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.

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.]

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.

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. 

Robert Tolmach Entrepreneur and Social Entrepreneur

May 11th, 2015

How would 10% get diluted to 2% by the addition of other founders and seed investor? That suggests they are collectively getting 80% of the company.

David Antila Managing Partner, Product Strategy Partners

May 11th, 2015

This post http://members.founderdating.com/discuss/1799/Have-you-had-any-difficulty-setting-up-a-Grunt-s-commission-in-a-Grunt-Fund-Slicing-Pie while not perfectly addressing your questions, illustrates another method to consider when determining equity, which I personally have used in past startups quite effectively.


Edward Robertshaw Started TinyCall

May 11th, 2015

Cofounder is just a title and thats clearly how you see it. Fine.

If you want people to work FOR you, you offer them a combination of cash and equity. The earlier the company the higher the risk that the equity becomes worth anything. If you pay them market rate maybe you give them no equity, thats your call.

If I was your co-founder, I would laugh at your offer of 2% because its the kind of offer you make first employees (unless you put $1M of your own cash in the company or something... and if you did that then you should probably have different stock for it). Go look at the offers on angel.co for first employees, maybe that is more what you are looking for. 

If you want a co-founder, someone to be there till the bitter end you NEED them to have so much invested in the company they will stay till the end. Not just take another job!