Founders · Equity

Think I've found a tech co-founder, now what? Equity, accountability, timeframes etc'

John Duffield

December 30th, 2013

Hi guys, thanks for all the great feedback to my post 'What else can you do to be as attractive as possible to a tech CoFounder?' - I may have found that person. Here's my next questions:

If I've spent 3 months full-time doing nothing but coming up with idea, validating the market, wire framing, paying a designer, getting the MVP coded and building a customer network and delivering proposals, and constantly talking to prospects…. how do we structure the equity to make both parties happy? He suggested 50/50 and I responded with 60/40. The discussions have been very healthy so far. Here's the situation:

He is showing great interest and is becoming emotionally connected by the idea, even suggesting an additional direction within my target market (its a B2B product) which I hadn't thought of and sounds great. He is qualified, great experience, Top 25 school MBA grad, certificate from Stanford etc, startup experience and big corp experience. Lately he's more a CTO / infrastructure type tech-person, big on strategy and gets the big picture, less a coder. He has an offshore dev team for his current business, but is confident he can code the thing himself. 

1. Yes there is no '100% complete product' as of right now, but with paying clients I could fund development (or part of it) myself if I had to. I certainly don't feel comfortable giving up 50% to someone I just met, having put 3 months full time into it (without salary) and paying a designer. Am I justified at 60/40? 

2. Should I have him commit to a 'cash injection' to match my time and cash payments made to the product so far, in order to be an equal 50/50? 

3. I don't want to de-motivate either. But yet, I feel strongly about maintaining control. I can't see myself going anywhere less than bare minimum 51/49 if it came to that.

4. Am I greedy, am I over-cautious, am I stupid? Would love the thoughts. Whatever we proceed with, I need to make sure this person can 'get it done' and in 'reasonable timeframes' otherwise I could be locked in to something taking forever to build.  So am considering a performance-based equity operating agreement which I can have an attorney friend put together. 

Chris Phenner

December 30th, 2013

50/50.

Three months of your 'head start' will be a blip of a rounding error compared to what you risk by putting that spread between yourselves.

Mike Moyer

December 30th, 2013

Wow! Lots of Slicing Pie recommendations! Looks like the book is making an impression!

Please note that I always offer free books to people who post relevant questions to this forum, I'm not just trying to sell books!

Thank you to all the Slicing Pie supporters out there!

A note on Monica's experience- her re-valuing at $40K (pretend value) was the right move. Sometimes you have to adjust to attract early members, but from that point on you should be earning under the same rules.

Anonymous

December 30th, 2013

I'll back up Detrick 100% here. No matter what you choose to do, Slicing Pie is an absolute read. You might or might not like the Grunt Fund concept, but I'm sure you'll get your head a lot clearer after you read it. For $12.55 on Amazon, you really don't risk much and it's a great investment.

As far as I'm concerned, I would never agree to 50/50 in that situation. You've put some effort already and should be rewarded for it. Period. In any case, 50/50 can put you in a deadlock situation, and I don't think any VC or business angel will recommend such an even split if you'd ask them.

Monica Borrell CEO and Founder at Cardsmith

December 30th, 2013

I'll quadruple the recommend to consider slicing pie. I recently found a technical co-founder and he understood and appreciated this approach to splitting equity. 

I had over 200k in historical 'value' contributed according to the slicing pie calculations, but I dropped this to 40k as a measure of good will because I realize that a good technical co-founder is worth her/her weight in gold. If you have a potential one now, you definitely don't want to lose them due to being perceived as greedy. The other problem of course is needing a way out if it doesn't work and if you just found this person, you don't know yet if the partnership will survive. I believe Mike's book offers a solution to both issues.  

Jake Carlson Software Development Manager at Oracle

January 6th, 2014

It's very hard to get firm understanding of where this guy is technically. What examples of his actual development work does he have to show? (Not projects he managed, but actual development work he's done.) If all he is saying is that he manages an off-shore team, we have no idea of his technical prowess. What are the specifics of what he has built that he believes can be utilized for your project? 

Further, it's hard to get a handle on the quality of your MVP without seeing it or having any further details. Therefore, I can't really evaluate the IP value of it nor his claim that it doesn't exist.

Bottom line: both he and you are making very specific claims about the value of what you have so far and the value of what he can bring to the table, and I'm not sure anyone here is in a position to evaluate any of those claims without further information. The number of hours invested on either side is essentially meaningless in terms of value; what matters is what you have to show for it (i.e., the result).

Tom Maiaroto Full Stack Consultant

January 6th, 2014

Interesting. Thanks for sharing, I am very interested in seeing how this goes. More experiences and stories help.

Man, I really feel like you're in a tough spot here. I'm also still seeing a bunch of red flags (what would be red flags in my book). At least yellow flags! I mean taking a departure from tech to get an MBA is great, believe me I wish I could do it myself...But I also have great concern when someone sharply changes their career direction. It could be a problem with follow through. Where's his MBA from? Why did he get it?

It's also really hard to throw around an MBA, certification, or any education as a way to justify a higher equity stake. It comes off as grasping for straws. It's a sell. He's selling you and I'm not surprised now understanding he has an MBA. Actually, it's a positional argument and that's not going to lead to anything good ("Getting to YES Negotiating Agreement Without Giving In" is an amazing book I highly recommend and must remind myself to spend more time going over myself).

To me it sounds like he's dependent upon some outsourced team...Have you seen any of his code? Does he have a GitHub page even? And why his developer team isn't even in the same country I don't know. I mean is he from Costa Rica? Is this where his friends and business connections are? Ok, that'd make sense... But if this guy has no developer resources from his own country...city...state... Why?

His dismissal of your time is also positional and to be frank, kinda insulting. I mean it hurts for someone to say that time and money isn't worth much or anything. That's not true at all. 700+ hrs is not worthless. That's $70,000 at a modest rate. My rate. AND you put in cash of $4,000. Your leads that haven't converted yet, fine. Hard to place a value one could argue...But that plus everything else I see absolutely no reason why you don't have $100,000 worth of value +/-.

It is your decision to take that investment and hand it over to someone else. Yours alone. But I would be trying to ensure you got that same level of value from him. I think the Grunt fund is perfectly fine and fair and I think it was a wonderful suggestion by people here. However, don't forget, you still need to add your value and investment and work to that equation.

You both have pills to swallow. If he can truly add value then you have to decide if it's 50/50, 60/40, or whatever. Maybe it is 50/50. There's no real rule here as you've heard from people...

But I think the pill swallowing on your end should be living with what you give up and the bill swallowing on his end should be that he's not entering this game at ground zero and he's joining you after wheels were in motion.

I say this partially as a frustrated tech person who has been taken advantage of enough times in life. I'm getting good at spotting a good screw. But of course I only have limited insight here. Please take my red flags with a grain of salt, but don't lose sight of your hard work.

Monica Borrell CEO and Founder at Cardsmith

January 6th, 2014

Hi John,  I'm 2 months into a newly implemented Grunt Fund, so perhaps it is too recent to be a valuable example to you. As I previously mentioned, I took the 200k of grunt fund 'value' (which included 30k of my own cash) and reduced it to 40k total value. I did this partially due to my desire to solidify the partnership,, but we also worked collaboratively and honestly to evaluate what the real value was of what I'd accomplished so far. We took learning out of the equation, and focused on what it would take to recreate what we had to start if we had to do it all over again, and then cutting that figure in half. The formula wasn't important, the collaboration in the solution is what mattered. 

It sucks to think that I 'wasted' money and time, but I decided to chalk it up to learning, and decided it was a small price to pay to get to a much bigger PIE that I felt my co-founder could create with me. This valuation exercise in itself was very informative. In doing it, we both recognized that neither of us was trying to squeeze the other, and we developed a serious amount of respect and trust for each other. 

I'd suggest you use the process of setting up the Grunt fund as a way to test whether you really want to work with this person. If you don't have a lot of trust, I don't think it will work. Look for red flags and be prepared to start again your search if you don't find the trust and collaboration.  Feel free to message me if you want to talk more offline.  

Good luck! 

Robert Clegg

December 30th, 2013

Get yourself an experienced lawyer/law firm immediately. 

#1, no sophisticated investor will ever put money into a company that splits control (not ownership). Read your incorporation documents. CEO role, Board roles, shareholder agreements, voting rights....

#2, understand vesting. Even the CEO will vest in many cases.

#3, understand employment agreements

#4. understand that your law firm represents the Company NOT you. Your partner must get his own lawyer to negotiate his employment agreement. The company cannot represent him. If he is not represented, you risk various things later.

note: since the law firm represents the company, not individuals, perhaps your new partner could pick up this tab ; )



Jeff Whelpley CTO at GetHuman.com

December 30th, 2013

+1 for 50/50. The legal agreement will protect you. Either it works out and you will want a 50/50 partner or it doesn't and you will cut him loose before it becomes a problem.

Mike Moyer

December 30th, 2013

I LOVE problems like this because the solution is so simple. The answer is to use a dynamic equity split. The splits you are suggesting are all "fixed" splits. They are never, ever fair which is why you are having such a hard time figuring it out. Dynamic splits are always perfectly, exactly fair. In a dynamic split equity is allocated on a rolling basis based on actual contributions of time, money, ideas, relationships or anything else someone contributes. A good system includes termination rules which determine what happens if someone leaves or gets fired. I've written a book on how to implement a dynamic split called Slicing Pie. You may have a copy if you send me an email to mike@slicingpie.com