Big News: FounderDating is joining OneVest to build the largest community for entrepreneurs. Details here
Latest Notifications
You have no recent recommendations.
Name
Title
 
MiniBio
FOLLOW
Title
 Followers
FOLLOW TOPIC

Question goes here

1,300 Followers

  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur
  • Name
    Entrepreneur

CEO with business plan vs CTO that gets paid for his work equity split?

FYI, "his second co-founder" = 3 co-founders;
1-him, 2-his first co-founder, 3-his second co-founder; but then you talk about only two people CEO vs CTO.

If you assume that "there's no right or wrong answer" then there is no point asking us about what kind of wrong answer do we feel like giving you. I am not picking on you I just value precision. So my answer is Right, at least until you can persuade me that it is wrong.

I was both CEO & CTO in telecom industry.
One unscientific way of negotiate equity is who ever can negotiate whatever amount for themselves. If your CTO will not work for less than 50% and you are willing to settle for the rest then that is what you have 50/50. But if you want to retain more equity then you look for CTO that will accept your offer. And so on.

While you said that you want to ignore fundability I don't think it could be because you are assigning equity value to business plan that took you 2-3 years. I highly dough that you will ever get funded from experienced investors without proof of concept or prototype or customer commitments or alike. 100% of business plans when used for startups are wrong. Usually without prototype 1-2 years longer to get to 1/10-1/100 of planned revenue whatever that "very conservative" number that you put into your plan. And unless you filed for patent there is virtually no point of you looking for investors. Therefore, it's irrelevant what quity split you will have. You all will have 100% of unfundable company.

There is a partial value in business plan for startups. It supposed to help you think through the venture, so result will very based on what you put in your plan. Maybe 1-5% of equity. If you asking this questions then not more than 1-2%.

Now. If there is patent then inventor gets 5-7% royalties on sale of tangible products when profit margin is in 250-300% range or 10-20% of services with 400%+ margin. Not equity. Many greedy investors will try to screw inventors to equate royalties to early equity that will get diluted later. They forget that inventor can go to any existing company and get same or better royalty deal. Inventor gets royalties period. If there can't be any patent, then what you have is an idea. Same idea that thousands though of but decided not to do anything about for various reasons or they did do something and you are trying to enter an existing market and at that point your business plan worth even less no matter how long you thought of it. Just because you spent time on something doesn't make it worth anything.

Try selling you business plan. Then your plan will worth as much as someone will pay for it. I bet it will be under a thousand bucks. I am going to coin a phrase: "Business plans can't be sold, they only can be commissioned." - think about it. (Clue: Everyone can write a business plan by filling in template so its worth few hours or days including time for research. Only incompetent person will commission someone else to write him a business plan.)

Back to your question. Another, a more scientific, method for splitting equity is equate it to money. BP = $1,000. If you both will not work until you get funded to be paid salaries that you worth on open market then you both deserve only 1-5% fully diluted to keep you motivated and the rest 90-97% should go to your investors. You heard that founders have sweat equity, well, in that case you will not sweat so you don't get much equity. But if you invest sweat by working for sub-standard salary or for free then you deserves proportionally on unpaid portion of your salary on par with cash investors.

Now, between CEO & CTO it depends on who will have to work more. More employees, more specialized skills CEO has to have then he gets a bit more. If CTO have to do all the work from funding till profit and CEO will be not as active then CTO gets more. You know your situation much better than you let us know, so figure it out. Equate everything to money. Equity split should only compensate you for lost earnings.

Max

--- On Fri, 11/23/12, Seth Kaplan <s...@seth.org> wrote:

From: Seth Kaplan <s...@seth.org>
Subject: Re: [FD Members] Issues in a 50 / 50 Partnership
To: "derek dukes" <dbdu...@gmail.com>, "[removed to protect privacy]" <[removed to protect privacy]>, "blalezar...@gmail.com" <blalezar...@gmail.com>, "Eric Rogness" <ericrogn...@hotmail.com>
Date: Friday, November 23, 2012, 1:27 AM

What's a fair equity split for two co-founders where the presumed CEO had a 2-3 year head start and later found his second co-founder? Lets assume for sake of argument that the presumed CEO spent those years doing all the research and writing up the business plan. ?But there's no product yet or any funding at the moment for the business. So the business is still a concept, although a well planned out one. CTO has the responsibility of architecting and orchestrating building of the product?if/when the company gets funding, and the assumption is not to start coding until that happens.?
Ignoring all the what-ifs surrounding actually getting funding without a product and such, assuming it were to happen and kick off full time work for both co-founders, what's a reasonable equity split in your minds? 50/50 CEO/CTO? 60/40? 75/25? Even as low as 85/15 CEO/CTO? Does the research leading up to this point count for anything for the CEO? Or because theres no product or funding, the CTO should be compensated dully?
Understand there's no right or wrong answer, I'm perfectly happy with gut feelings and reactions. If you're a CEO or a CTO, maybe mention that too since it helps understand the perspective being offered. ?If you've been in this situation during early startup stages, even better. ?Although for my question having been in this situation isn't a prerequisite to offering an opinion :)
And I'm operating under the assumption that none of us forward these emails outside of the group, so in this case, I would appreciate it greatly if you didn't forward mine. ?
Regards,?
-- Seth

3 Replies

Michael Barnathan
0
0
Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum

With two total founders, I did a 65/35 split for a co-founder who joined ~1
year in for my medical startup. However, I'm the more technical of the two
of us, and had already coded the technology prototype. At the same time,
the other co-founder brought in useful regulatory knowledge and an industry
background which I could not hope to replicate. Evaluate how long it would
take for your co-founder to replicate the work that you did, as well as
what skills/connections/perspectives he or she brings to the startup, then
set an equity level which will motivate the co-founder but is also
realistic given the contribution and stage.

If it would take the co-founder a month or less to replicate the existing
work, the co-founder's risk is similar to yours, and your skills are
otherwise compatible, I would argue for a 50/50 split. Your case sounds a
bit more like a 60/40, but realize that if you need a prototype and the
co-founder is the sole founder who can provide it, he, not you, is in the
prime negotiating position. If that work is likely to be substantial (as it
usually is), you may want to settle for a 50/50 split even if you've
started with a head start. It also depends on the risk the co-founder is
taking: if you're already funded and on your way to profitability, new
co-founders should get substantially less equity than those who were at the
beginning (likewise, you'll find it easier for other technical co-founders
to join in if the risk is lower).

You can always start with terms relatively favorable to yourself and
negotiate, although I'd urge you to make it clear that further negotiation
is possible later on (I've seen many co-founders burn out during execution
and become useless because their duties have increased but their
compensation has not increased with it, and making it clear that it's ok
for them to request a revised equity grant should prevent that).

A reminder when you grant equity: mention the possibility of 83b election.
This is usually favorable tax treatment if the company's stock grows in
value, but needs to be filed within 30 days of the grant.

Max Avroutski
0
0
Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.

"I'd urge you to make it clear that further negotiation is possible later on"

I agree on everything Mike said except one thing. Never-ever for any circumstances say anything like the sentence above. You will not be able to work with those people after you said that. If you give people a rope to hang you they just may do that.

Negotiate for all possibilities (there is not that many of them) before you take him on to properly compensate him for whatever work he will do or if he quits or another 10 guys like him needs to be hired as co-founders or employes and all co-founders would need to share the equity or put in your own cash to pay salaries to employes, and so on. Spell it out in an agreement and sign it. Vest all the shares. One vesting standard is: 28% after 1 year and then 2% every month for 36 month. So if they quit in the most critical period, first year, they get nothing. Also, negotiate what will happen if they will get fired for cause or without cause. Spell out what the causes are. And so on.

Max

--- On Fri, 11/23/12, michael <mich...@barnathan.name> wrote:

From: michael <mich...@barnathan.name>
Subject: Re: [FD Members] CEO with business plan vs CTO that gets paid for his work equity split?
To: [removed to protect privacy]
Date: Friday, November 23, 2012, 12:06 PM

With two total founders, I did a 65/35 split for a co-founder who joined ~1 year in for my medical startup. However, I'm the more technical of the two of us, and had already coded the technology prototype. At the same time, the other co-founder brought in useful regulatory knowledge and an industry background which I could not hope to replicate. Evaluate how long it would take for your co-founder to replicate the work that you did, as well as what skills/connections/perspectives he or she brings to the startup, then set an equity level which will motivate the co-founder but is also realistic given the contribution and stage.
If it would take the co-founder a month or less to replicate the existing work, the co-founder's risk is similar to yours, and your skills are otherwise compatible, I would argue for a 50/50 split. Your case sounds a bit more like a 60/40, but realize that if you need a prototype and the co-founder is the sole founder who can provide it, he, not you, is in the prime negotiating position. If that work is likely to be substantial (as it usually is), you may want to settle for a 50/50 split even if you've started with a head start. It also depends on the risk the co-founder is taking: if you're already funded and on your way to profitability, new co-founders should get substantially less equity than those who were at the beginning (likewise, you'll find it easier for other technical co-founders to join in if the risk is lower).
You can always start with terms relatively favorable to yourself and negotiate, although I'd urge you to make it clear that further negotiation is possible later on (I've seen many co-founders burn out during execution and become useless because their duties have increased but their compensation has not increased with it, and making it clear that it's ok for them to request a revised equity grant should prevent that).
A reminder when you grant equity: mention the possibility of 83b election. This is usually favorable tax treatment if the company's stock grows in value, but needs to be filed within 30 days of the grant.

On Friday, November 23, 2012 4:55:32 AM UTC-5, alphaone2k wrote:FYI, "his second co-founder" = 3 co-founders;

Michael Barnathan
0
0
Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum

I've never actually had anyone take me up on the renegotiation offer, so
I can't comment on outcomes of it (beyond that people don't seem to take
advantage of it). But remember that there's always one renegotiation
option open to a co-founder: they can quit at any time. That's a rope to
hang you on if any ever existed. I consider negotiating additional
compensation for continued service a superior option if the co-founder
is good (and if not, deny the request on the basis of prior performance
and tell the co-founder what he/she can do to improve. Chances are the
founder will quit anyway at that point, without a silent, disengaged
period prior to the event. And if the founder does stay on but
disengages, you can terminate and the reason should be clear to all
parties at that point).

Agreed for spelling everything out, and for vesting. That includes
business risks too: what happens if the business goes
bankrupt/merges/gets acquired? How will shares dilute if new funding
comes in? Etc.

On 11/23/2012 4:42 PM, Max wrote:

Join FounderDating to participate in the discussion
Nothing gets posted to LinkedIn and your information will not be shared.

Just a few more details please.

DO: Start a discussion, share a resource, or ask a question related to entrepreneurship.
DON'T: Post about prohibited topics such as recruiting, cofounder wanted, check out my product
or feedback on the FD site (you can send this to us directly info@founderdating.com).
See the Community Code of Conduct for more details.

Title

Give your question or discussion topic a great title, make it catchy and succinct.

Details

Make sure what you're about to say is specific and relevant - you'll get better responses.

Topics

Tag your discussion so you get more relevant responses.

Question goes here

1,300 Followers

  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
  • Name
    Details
Know someone who should answer this question? Enter their email below
Stay current and follow these discussion topics?