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How to figure out equity split for cofounders joining at later stages?

I'm considering joining a startup as a CTO/technical cofounder.

In case of a completely new venture (just an idea), an even split seems to be fair. But how to figure out equity split in case when the product is (partially) built, when there are paying customers, investments raised, etc (any combination of those factors)?

9 Replies

Jonathan Barronville
4
0
Jonathan Barronville Entrepreneur
Software Engineer at npm, Inc.
Hi, Nikolay.

Please don't do an even split. They sound good at the beginning, but they can become a pain when, for some reason, terms have to change, or a founder has to get fired, et cetera.

Check out Mike Moyer's "Grunt Fund" model:http://slicingpie.com ... Mike Moyer is on FounderDating, too, so I'm sure he can comment more on this.

- Jonathan
Kate Hiscox
2
1
Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
This is good guidance Niko - http://www.startupsmack.com/how-much-equity-to-issue-to-officers-and-employees/
Werner Krebs
0
2
Werner Krebs Entrepreneur • Advisor
Financial & Marketing Software Developer
Figure out what the split would be if you could afford 100% cash compensation. From this, and consideration of anything else either of you have brought to the table, you can figure out the equity split. Happy to discuss more. We talk about some related issues in a blog post: http://www.acculation.com/blog/2014/05/29/common-startup-hiring-misconceptions/
Mike Moyer
6
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Even splits are rarely, if ever, fair. Neither are fixed splits, which is when equity is allocated in advance of work being done. These are common practices, however. So common, in fact, that people think they are good ideas-- they are not.

All of the factors you described can and should be accounted for in a dynamic split. Each contribution has a fair market value which is the price at which you could acquire the contribution for cash. So, a person's share should be equal to the fair market value of their contributions (plus a risk multiplier) divided by the fair market value of all contributions made by all contributors. In a dynamic split the allocations adjust as additional contributions are made. It is a straightforward method that guarantees that each person gets what they deserve. Here is a link to a video explaining how it works:http://www.slicingpie.com/equity-splits-at-stanford-university/

You also need to agree, in advance, to what happens to shares when someone leaves the company. There are different reasons someone could leave which will impact their rights.

I've written a book on this subject, called Slicing Pie, I would be happy to send you a copy if you contact me through SlicingPie.com
Florian Pestoni
1
0
Florian Pestoni Entrepreneur
CEO at Axzo Digital
I like Mike's grunt fund model, but if the idea of dynamic allocations sounds too strange, you can probably approximate it with combination of static initial allocation and repurchase agreements (vesting). This is because a startup can't afford to carry dead weight around, so you're better off parting ways with a co-founder who's not working out (eg not putting enough effort into the venture, expecting others to do the work, etc.)

I've used thishttp://foundrs.com as a starting point for discussions. Do not use this as "the calculator told me this was the right split", but rather play around with it to see if everyone agrees around the relative weights; they probably won't, but it's still a good exercise.

F


Werner Krebs
0
1
Werner Krebs Entrepreneur • Advisor
Financial & Marketing Software Developer
I think vesting goes without saying for a number of reasons (including taxes). A competent lawyer will normally offer that as the default option (our startup lawyer did). Contractually, you probably don't want to stray too far off the beaten path as it will just drive up your legal costs & probably create accounting/tax and precedent uncertainties. Having said that, all of these detailed analytical approaches are great, and may help you arrive at a better number or scheme. However, VCs frequently change the split "to make it more fair" at the Series A stage and add in vesting if it is not already there. So, unless you are a VC or planning to bootstrap the entire way, it is perhaps best not to over-analyze the exact split ratio at this stage. There is a great book on all of this written by a VC attorney (although it is written mainly from a contractually point of view). Obviously, you'll want to seek the advice of your attorney and accountant before making any decisions on something this important.
Zac Kline
0
0
Zac Kline Entrepreneur
Technology Transactions and General Commercial Attorney
Thanks Werner, what is the name of the contract-focused book?
Zai Sarkar
1
0
Zai Sarkar Advisor
C.E.O. at Wyzgo Solutions. pioneering a new affordable way for vacationers to experience the world!.
Question for Mike,
Your dynamic split model is definitely more balanced than the static or vested -shares models.
As founder of my company and striving to get to market quickly, I am operating on a shoestring budget, I find myself extending into evenings and weekends multitasking, performing multiple roles like all entrepreneurs do (lots a technical, strategizing, business modeling etc). The service is expected to be launched in October this year.
I am planning to bring in senior executives for marketing and sales to ramp up aggressively.before the launch. I expect things will escalate in terms of how much work is to be done, managing the team, bringing them up to scratch etc.
Question is, how do you factor those extra efforts into the dynamic model for those who extend themselves beyond the call, yet keep the clocking honest?
Maybe I should get a copy of your book and read it Mike!
Zai
Mike Moyer
1
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Hi Zai,

Thanks for the comment. The book is available on Amazon.com or you can contact me through my site at www.slicingpie.com!

To answer your question, one way to ensure honest time-keeping is to use a time-tracking system and ask people to provide notes on what they did. Most time-tracking programs include this. If you find someone spending excessive time on simple things you can have a conversation. Dishonest time-tracking is a management issue, it's not a dynamic equity issue. No system will protect you against dishonest people!

-Mike
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