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Equity for non-investing co-founder

How much equity would be a reasonable offering for a non-investing technical co-founder? Start-up costs to build MVP are estimated around $100K (at least $50K for product and some funds for business setup and marketing). He would be involved full-time right through MVP to launch. Beyond that, if it works out, he'd assume the CTO role and would be compensated accordingly upon a seed round and/or we start generating revenues. I am putting up all the money and will be actively involved. Co-founder is a CTO / developer type who will build the MVP and oversee any 3rd party resources we need. He will be paid a stipend which will be far less than what he would ask for in terms of salary (probably 50%). Idea is mine but he's contributed significantly thus far on ideation.


10 Replies

Mike Moyer
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Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
The best way to make sure that everyone gets what they deserve is to use the Slicing Pie model for equity allocation and recovery. Unlike traditional models which usually result in fixed chunks of equity doled out in the beginning in anticipation of future work based on guesses about the future value, the Slicing Pie model allocates equity on a rolling basis based on the actual contributions to the company.

When you contribute cash, time, ideas, etc to a company you are, in effect, making a bet on the future of the company. The amount of that bet is equal to what you would have otherwise been paid for that contribution if you sold it to someone who could pay you. This is the fair market value. The Slicing Pie model uses a formula to calculate equity based on the relative value of the bets people make.

It is the only model that guarantees everyone gets what they deserve. I've written a book on the subject and you can have a copy if you contact me through SlicingPie.com
Leena Chitnis, MBA
4
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Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Hi Richard. My humble 2 cents would be to ask yourself...how much is he investing otherwise? How much time, sweat equity, and risk is he putting in? What is he giving up or sacrificing to do this with you? How much time away from his family, friends, life and even day job is he giving to this project? How invested is he emotionally? Does he feel as invested as you; is this project his baby, too? Is he in this for the long game like you are? Is he as passionate about the idea, regardless of the outcome? Does he want a leadership role; has he hinted or explicitly stated as to what role he envisions playing in your company? Has he seen the end game, talked about what he imagines the outcome of your work together will be? Does that vision align with yours? Most importantly, how much work is he putting in, and is it on a consistent and reliable basis? What would he ordinarily be paid for such work?

These are just some questions I'd ask myself about a co-founder, to see how invested they are and to also determine a level of appreciable equity. I'd see their work ethic, quality of work, attitude, feeling, team work, etc.

I'm not putting a number out there for you, because I don't know your scenario intimately. As for me, I have a very lean team for both of my startups. It's just me and my co-founder. And I'm willing to give 50% (vested over an agreed-upon schedule) to someone whose got just as much skin and effort in the game as I do, even if they haven't put in the money like I have. To me, it's more important that they feel like this is their baby as much as it is mine. When that is the case, I've noticed that two good parents emerge -- both feel equally responsible for the outcome of raising this company and both are equally invested to make the same gains when things pan out. Once that is covered, there is no feeling of superiority from anyone in the team/duo, no resentment from the person who has less equity, and no lack of effort due to assigning more responsibility to the person who's got a bigger percentage of the company.

I'm sure I'll have dissenters. I'm not giving you advice, as much as I am showing you how I've treated your question in my personal life, in my own way. Best of luck to you!! :)

Victoria Woo
0
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Victoria Woo Entrepreneur
Future catalyst, scholar, researcher, educator, entrepreneur
IMHO, equity compensated for technical co-founder might be best when it is vested over time. I have a 24 month vest with mine and I hope that it will keep them engaged and make necessary changes as the offering and business evolves once you get a few pilots and customers. As far as percentage of the company, I escalate with milestones we agree upon and meet.
Becky Cruze
2
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Becky Cruze Entrepreneur
Editor of "How to Start a Startup: The Book," Board Member of Women Get It Done
As part of the How to Start a Startup course at Stanford University, Y Combinator partners discussed what they considered to be the ideal allocation of equity. In a nutshell, they recommend dividing up equity fairly close to equally amongst all founders and also following some sort of vesting schedule. Read more on their advice: http://thinkapps.com/blog/entrepreneurship/how-start-startup-legal-and-accounting-advice/.
Leena Chitnis, MBA
1
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Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
I am in agreement with Becky re: Y Combinator's equity advice and am a huge fan of Paul Graham. If you have a chance, read his blog; the advice is invaluable.
Richard Pridham
0
0
Richard Pridham Entrepreneur • Advisor
Investor, President & CEO at Retina Labs
Thanks everyone. Good points. I know this subject has been discussed widely here and on other sites. Many of the equity spit formulas seem to work when founders are not personally investing real money. In this case, I'd be acting both as a co-founder and an angel/seed investor. My contribution, while not on the software programming level will be just as intense. So sweat equity is coming from both sides, but real money from just one.

The co-founder in question has contributed significantly so far. Not only in terms of product ideation but strategy, positioning... He's an experienced individual and I seem to work well with him which can make a world of difference. These intangibles must factor into an equity discussion.
Richard Liang
0
0
Richard Liang Entrepreneur
CEO, Founder at Preo
One thing to note -- you can be both a founder AND an investor. I've seen teams split up equity in two stages when money is involved.

First, equity allocation as if both founders were not putting in any capital. Let's say you end up at 55/45 for you/CTO.

Then, you and your co-founder can figure out how much equity you're willing to give up for the initial seed investment. Let's say 10% for $100K.

Now, you and invest the $100K and dilute the both of you. In this scenario, your co-founder will end up at 40.5% and you will end up with 49.5%. Can't agree on valuation? Invest in convertible notes.


Richard Pridham
0
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Richard Pridham Entrepreneur • Advisor
Investor, President & CEO at Retina Labs
I am ready to embark on negotiations with the co-founder regarding comp and equity. Is there anyone I can discuss this with off-line for some advice? Someone with experience in these sorts of things? I want to lay out the financial parameters for my investment, comp for co-founder, roles etc...but don't want to air the details of this on an open forum. Thanks!
Juan Ramon Zarco
1
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Juan Ramon Zarco Entrepreneur
Managing Director, Silicon Valley Ventures Growth Partners llp
I have seen numbers all of the place. I know of one "CTO" getting 30% of the company, full salary, while still funded by the founder. Angel.co does publish compensation statistics on line that help determine non-foundres CTOs equity/compensation figures. Regardless I feel that one gives up enough equity and income to retain that person if that person does deliver on time, without giving away the house. I n other words if the CTO does make a commercially viabe product and generates revenues, then you have a worthwhile company. Without that person, you have 100% of nothing. I also believe that it should be delivered over time, about 3 years, so that the commitment is set in stone.
Mark Fallows
0
0
Mark Fallows Advisor
Founder & Partner at CURIOUS NYC
thanks for all the great insights everyone. Very useful.

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