Equity · Growth

Third co-founder. How much equity should I give away?

Anonymous

Last updated on June 14th, 2019

One year ago, I started a side project (evenings and weekends) with a friend.

After 9 months of hard working, we managed to release our MVP.

Until now, we invested around £10.000, and we have about 2000 users just in London. So we think we are ready for the seed round, but we have no experience with fundraising.

My co-founder is a marketing specialist, I am a software engineer and we have a 50/50 equity split at the moment.


A few weeks ago, a business development and strategy type of person approached us with the proposal of joining the founding team.

We think that he will bring lots of value, experience and network into the project and help us to push the project to the next level.


My question is, should we accept the proposal? How much equity should we give away?

Meurig Freeman Problem Solver

June 14th, 2019

I would say, don’t accept the proposal, instead stick to two founders. You and your business partner sounds like you’re working well and you have built something people want to use (well done!).


Two is the ideal number of founders, if you add a third there are many more relationships that need managing and it becomes harder to reach a consensus and make decisions.


That’s not to say you might not need this guys help and that you might not give away some equity to this guy for his assistance. But I’d keep yourselves as the two founders and him as an advisor or employee on suitable terms.


I know that’s not what this guy is looking for, but personally I’d let him walk away before potentially messing up a good thing. If he thinks it’s a good bet, so will others 👍

Steve Lehman Investor, Entrepreneur

June 14th, 2019

If you are adding in partners and giving up equity, I would suggest that you scale their equity in based on time and performance. Just because someone has a skill set that you need, does not mean they would make a great partner. Weigh the value against the equity you give up, and compare to hiring someone for the job instead of giving up equity. Take a test drive before you buy.......

Mike Moyer

June 14th, 2019

This is an EXTREMELY common problem. At the core of the problem is the fact that you doled out equity in advance of doing the work. This means you gave equity out based on your intentions, not on reality. The future is unknowable and you are realizing that you have no idea what this new person will contribute in spite of what he promises. So, no matter what number you pick, it's going to be wrong because what you think will happen will probably not happen exactly the way you expect.


This problem is easy to fix, but you need to re-frame the situation. It's not about what each person gets, it's about what each person gives. "Giving" implies that a contribution is being made, but not paid for.


If someone gives their time, money, ideas, relationships, etc. to a startup company he or she is essentially betting the fair market value of the gift on the future outcome of the company. So it's not really a gift, it's a bet...


You and your partner have each bet 9-months of your time and £10.000 . But the betting isn't over. You will continue to bet your time and money until your business is able to pay for your time (salary) and over the expenses you are covering out of your own pocket.


When the new guy comes in, he will bet his time and money too. Until you are able to pay him, he will be placing bets.


Each person's share of the equity should be based on each person's share of the bets.


The above statement is obvious, logical, unambiguous and universally true. In fact, there is literally no other way to solve the problem and create a fair split.


Imagine your startup as a gamble. You and your partner are betting as a team, not as opponents:

  • If you each bet £1 you should each get 50% of the winnings.
  • If you bet £1 and he bets £2 you should get 33.3% and he should get 66.7%.
  • If you bet £1 and he bets £2 and your new partner bets £1 you should get 25%, your original partner should get 50% and the new guy should get 25%

Simple, yet essential to getting the equity split right. Consider the bet again:

  • If you bet £1 and he bets £2 you should get 33.3% and he should get 66.7%

"But," you say, "we had a deal for 50/50!" You could sue him and probably win, but that doesn't mean it was fair...


Consider this bet again:

  • You bet £1 and he bets £2 and your new partner bets £1

You tell the new guy that even though he assumed 25% of the risk, he only gets 5% of the winnings. "Our bets are magical because we are special so we get more..." Do you think he would join? Even if you could fool him into accepting the deal it still wouldn't be fair.


Fair is fair. Anything else is not fair.


This approach, called the Slicing Pie model for cofounder equity splits, is used by startups all over the world and it never fails to create a fair split. There is even a law firm in London that specializes in the implementation of Slicing Pie.

P Saldana Needed - Tech Co-founders YES two (back- & front-end)

June 14th, 2019

It sounds like you’re ready for your first early hire. Offer equity and a minimal salary. Another option is find a consultant that will accept 1-2% equity in a company that has traction.