behind unvested shares, your capital doesn't vaporize.

As others have pointed out, what concerns me is the 50% after you've de-risked the startup, and the non-voting shares. Maybe this cofounder is worth the 50%, but why negotiate against yourself on the non-voting shares? Two classes of shares is just more billable hours for your lawyers, in addition to being unfair to you. You're already offering him a generous amount of equity in good faith.

Are you wanting to structure the deal this way because you want your cofounder to be CEO? The CEO doesn't need 50+% (and rarely has it, except maybe for a fleeting moment at seed stage) to effectively manage a company.

Steve Simitzis Founder and CEO at Treat

January 11th, 2015

What he wants vs how much value he brings are two different questions. It should be more about the latter. Try playing with the calculator at foundrs.com to get some ideas.

Ken Carpenter Software Engineer at Arista Networks

January 11th, 2015

Read the book "Slicing Pie" for a fair way of dealing with varying levels of contribution and how to account for money vs. time. http://www.slicingpie.com/book/ It deals with this situation and many others. Ken Carpenter Sent from my iPhone