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How much equity to give my technical co-founder?
I have been the non-technical sole founder of my startup company for 8 months since it first started earlier this year from an idea and developing it into a ready product.
I have been looking around for a suitable technical co-founder for a while and recently i found one.
He is currently working in another startup for 3 years and was one of the founding team member. He is currently the VP in charge of development efforts in both local and overseas offices.
I was impressed by his resume as he has both the experience and technical skills which i am looking for. I asked him what makes him want to leave his current startup company now as it is well funded and has expanded overseas.
The reasons he gave were that company is now running smoothly and he feels that he has done his job and he is not needed anymore and it is getting boring for him. Another reason was that the amount of equity give to him was not significant.
He also told me that he was approached by some other funded startups but he declined as he doesn't believe in their ideas. He said that he believed in my idea and my vision.
He said that he requires a monthly salary but knows that my startup is still bootstrapping and couldn't afford it. So his suggestion was to stay in his current company while helping me with all the development efforts of my company and planning.
My question is how much equity should i give him and how should i structure it in order to protect myself better.
Michael Blicker Entrepreneur
Joe my advice is you need to take a long hard look to determine whether this guy is actually the right co-founder for you. If you have some technical friends with a similar programming background, I would get their advice on this situation. Also, if this guy truly believes in your vision, he should quit his job and join your company.
are you sure that his technical abilities are what you need to build this platform / app? If so, do you have a friend who has the ability to evaluate his skills?
What type of vesting schedule are you thinking about?
What are the conditions you are thinking about including as part of this co-founder agreement? Do you have a lawyer to draft this agreement?
Is the guy based out of the same city or is this a remote correspondence sort of thing? What are the conditions for termination of the contract?
I understand you want a technical co-founder, but you need this guy to commit to your company. There's no half way in the door. He either commits and becomes your co-founder or stays at his other company.
I'd sooner pay someone who can fulfill what you need technically then to enter a situation with a potential co-founder who can't fully commit to what i'm assuming will be a lean methodology approach.
Anyway my 2 cents.
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
The Slicing Pie model for equity splits will solve your problem 100%. It will allow you to create a prefect split that not only reflects the time and money you have invested to date, but also the fact that you are paying him a below market salary.
Unlike every other equity split model in the world that basically requires you to guess. The Slicing Pie model allocates equity based on relative risk.
When people contribute time, money, ideas or anything else to a startup they are taking risk. The value of that risk is equal to what they would have otherwise been paid for that same contribution to a company that could pay. They are, in effect, betting the fair market value of their contributions on the future value of the company. You have bet eight months of forgone salary and he will be betting the unpaid portion of his salary.
Slicing Pie allocates equity based on the relative value of each of your risk. Your share = your risk/all risk. It is a dynamic equity split so it changes over time to stay fair.
The Slicing Pie model will not only give you a perfect split, but also tell you the right buyout price when someone leaves the company.
I've written several books on this topic and you may have one if you contact me through SlicingPie.com.
Kuldeep Mamgain Entrepreneur
HRBP & Talent Strategy Leader - eKart at Flipkart
Approximately 10 to 15% Sent from Outlook
Joe Emison Advisor
Chief Information Officer at Xceligent
If you can't afford to pay the salary of a technical co-founder, then you need to raise that money. The number of quality technical co-founders you're going to get on a pure equity basis is so close to zero that it might as well be zero. (Exception: you know each other outside of this and want to work together).
You should also be very worried about your company's legal right to what someone is producing who is full-time employed by another company. Many employment agreements will require that anything developed by an individual while they are employed full-time by the company are the property of that company. Even if you get legal paperwork in place that makes the work product your company's, that's no guarantee that you'll actually own it, and you presumably don't want to get locked up in an IP lawsuit as you're trying to start a company. The fact that you know he's full-time employed elsewhere is a significant impediment to you winning that lawsuit.
Dirk de Kok Advisor
Founder and CTO Mobtest
Assuming you are the only founder currently, give him 45 % with 4 year vesting. Or 30 % with stating that you will look for a 3rd cofounder. Pay him the same amount in salary as yourself (if none then none). And require him to quit his dayjob at once.
If he is not willing to quit, move on.
Oh and btw I agree with Joe, his current company probably owns the right to everything he develops right now, even for your company. That is a massive risk
Jai Kumar Entrepreneur
Entrepreneur and Technology Leader - Passionate and Dream Chaser (Get things done guy)
I never thought about "right of product development" out-side the full employment. Question to Joe/Dirk -
If someone is full time employed at other place, and that company does have that policy. But that prospective partner is working ONLY for business development, not on product development, then does it still pose any legal issue?
Joe Trumph Entrepreneur
Co Founder at Far & Beyond
Sorry if i did not explain myself clearly. He will be overseeing the development of the app/api/software but the real coding will not be done by him but by an overseas external development team.
So if this is the case then the products won't be legally owned by his current employment company right?
Besides quitting his job to show his commitment to me, i am thinking another way is to ask him to invest some money in my company.
Peter Johnston Advisor
Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.
Ask yourself - What is the role of a co-founder?
Co-founders drive the direction of the planned organisation. Instead of it being one person's vision and idea, it becomes a stronger, shared vision, made up of two brains which see the problem and opportunity from a different viewpoint. Together you create a 3D view. And since you create the view and the opportunity together, you both share in its success - and share the financial and operational risks of its failure.
That's not what you're describing here.
You're describing someone you see as an employee, hired to do the specific task of developing your product. Now you're quibbling over what that task is worth to you.
You have a 20th century attitude to technology. That you see the product and technology is just a tool to make it.
The reality is that, in a world where every business is made up of pixels and bytes (images and data), how well you manage those pixels and bytes decides how good your business is going to be. And in a world where pixels and bytes are easy to change - and thus change constantly - it is not enough to create a product once. You will be judged on whether you can change your pixels and bytes faster than the market and get into a position where you drive the market, rather than it driving you.
This person is thus more than 50% of your company. You're creating the "starter for 10", he is going to create the rest - with systems which take feedback from the market, turn it into the insight for your product revisions, build the relationships which take you forward and manage the costs to ensure profitability. Yes - it really is that important.
So arguing over shares here is bald men fighting over a comb. There's no pint because the company isn't going to be successful. You're still stuck in the twentieth century with the wrong attitude to build a modern company.
Doreen Jaress, SPHR Advisor
Recruitment, Recruitment Process Outsourcing, Startup & Technology Recruitment, HR & Recruitment Expert
Joe,you are getting some excellent advice and ideas. I'd like to add a couple of thoughts: background and reference checks; Review his current employment contract/NDA, etc., to understand if he is free to work with your company; and, whatever you two decide, make sure he has "skin in the game" too. Agree on the milestones that need to occur, and vest his percentage in increments upon meeting the milestones. Also, agree upon how he exits the company. Engaging an attorney for this hire is recommended. Protect your company. Best wishes for your success.
Andrew Lockley Advisor
Investor and strategy consultant
Depends how much you trust him, depends how far you've got already, depends
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