Ask HN: How should we split the equity?
We are planning to start a startup next month. I am investing 35% of total investment and the rest of it comes from friends & family. I am the business guy and I ll be joined by a technical person. He is not taking any pay cut while I ll be taking 50% of my original salary. Now, should the other person be treated as co-founder or should he be treated as employee? How would you advise to split the equity?
5 comments
Break it down into the three roles that are described here, co-founder, investor and employee.
You are both co-founders. He is taking considerable risk along with you and neither the product nor the market have been proved yet. Split the founder's equity 50-50 with identical terms.
Your investment, along with the rest of the F&F money should be written up as convertible notes. You will get that money back (plus interest) in the form of cash or stock (at a discounted conversion) when the company succeeds. Obviously, since he is not an investor, your co-founder won't get any of that.
Finally, you are both employees. Since you are also both co-founders you typically don't issue additional equity. However, if you both feel it is the fair thing to do then you could issue stock options to yourself, as the CEO, to make up for the salary cut. 5%, vesting over 4 years, would be typical for a CEO (with salary), but then even a fully-paid CTO would expect to get 2-3%. All things being equal, and assuming you don't both take employee stock options (because it is just more paperwork) I would say that your 50% salary cut is worth a couple of percent in options, at most.
The big variable here isn't your personal stake in the company, it is the success of that company. It is important that all parties feel that the split is equitable and they are full engaged in the process. Treating the guy who has chosen to join you at this early (and very risky) stage as anything less than a cofounder could make the difference between him making a superhuman effort to help the company succeed and treating it as just a job. Deal with the investment and compensation issues seperatly.
Oh, and take the hit to pay a decent attorney to get all this written up (corp docs, co-founder docs, stock plan, convertible notes) and filed properly. A few $k now will save major problems down the road and make your company much more appealing to investors.
Good luck with the startup :-)
You are both co-founders. He is taking considerable risk along with you and neither the product nor the market have been proved yet. Split the founder's equity 50-50 with identical terms.
Your investment, along with the rest of the F&F money should be written up as convertible notes. You will get that money back (plus interest) in the form of cash or stock (at a discounted conversion) when the company succeeds. Obviously, since he is not an investor, your co-founder won't get any of that.
Finally, you are both employees. Since you are also both co-founders you typically don't issue additional equity. However, if you both feel it is the fair thing to do then you could issue stock options to yourself, as the CEO, to make up for the salary cut. 5%, vesting over 4 years, would be typical for a CEO (with salary), but then even a fully-paid CTO would expect to get 2-3%. All things being equal, and assuming you don't both take employee stock options (because it is just more paperwork) I would say that your 50% salary cut is worth a couple of percent in options, at most.
The big variable here isn't your personal stake in the company, it is the success of that company. It is important that all parties feel that the split is equitable and they are full engaged in the process. Treating the guy who has chosen to join you at this early (and very risky) stage as anything less than a cofounder could make the difference between him making a superhuman effort to help the company succeed and treating it as just a job. Deal with the investment and compensation issues seperatly.
Oh, and take the hit to pay a decent attorney to get all this written up (corp docs, co-founder docs, stock plan, convertible notes) and filed properly. A few $k now will save major problems down the road and make your company much more appealing to investors.
Good luck with the startup :-)
Great breakdown, adding a few modifications:
1. I'd use a SAFE [0]. They are simpler than a convertible note since they don't have the debt instrument and match up with the investment intent more fully- to get equity at a future for money you put in now.
2. I wouldn't worry about the employee roles. You have different opportunity costs and can try to make them up later via bonuses etc, but I wouldn't formalize that now with an additional equity grant.
3. The most important thing here is that the split is relatively equal (50-50 as cofounders, adjusted by a few points by the investments). To make sure that both of you have an equal position in decisions and discussions, you should keep the equity gap between you as small as possible. That way there will be no weird power dynamics. Having 5% more due to your investment is fine, having 20% more is not.
1. I'd use a SAFE [0]. They are simpler than a convertible note since they don't have the debt instrument and match up with the investment intent more fully- to get equity at a future for money you put in now.
2. I wouldn't worry about the employee roles. You have different opportunity costs and can try to make them up later via bonuses etc, but I wouldn't formalize that now with an additional equity grant.
3. The most important thing here is that the split is relatively equal (50-50 as cofounders, adjusted by a few points by the investments). To make sure that both of you have an equal position in decisions and discussions, you should keep the equity gap between you as small as possible. That way there will be no weird power dynamics. Having 5% more due to your investment is fine, having 20% more is not.
None of this makes sense?
Does your "technical guy" know you're posting this? Why would you consider having an employee when you have no income?
> He is not taking any pay cut ...
> I'll be taking 50% of my original salary.
> I am the business guy ...
Does your "technical guy" know you're posting this? Why would you consider having an employee when you have no income?
We are working in an enterprise now. We both are in same team. The pay cut is from the actual salary which we are drawing in the current company.
I have 10 years of experience and the other guy have 6 years of experience. I ll be handling product design, marketing, sales and investor relations. We both are going to work full time on this.
We are yet to discuss about equity. I want to make sure that I handle it in a fair way.
I have 10 years of experience and the other guy have 6 years of experience. I ll be handling product design, marketing, sales and investor relations. We both are going to work full time on this.
We are yet to discuss about equity. I want to make sure that I handle it in a fair way.
If what you see as fair involves more equity for you, then at best your position might be seen as biased. If your goal is to be wealthier than your cofounder should things go well, then perhaps.you're optimizing on the wrong thing. Unequal equity is unlikely to increase the odds of success.
If the technical person is not making an "investment" [in uncompensated time] they sound like an employee. I would think that equity for an employee should be enough that they want to stick around.
That said, don't expect "co-founder" performance from an employee. If you think you need the technical person to be as committed as you are, you should align their goals with yours i.e. make them a co-founder.
That said, don't expect "co-founder" performance from an employee. If you think you need the technical person to be as committed as you are, you should align their goals with yours i.e. make them a co-founder.
I have just started a little project with a business guy and we both know we need each other. HE has frontend some cash to get it off the ground but was willing to give me 49% of the business which means we are both happy and we both have enough of the business to want to stay up late and bust our balls.
From my point of view equity is to keep people interested , feel that they need to really put in the effort and it can be a trade off for a lower salary whilst it is starting. An employee will always want to go home at the end of the day.
From my point of view equity is to keep people interested , feel that they need to really put in the effort and it can be a trade off for a lower salary whilst it is starting. An employee will always want to go home at the end of the day.
Sounds more like a Quora question. Lot of such questions could be answered on that forum. Try checking it out.
Plus, its not always easy to start a startup and have name tags to your roles. If you are doing that, you have missed the most fundamental part of startup101. but i know a lot of startups still do that, and I don't like that.