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How do you deal with a Co-Founder who wants more equity Year 2?

I own a C-corp (just converted from an LLC). My business partner and I at the time decided to split 1/3 (me) - 2/3(me) based on the amount of money we put in.

A year and a half later, my partner found several key investors who also brought in a couple people to invest and now he wants more equity.

He wants to even us out claiming he brought in all of the investor money and he's worth more equity. How do I deal with this? What are my options? He's obviously not happy and wants more equity - what is the right move? Is it common for founders to renegotiate their equity positions?

19 Replies

Brian McConnell
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Brian McConnell Entrepreneur
Head of Localization at Medium.com
If he brought in substantial investment, he's probably justified in asking for more equity. Time worked is one factor, but so are results, and one the hardest things about startups is raising money in the early days. My $0.02
Orion Willow Parrott
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Orion Willow Parrott Entrepreneur • Advisor
Founder and CEO, Lendsnap YC S16. We're hiring!
How do you feel about giving him more equity? Are you against it or do you think it might be reasonable? Sounds like you are hitting one of the challenges of "static equity" a la Founder's Dilemmas. While you are not legally obligated to do something under the terms of your agreement, a situation has come up for which you did not write a contingency. The situation could have equally been in your favor (i.e. if you brought the investment). OR if it was stated from the beginning in your agreement that it was both your roles to raise investment, then I would say the agreement already accounted for that.

I have considered some agreements with founder partners that allow for them to earn more equity as a reward for bringing investment. That's great for next time for you, but doesn't help here.

Sounds overall like an opportunity to do what you think is fair, beyond the written letter of your contract. Certainly the amount of cash put in should not be the only consideration in equity splits. Levels of effort change, things come up. Good luck!
Reuven Granot
1
4
Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
Renegotiation between founders is not right as it will destroy the harmony required to run a successful Start-Up. However compensating for real achievements is another thing, which is the right way to maintain relationships. You should not renegotiate the early agreement, just negotiate each valuable achievements both of you do. Bringing successful investments is one major achievement, which should be compensated. I assume you had other achievements as well.
Jeff Brink
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Jeff Brink Entrepreneur
Aerial Drone Cinematographer at Freelance
Thank you all for your input - yes levels of effort do come into play and I've had my own achievements as well. What scares me is he seems to have a grip on the investors that if I don't give him what he wants, I honestly don't know what recourse he has, but I can't see it being good.

Reuven, when you say negotiate the valuable achievements - what do you have in mind? Am I the only one who gets diluted in that scenario still?
Michael Barnathan
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Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
If he brought in the investment, you will probably want to reward that (and if you don't, it might break apart the team because now he feels like he's not getting adequately compensated for his work). Take a realistic assessment of the value each of you have contributed and can be expected to contribute in the near future, and choose whether to accept his offer or counter somewhere in the middle. If he's done more than expected, you probably shouldn't just reject his request outright.
Chris Carruth
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Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions
I think this comes down to, as others pointed out, doing what's right. However, right is impacted by many things..are you both working full time? are you both on payroll yet or is one providing sweat equity and the other providing funds? is either of you contributing IP to the company under an assignment agreement or is it being licensed back to the company? are there bonuses structured that include equity rights? are there non-dilution clauses for either one of you?

I am sure there are others..ask yourself "what is the right thing to do"? Much of corporate America's CEOs who wound up in prison would not be there if they just took a moment and...
Reuven Granot
0
0
Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
NO. In my opinion from time to time you have to compensate for work. If you can pay salaries, this is the best way. If not always dilute, so partners feel that if they contribute more get more. But pay for achieved goals (preferred to define them ahead), not for time spent.
Jeff Brink
0
0
Jeff Brink Entrepreneur
Aerial Drone Cinematographer at Freelance
We both are full time and we both are getting minimal salaries right now. The biggest difference I can see is that he raised a decent amount of funds for the first round. He deals with more of the business side of things, I deal with the tech side of things. I'm not the one specifically creating IP, but I work with our engineers to do that and to better our product. He spreads the word along with a marketing guy we have and deals with the clients before I show up with the gear and deal with them on the job. There are non-dilution clauses that I'm aware of and there are also no bonus equity clauses for that matter either.
Dirk de Kok
1
0
Dirk de Kok Advisor
Founder and CTO Mobtest
just make sure you don't split 50-50: if you guys get into a fight and somebody has to leave with the other keeping the company afloat, make clear who is going to be in and who out.
Manav Choksi
2
0
Manav Choksi Advisor
Chief Operations Officer
Jeff - as everyone has mentioned above, there are multiple facets to support a "fair" equity allocation. Bringing investors and funding to the table doesn't substantiate a basis for, what seems to be, a significant increase in equity share. If he leaves, will the investors leave? If so, then the investors are funding your co-founder and not the company/product. I imagine any sound investor would invest in a company due to many factors including, but not limited to, product, market size, confidence in executive team to execute, and traction.

If your co-founder is successfully growing the company from a business development role (assumed from your most recent response), then his equity should be aligned accordingly. A good approach do this would be to get a performance based share plan in place. Set vesting targets such as quarterly sales growth, marketing milestones, maintaining or growing margin, or a combination of the above. Remember, you can get creative with this by incorporating a time vesting requirement in conjunction with performance targets, which can also be based on a sliding scale (e.g. 50% growth in sales, then % of shares; 100% or greater growth in sales, then % of shares). It really boils down to understanding why your co-founder believes he deserves % ownership and then creating an equity plan which aligns with those expectations.
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