Hello fellow entrepreneurs.
We have been in business as a consulting company since 2006 (me 100% owner of consulting company). 1.5 ago we started building a product that we have successfully launched with one Credit Union as a paying client, and we are now in the process of launching with second credit Union later this year, with discussions of launching with 3rd client in q1 of 2018.
I'm now thinking of spinning this product into a company of it's own, and I'm looking for a cofounder with experience in fundraising and sales, and even more ideally with experience of selling to Credit Union industry.
My question is how much equity should i be offering to a potential cofounder? Any advice on biz arrangements, vesting and anything else that I'm not even aware of.
Two co-founders forming a company together in which they will both work full time should expect to split equity between 90/10 and 50/50, depending on what each one brings to the table. You'll have to make that call yourself and it should be a negotiation.
I highly recommend against 50/50 and prefer 49/51 if you want "equal" shares -- one of you should be the leader/CEO with the other as support. A partnership sounds heavenly at first but they fall apart when things change long term. It (nearly) always happens.
Typically your shares vest over 4 years with a 1 year cliff. That means you'd be completely vested after 4 years, but if you leave before the 1 year cliff you get nothing. Conversely, if one of you fires the other without "cause" (e.g. stealing from the company), before the cliff is up, that person who got fired immediately vests the full year even if it's only been a month. The cliff is basically an incentive for both parties to work well together for 1 year minimum.
Get a lawyer and do it right -- take it slow -- and don't get in bed with strangers. If strangers are your only option, try easing into it by paying them a salary and offering generous stock options, rather than co-founding with them. People who seem like a great fit at first, often end up rubbing the wrong way in the long run.
I cannot stress this enough -- unless you have done business together before, you do not know what it's going to be like, so don't be too optimistic about a 4 year journey with a stranger!
If you expect the co-founder to be the primary on the strategy while you run the consulting company, then this person needs the ability and authority to build the separate company. You can remain the control owner, but you need to allocate equity into a pool to allow this person to add other resources. Funding will be required, because of the long sales cycle, to support a team under this person. I assume this is why you want fundraising expertise. Investors will want to see perfectly aligned interests and strategy for the enterprise. Simply, you and this person need to be clearly on the same plan. Others have commented on vesting well enough. I agree with Dmitry that this should be 15% post funding for the co-founder, subject to dilution for follow on rounds if required. Charlie has mentioned a 51/49 split in your favor that would work for the above, with the balance not allocated to the co-founder, as a pool for new hires. I am in agreement with Charlie's general advice as well. Use the lawyer (with experience), go slow, and know this is a relationship that will be more risky than marriage.
Having been burned before, here are my suggestions:
- I would absolutely require a vesting schedule. You already have a product and some traction. They're essentially coming in after you and have more to prove than you do.
- Have an exit strategy if it doesn't work out. Really, really think it through and plan for if it doesn't work out from the very beginning.
- Couple equity to performance. Don't just give your shares away. Make them prove they can deliver. Really charismatic people can sell on confidence. You need to see results.
Although, my question is why you would want to spin it out as a separate company? Many companies that have products also provide professional services. Personally, I would keep doing what you're doing instead of creating another entity and giving away equity for a position you can hire for. Keeps things simple (less admin) and you stay in the driver's seat.
Use Slicing Pie, the only equity model that will give you a fair split.
Think of your spin off as a gamble. What you are contributing in terms of the product, customer, your time, etc. is your "bet" on the future value the company will create. You have already placed some of your bets and you will continue betting until the company starts paying you/creates value.
When you hire someone to work with you, they will be placing bets too. Unless you simply pay them (I'm assuming you're not).
You may bring in others and ask them to place bets too. You can't predict how much betting will be required to reach breakeven or Series A, but when you do, it will be easy to tally the fair market value of each person's' bets.
A person's % equity should be based on that person's % share of the bets.
This is an obvious, unambiguous, knowable calculation.
Every other equity model is based primarily on guessing and predicting the future.
The Slicing Pie model, however, is based on logical facts. You can learn all about it at SlicingPie.com
One of the most important lessons I've learned is to never take on a co-founder on the basis of them being a "fundraiser." A very successful sales person with a history of raising capital is essentially a C-level/President, and will generally receive equity up to 15% post-funding. Also remember, a co-founder is really a partner, which means decision-making is now split. In finance, you may have more luck finding a more senior, near retirement executive looking for a part-time role that leverages their rolodex vs. a scrappy startup person.
That type of person, or a great salesperson are probably hirable now at 5-10% (or less) pre-dilution, which is the route that I would go. Ultimately, investors will be more interested in your success as a businessperson and your company's success in generating new business than as a co-founder's success as a fundraiser.
My 2 cents.
Best of luck,
That's a good thing Alex. The amount of equity you are willing to offer should actually be based on how much investment you seek as well as how much an external investor is willing to offer you. But in the end, you still need to have significant control of your firm/ product even after the equity. Directly message me as I'm looking for a place to put some of my money in if it's highly profitable, we can work together.
When my clients have this situation - I work with them to consider the issue in four steps:
Note: Most people just assume that the results will be distributed according to the ownership (equity) percentage. However, it often is beneficial to develop a separate plan for the results- whether it be “permanent” or time limited.
4. Ownership. How will the equity be divided among the participants.
As a starting point, consider each persons initial contributions- whether that be cash, or “other” assets. Then review the desired equity position for each founder and agree upon a path to reach that goal.
Generally I find that resolving these questions separately and in this order will lead to a much better result. By addressing each item separately, we can identify and address the needs and concerns of each member/ partner/ owner/investor and thereby achieve a better resolution.
Hope this helps. If you would like to discuss your specific situation, feel free to contact me directly.