Equity distribution · Equity contracts

Should you "sell" your cofounders on share percentages?

Mike Whitfield Sr. Software Engineer, EPAM, Google

May 10th, 2015

I'm undereducated in this area. As a technical person, I try to stick to rational conversations since it's uneconomical for me to drift too far into a sales or marketing mindset. This has been challenging, particularly when motivating other staff around me. Notably, I found a situation where a cofounder was unagreeable to the 2% equity I was offering. He latched onto the highest number that came out of our advisory/attorney meetings (in this case, 10%). I crunched the numbers one weekend, and reasonably after other additional cofounders and a seed investment, his dilution would put him at 2%.

Was he the wrong cofounder to pursue equity so aggressively rather than negotiate terms around the number I gave? (e.g. he should have asked for a protection against dilution clause until post-seed)

Have you experienced cofounders that play hard ball by taking up a lot of your time only to run the bait and switch game?

It seems like the right balance is to offer revenue sharing and contracts lasting through each round of financing (cliff seems best to go through that duration, vesting can last longer). I'd love to hear from others' experience.

Anonymous

May 10th, 2015

Personally, I think 2% is way too low for any co-founder. (If I understand correctly, you haven't even raised seed funding yet.) I think he's just staying safe and making sure you understand his value as a co-founder. Startups are very hard, so when someone decides to take on those crazy challenges with you, it should be clear to them that it's worth it in the long run.


This is probably not answering your question, but it's just my $0.02.

Michael Barnathan

May 10th, 2015

As others have mentioned, 2% for a tech cofounder isn't even in the ballpark for a seed-stage company. Rather than being unagreeable, it sounds like he may have had more experience dealing with equity splits and knew how much his skills typically commanded. He wasn't trying to waste your time - given the norm for this, he probably thought you were wasting his!

If dilution and other cofounders reduces 10% to 2%, then likewise they reduce 2% to 0.4%. Who's going to sign 4 years of their life away for 0.4% of your company? If you get a $100 million exit, is he going to be happy that his 4 years netted him only $400,000? Especially in a field where people can net >$100k straight out of college?

It's different if you're offering something close to market salary, but then he's still an employee rather than a cofounder and is being compensated as such.

Bridger Jensen Owner & Founder at Venture Imagery

May 10th, 2015

Bridger's $.02:

All depends on your projections vs his contributions vs risk.

Sounds like this person didn't feel 2% (of what he expected the company to grow to) was worth the risk involved in continuing. Sounds like you both felt time was wasted. 

You likely gave him the offer considering that he may reject it and you'd be back to square 1. Thus, if you can replace him with someone else, of equal skill, and for the same offer, then you did right. If not, perhaps he wasn't properly inventivized.

Market sets the price. If you can replace him for the same salary, (or offer) then you found the price.

You mentioned that you learned a lot. Keep it up, doesn't sound like a complete waste of time.  :)

David Schreiber Founder

May 10th, 2015

My feeling is that you shouldn't work with this guy, because regardless of whether he brings enough to the table to justify 10%, you're having trouble communicating, and that has led to you not trusting him. A co-founder is a partner and a peer, and it's hard to have that relationship with someone if there are trust and/or communication issues.

It's not clear to me, BTW, at what point he went from employee to potential cofounder, and whether the equity expectations went up at the same time. But regardless, in your first message it sounded like you were calling him a co-founder to whom you had offered 2%. If a VC interpreted something you said that way, they'd probably consider it a red flag. So make sure you're clear to yourself and to investors who is in what role, and that anyone you are calling a co-founder is someone whom you're comfortable 1) giving at least 10%, and 2) treating as a peer.

Anonymous

May 11th, 2015

Why not 49 %? You keep 51 % and full control, both common stock so you dilute both at the same rate. And both you should vest their stock in 4 years. Vesting is _very_ important.

98 % of a company that is worth zero is less than 51 or 90 % of a company worth 10s of millions

I have people to bring into a cofounder role, but I can't do that until the company/product gain more traction (this is obvious to me).

Ah, well not to me. What do you mean? The other way around, to bring on employees before revenue or investment is for sure impossible.

To be honest, it sounds like you already have a messy situation. Either get experienced advisors that tell you how to proceed next time, or completely abandon your current project and start anew with a cofounder right off the bat.

Michael Brill Technology startup exec focused on AI-driven products

May 11th, 2015

To be fair Mike, your original question was pretty specific and used the word "cofounder," which is rich in semantics around these parts. So I think the feedback you've received shouldn't confuse you. And I have no idea why it matters whether the feedback came from people with a technical or non-technical background. 

A few thoughts:

* Stop using the word cofounder. This person is an employee. You don't consider them a peer or central to the success of the business. You created your own mess by setting expectation that they could be a cofounder and cofounder almost always means a significant chunk of equity... not 2%. 

* You let this person take on a major role in advisor/investor discussions. Combine that with "cofounder" discussion and, again, you shouldn't be surprised if this person wants a more significant equity position. Where is the "politics" in all this? You have someone who wants to forgo a paycheck in exchange for equity and is trying to negotiate the best package for himself. Why is this a bad thing? Why does this make you want to "axe him?" 

* "they hardly understand the 1y vision" ... If that is the real case, then fire him. You clearly have little respect for the guy so why all the contorting? 

* I don't understand the paragraph about employees not believing in revenue. Here you have a guy that is willing to forgo cash compensation for equity, so *clearly* he believes in the ability for the company to generate revenue in the future. Or was this paragraph a different topic?

Again, it's unfair to assess from just a couple paragraphs, but it *seems* that there some issues on your part that span communication, leadership, trust and control.  Communicate the vision, make it clear what needs to happen to achieve it, define their role(s), and define their compensation. Allowing someone to float around, thinking that they're a cofounder whereas you appear to think that they're barely functional is unfair and is your own doing.

[Slightly exaggerated and one-sided for effect.]

Michael Brill Technology startup exec focused on AI-driven products

May 10th, 2015

Let's say he's a real cofounder with contributions that are roughly comparable to other cofounders. How does he end up with a piddling 2% after a seed investment? Obviously all cofounders don't necessarily get the same equity, but unless you guys are a marching band, 2% seems well below any reasonable expectation. 

David Schreiber Founder

May 10th, 2015

Without specifics (number of cofounders, how equity is divided up between them, this co-founders salary expectations, how far along the company is now, etc.) it's hard for me to analyze your potential cofounder's behavior. But a good rule of thumb is that if a person does not have at least 10% equity, they aren't a co-founder (Y Combinator, for example, requires each co-founder to have at least 10%). If this person's contribution only justifies 2%, then are an employee (and should receive a market-rate salary).

Mike Whitfield Sr. Software Engineer, EPAM, Google

May 10th, 2015

He was an employee that wanted to pursue capital instead of customer development (what I hired him for, in part).  I'm flexible since I think startups need to strongly align with each individual's motivation, so I let him go down the investment preparation route to see what turned up.  This somehow got out of hand and turned into him being in an advisor meeting in addition to putting me in the room with his attorney contact.  Somehow, the expectation for salary was minimized and the request for equity jumped to 10%.  He had no personal interest in salary since his veteran's checks took care of his basics.

Organizationally, there were a lot of takeaways and lessons to learn and grow from.

There are no other cofounders at the moment.  Perhaps employees might see this as an opportunity to pursue some cofounder role?  I have people to bring into a cofounder role, but I can't do that until the company/product gain more traction (this is obvious to me).  I see a conflict of interest with motivating employees/telling them they aren't cut out to be cofounders if they feel it's an opportunity.

Bridger Jensen Owner & Founder at Venture Imagery

May 10th, 2015

Ps,Tell me how short-term, revenue-sharing contracts would work if a company is just a startup? Most companies are not profitable enough at launch time for this.

How would it work while the company is negative cash flow?

I'm currently looking for software and ui cofounders, and advisors. I'm interested in this, given that it's a win-win.