Founders · Cofounder

Paying a cofounder for labor and equity?

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

January 26th, 2015

I'm working with with a team of 2 co-founders and 2 partners of a small start-up.
One co-founder who manufactures the product wants to get paid for labor along with getting 40% equity.
This co-founder is named on the patent and is very resistant to sharing the production process.
They want to charge $75/hr for producing the product on top of material costs.

Of course, this is causing friction among them because the others feel the this co-founder is double dipping.

How have you handled similar situations?

Tim Scott

January 26th, 2015

First, he must assign the patent to the company. Second, no one should "get" x% equity. Everyone should vest over time (e.g., 48 months with a one year cliff). Third, if he is being paid, you and anyone else should be paid for their work too. He might argue that his work is worth more than yours, but he cannot argue yours is worthless.

Patent assignment is non-negotiable. If your company does not own it's strategic IP, what can it be worth? You could soften on my second point about vesting. In order words, he gets faster vesting or some part up front because he developed IP before the company began.

Regarding compensation, you should argue that work is work, and everyone should be paid. But what you want is for no one to be paid. It's just a bad idea for founders to take compensation in the earliest stages.

He might be the kind of person who think it best to start any negotiation with an extreme position, or he may just be some combination of naive and unreasonable. You will find out when you push back.

Jake Carlson Software Development Manager at Oracle

January 26th, 2015

Combination of equity and pay is fine. Just distill time down to money, subtract actual pay from that and the rest is compensation in the form of equity a la slicing pie. The math is the easy part; if the guy thinks he's worth more than he is, that's another matter. Make sure everyone's contributions are factored fairly. The patent is a little harder to valuate but once that's done just factor it in. 

Shingai Samudzi

January 26th, 2015

This seems like a situation suited for Mike Moyer's Slicing Pie model of dynamic equity distribution Sent from my iPhone

Cameron Carey Manage Energy for Efficiency and Savings -Founder, President, CEO at Sustainable Energy Solutions, Inc.

February 21st, 2016

As Shingai says, see "Slicing Pie"

Hugh MS Chief Intacct Data Migration Specialist at The Financial CoPilot

February 22nd, 2016

We created a model that handles that very problem 7 years ago, reducing the problem down to distinct types of contribution and factoring in their replacement market value. The model works for both startups and existing company equity buy-ins, whether or not distributable cash flow is available. We also wrote and provide the software that facilitates the negotiation of blended contribution from a variety of partners, offset for time-value of money considerations of specific contributions.