Permanent part-time co-founder who wants "dynamic" equity

Nathan LaFratta

July 26th, 2013

I have a potential co-founder with a high salary (he consults) which probably can't be met by the start-up anytime in the next few years (too high to be reasonable as a salary). He's interested in joining PT (15-20 hrs/wk) plus bringing some important, but not game-changing cash. In addition, he wants a "dynamic" equity model between co-founders (3-4). His logic is that we don't know the future, so base the current equity split on what is known TODAY. By his logic, he is contributing equally to other co-founders since they would also be PT until funding. Then equity would be recalculated based on who comes aboard FT. This seems overly complicated, and feels like someone trying to overvalue his contribution by making the true yet useless statement- "We don't know the future". I've really wanted this guy, but I'm starting to view this perspective as a red flag after having been bitten twice in the past with co-founder issues.

Anyone have experience with any aspects of this situation? 

How realistic is it to re-negotiate equity after a first funding round?

I am making too big a deal of this by seeing it as a red flag?

Any suggestions that might be a middle ground?

Thanks all!

Robert Clegg

July 26th, 2013

Are you represented by a law firm? They should have experts on staff that know what types of deals get funded in your area. Crazy structures out of the norm will scare investors off and/or create major headaches. Find an angel group in your area and get connected to find out what kinds of deals are typical. But your lawfirm should be well versed.

When you do get vc investment, everyone signs employment agreements. And that's a time for negotiation. Key players can be trued-up with additional options (new shares are issued that put everything into perspective). At this time a compensation committee could be set up to negotiate contracts and determine compensation. The vc will play a major role in telling people what's going to happen. They are bringing major money and have a lot of leverage here. 

I've seen people bonused and compensated all kinds of ways to get them on board, keep them on board, or devalue their position in the company. VC's will do what needs to be done. They find a way to offer more shares and dilute everyone and then re-adjust everything using an employee option pool. 

Consult with your lawyer. Their are prominent firms that represent start-ups in your area.

Another note - At the time of signing an employment agreement, you will need your own personal lawyer. The company law firm does not represent you or any individual. 

Lydia Loizides Founder and CEO @GGGrit

July 26th, 2013

As a mentor once told me (a VC BTW) K.I.S.S.  Being driven by equity at the beginning is bad way to start.

IMHO - the fact that you've posted this and have expressed your reservations 'but I'm starting to view this perspective as a red flag after having been bitten twice in the past with co-founder issues' - is your answer.  You don't trust this guy now and probably never will.  

Van Chappell

July 26th, 2013

Read the book "Slicing Pie" by Mike Moyer. It exactly addresses this situation.

Andy Dennie Independent mobile developer/architect, consultant, and advisor (Android, web APIs).

July 26th, 2013

This sounds very much like the "dynamic equity" model described in Noah Wasserman's "The Founder's Dilemmas", and expanded upon in Mike Moyer's "Slicing Pie".  It's a little more complicated than just guessing at an appropriate split at some arbitrary point in time, but it seems much fairer to all in that it reflects actual contributions over time rather than estimated future contributions at one point in time.

Nathan LaFratta

July 27th, 2013

Great feedback everyone, thank you for the ideas. I am surprised by the variety of them which makes me realize this is not a black-and-white issue and includes a certain amount of subjectivity. I have read about dynamic splits in The Founder's Dilemma, and seen the website for Slicing Pie but didn't know how practical they were. I've ordered Slicing Pie to give it a closer review, and I've reached out my lawyer as well (I do have legal representation) about how I might approach this and received some good feedback there as well.

Jeb PhD Decision & Data Scientist / Experimental Psychologist / Business Intelligence

July 26th, 2013

I think it's premature to see someone asking for what they want as a red flag -- you want hard negotiators on your team. The red flag I'd look for is if the person isn't able to work with you gracefully to find a solution that aligns his or her incentives with those of the company. If your business happens to take off, you're going to want some adults in the room. My two cents is this: You do know the future. Assuming you already have a fully-specced out minimum viable product, and you know which parts this potential co-founder would be responsible for, value the total contribution as a percentage of the company, relative to the other contributions. Allow completed or partially completed blocks that are valuable to trigger partial vesting; personally, I'd consider incomplete blocks worthless and not allow them to trigger vesting. (Yes, sometimes this is ambiguous... make an executive decision and remove the ambiguity up-front.) Leave some space to allow the person to move into either an advisory or ongoing contributor role after launch. This incents the person to complete their entire block of work while giving them a reason to be available or keep working after launch -- which is when the hard part actually starts. It's OK that some people's contributions are going to be worth more than others. It's also OK if maybe you just want one person to have more potential upside than another. Good luck!

Jonathan Vanasco

July 26th, 2013

I'm honestly not sure if this sounds entirely reasonable or like a potential problem.  I think the devil is in the details, and your question isn't as detailed as it could be ( though it is detailed! )

If everyone is working PT and equal time commitments, than this sounds fair.
If everyone's money is treated as a convertible note, than this sounds fair.  

Not Reasonable-
This is where some of the (lack of) details worry me.

There's the line "[high salary] which probably can't be met by the start-up anytime in the next few years".  Stuff like this always worries me, because people often start saying "I'm making 250-500k a year now, so I want my compensation to be based off that".  The problem with that line of thought with FOUNDERS is that startup co-founders ( and essentially all company owners ) are somewhat expected to work at scale and draw as little as possible from salary; their primary compensation comes from profits and added value.

It's one thing for an EMPLOYEE to value their contribution and start negotiating for more equity because of the loss of salary.  They're typically looking at something < 1% equity and half their salary; it's a terrible deal.  Employees , even employee-owners , are thinking about themselves first , the company second.  Their goal is to get as much as possible in the short term, as they have no long-term control.  

With a cofounder though, there are the competing goals of self-preservation and whats-best-for-the-company in the long term.  If their salary is 500k , the company can only pay cofounders 150k for a few years, and this is a huge issue for them -- that raises a red flag for me .  I'm worrying why they're so focused on the short-term and "getting things out" of the company.  I'm worried why they think cash should go into the salary instead of into more employees/marketing.  I'm also worried about why they're treating this as a side-step or promotion in their corporate life, instead of redeveloping their career ( It's really common for people to switch careers and make half as much (or less) for more fulfilling or potentially lucrative work ).  They're auditioning for a job-role that pays $x; you shouldn't be auditioning for an employee that is currently making $y.

It's also another issue where someone wants compensation for their time at a different rate than others.  Some people will say "I make 500k a year, you make 100k, so my PT hourly contribution is 5x yours". 

I don't know if any of these things apply, but I'd watch out for them.

Anyways, in your situation I'd want to treat any of the cash-in from co-founders as a convertible note with some preferential terms on the discount rate (ie, do better what you'd offer in a seed round ).

Michael Richards GoMotive CEO (mobile client retention system) & PRR Chief Operating Officer

July 26th, 2013

Nathan I think there is a solution to this.

Brian McConnell

July 26th, 2013

Keep it simple. Have a vesting schedule that's linked to a minimum of X hours/month contribution. If someone slacks off, they stop vesting. No need to make it more complicated than that. Also, not all co-founders are equal. Is this person irreplaceable/critical to delivering a product? Or nice to have? Factor that in how much equity you set aside as well. The main red flag I look for is if someone is being greedy up front. That betrays hoarder behavior that will undermine long term efforts to grow the company (the person looking for too much before you've even founded the company will be the person who demands to cash out during a funding round and potentially screw the whole business pursuing short term personal gain). Been there and have the t-shirt.

Robert Clegg

July 27th, 2013

Great! keep us up to date. Would be good to hear how it goes.