Founder equity · Technical co-founder

Need help RE-Negotiating equity with my Co-Founder.

Jordan Plosky Co-Founder and CEO at ComicBlitz LLC

April 11th, 2016

Had a talk with my CTO & Co-Founder the other night.  He currently has a 22.5% equity share in the company.  I am around 60%, depending on how much we set aside for future employees.  He doesn’t want an even split, but something to bring the two shares closer together.  In all fairness, I’ve always thought I’ve gotten him for a steal, and now it seems, he realizes it too.
We already discussed that if we do raise his equity, that it is a 1 time thing.  And that the two stakes together = 1 Board vote, with ME always having the final say.  
We of course already have a signed agreement for his current equity, but at the same time, I know that if I don’t budge, I won’t be getting the same productive, happy partner I have now.  It’d be a resentful, bitter partner.  

So, the questions are, how much more do I give him?  And, HOW do I give it to him?  My initial thought is to tack it onto the END of his 4 year standard vesting period, like a 5th year, which protects me the longest, if we were to actually split for any reason.  Open to any advice here.  Not sure this is a standard thing by any means.
Thanks in advance!

Mike Moyer

April 11th, 2016

Your current split is fixed. This means that in order to change it you have to do exactly what you're doing: a painful, confusing renegotiation. This will result in another fixed split which will lead to another painful, confusing renegotiation. This will continue throughout the formation of the company. Each time putting you a odds with your partner.

Your split is little more than a guessing game. The advice you are getting is just more ways to guess. When you do a fixed equity split the guess is always wrong.

Time-based vesting is simply a band aid on a bad split decision.

You need to change your approach. The good news is that there is a way to guarantee you get a perfect split no matter what happens. It is a self-adjusting model called Slicing Pie and it's based on a simple principle: a person's % share of the equity should always equal that person's % share of the risk.

For example, pretend you and your partner are playing Blackjack. You agree to a 50/50 split on the winnings and each bet $1 on the same hand. If you win, you will each get half.

Now, say the dealer deals two aces. This wasn't what you were expecting, but you want to take advantage of the opportunity. You split the aces and double-down. Your partner is broke, so you put down $2 more. Now your total bet is $3 and his is $1. The 50/50 split doesn't look fair anymore, even though you agreed to it. It should be clear that you deserve more. Specifically, you should get 75% and he should get 25%. Your share of the winnings should reflect your share of the risk.

Slicing Pie works the same way. 

When you invest in a startup  you are essentially placing a bet on the future outcome of the startup. The value of your bet is equal to the fair market value of the contributions you make. 

Using a function of these "bets", the Slicing Pie formula allocates equity based on your risk relative to others. It not only allows you to calculate a perfect split, but also tells you the right buyout price when someone leaves.

It is the worlds only way to create a perfect split. Everything else will cause problems.

I've written a retrofit guide that will help you figure out what the right split should be based on the Slicing Pie model. Then, you continue to use the model until you reach break even or Series A investment. 

You will LOVE it!

Chicke Fitzgerald

April 11th, 2016

Jordan - I am a huge fan of milestone based equity.  Code that doesn't produce a revenue stream is not worth much.  

I was just looking at your site (nice job on the UX by the way).  Traffic on your site seems pretty low.  I would give him an incentive to help you build that traffic by focusing on features that will bring in new users and increase the time spent on the site.  Also provide an incentive for him to lower the bounce rate.  

I am happy to speak with you one on one if you need some support through this process.  Another good book is Slicing Pie  http://www.amazon.com/Slicing-Pie-Company-Without-Funds-ebook/dp/B0096EFHBI/ref=sr_1_1?ie=UTF8&qid=1460408623&sr=8-1&keywords=pie+equity    

Roger Smith

April 11th, 2016

1) you typically don't set aside for future employees unless you have created an option pool. If you were to bring on another employee and wanted to give them stock then typically everyone dilutes pro-rata.(of course depending on your founders agreement)
2) If your company has value or the shares have value, granting stock will come with a tax implication. There are 2 ways around that: 1) put as a stock option 2) make it a one time grant post-dated to the date you signed your 83b election. Issue there is that you will need to be granted 100% vested.

Honestly it sounds like you guys might be headed for issues down the road if you are talking about knowing you got him for a steal, but now trying to put the chains on him. Founding a company is hard enough, founders always have issues like any marriage, but you have to be in it with someone you trust and who is always willing to discuss issues openly. Anything other than that will mean disaster at some point.

Paul Gallo CEO at First US Advisors Inc., M&A and Capital Raising

April 11th, 2016

I have a question for you that I think is most important in answering your question. What is the exit strategy? How are you and your Junior partner partner going to make money - no matter the split? There are a thousand ways to structure a deal that works for both of you - but it is best to engineer backwards from the expected outcome to arrive at a satisfactory relationship today. So think about this - I'm not pontificating here - I'm asking for a serious answer. You give me a well-thought-out answer and I will then be able to ask you another question as we step-back from the future - then you yourself will know the right answer - so much better than any outsiders and pontificate

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

April 11th, 2016

Sounds like you have a good partner, and a good partnership. So ask him how much he thinks is fair. I bet it will be lower then you would have given him anyway! :-)


James VinsonĀ  President at V-Chain Solutions, Inc.

April 11th, 2016

Look at this site: http://foundrs.com/ Answer the questions and it will calculate how much you should give but don't give us straight up. He needs to vest over a period of time. I used 4 years with mine so if he decides to leave before 4 years, then he only gets 75% of what he was due. This will retain him. Thanks, James Vinson President, VChain Solutions, Inc. 512-822-6793

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

April 11th, 2016

Really so many questions need to be answered before anyone can make a real answer to this:
  • Do you pay him market rate currently?
  • Did you invest in this company? If so, how much?
  • Do you do equal work as him, more, or less?
  • How important is he to the organization? If he wrote the software and knows all the code inside and out? (Assuming it is software).
All that comes into play. If he is a serious cog-in-wheel, and he puts in as much or more time then you, and you have not invested a ton of money that he didn't then I think you should sweeten the pot.


Eric Sullivan CEO at FoundationLab

April 11th, 2016

I have been through a few partnership agreements and it's always complicated with a lot of details and options. I always rely on a lawyer to present the options and would suggest you do the same. Eric

Jordan Plosky Co-Founder and CEO at ComicBlitz LLC

April 11th, 2016

Paul, short answer I would say that our exit strategy is to sell the company in 5 years.  So, if we sell for $100 million, after dilution, what we're left with currently is most likely something like $15 & $5 million respectively, or somewhere in that ballpark.  This is just very quick, 3 rounds, selling 25% each time math.  
so, that's a potential outcome, with all optimism.  

Chicke Fitzgerald

April 11th, 2016

Jordan - do the two of you have someone that you could trust to help you talk through this together?  I agree with Roger that if there is already a feeling of inequity (either in work or in ownership or both) that there is potentially more going on than just the equity piece.  Like marriage counseling, it is best to have someone that you both trust to help you talk through the issues.