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Need help RE-Negotiating equity with my Co-Founder.

Had a talk with my CTO & Co-Founder the other night. He currently has a 22.5% equity share in the company. I am around 60%, depending on how much we set aside for future employees. He doesn't want an even split, but something to bring the two shares closer together. In all fairness, I've always thought I've gotten him for a steal, and now it seems, he realizes it too.
We already discussed that if we do raise his equity, that it is a 1 time thing. And that the two stakes together = 1 Board vote, with ME always having the final say.
We of course already have a signed agreement for his current equity, but at the same time, I know that if I don't budge, I won't be getting the same productive, happy partner I have now. It'd be a resentful, bitter partner.

So, the questions are, how much more do I give him? And, HOW do I give it to him? My initial thought is to tack it onto the END of his 4 year standard vesting period, like a 5th year, which protects me the longest, if we were to actually split for any reason. Open to any advice here. Not sure this is a standard thing by any means.
Thanks in advance!

19 Replies

James Vinson 
1
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James Vinson  Entrepreneur
President at V-Chain Solutions, Inc.
Look at this site: http://foundrs.com/ Answer the questions and it will calculate how much you should give but don't give us straight up. He needs to vest over a period of time. I used 4 years with mine so if he decides to leave before 4 years, then he only gets 75% of what he was due. This will retain him. Thanks, James Vinson President, VChain Solutions, Inc. [removed to protect privacy]
Michael Meinberg
0
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Michael Meinberg Entrepreneur
Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)
Really so many questions need to be answered before anyone can make a real answer to this:
  • Do you pay him market rate currently?
  • Did you invest in this company? If so, how much?
  • Do you do equal work as him, more, or less?
  • How important is he to the organization? If he wrote the software and knows all the code inside and out? (Assuming it is software).
All that comes into play. If he is a serious cog-in-wheel, and he puts in as much or more time then you, and you have not invested a ton of money that he didn't then I think you should sweeten the pot.


Chicke Fitzgerald
2
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Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
Jordan - I am a huge fan of milestone based equity. Code that doesn't produce a revenue stream is not worth much.

I was just looking at your site (nice job on the UX by the way). Traffic on your site seems pretty low. I would give him an incentive to help you build that traffic by focusing on features that will bring in new users and increase the time spent on the site. Also provide an incentive for him to lower the bounce rate.

I am happy to speak with you one on one if you need some support through this process. Another good book is Slicing Pie http://www.amazon.com/Slicing-Pie-Company-Without-Funds-ebook/dp/B0096EFHBI/ref=sr_1_1?ie=UTF8&qid=[removed to protect privacy]&sr=8-1&keywords=pie+equity
Roger Smith
2
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Roger Smith Entrepreneur
Chief Technology Officer at RealtyClub Investment Advisors
1) you typically don't set aside for future employees unless you have created an option pool. If you were to bring on another employee and wanted to give them stock then typically everyone dilutes pro-rata.(of course depending on your founders agreement)
2) If your company has value or the shares have value, granting stock will come with a tax implication. There are 2 ways around that: 1) put as a stock option 2) make it a one time grant post-dated to the date you signed your 83b election. Issue there is that you will need to be granted 100% vested.

Honestly it sounds like you guys might be headed for issues down the road if you are talking about knowing you got him for a steal, but now trying to put the chains on him. Founding a company is hard enough, founders always have issues like any marriage, but you have to be in it with someone you trust and who is always willing to discuss issues openly. Anything other than that will mean disaster at some point.
Paul Gallo
2
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Paul Gallo Entrepreneur
CEO at First US Advisors Inc., M&A and Capital Raising
I have a question for you that I think is most important in answering your question. What is the exit strategy? How are you and your Junior partner partner going to make money - no matter the split? There are a thousand ways to structure a deal that works for both of you - but it is best to engineer backwards from the expected outcome to arrive at a satisfactory relationship today. So think about this - I'm not pontificating here - I'm asking for a serious answer. You give me a well-thought-out answer and I will then be able to ask you another question as we step-back from the future - then you yourself will know the right answer - so much better than any outsiders and pontificate
Eric Sullivan
0
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Eric Sullivan Entrepreneur
CEO at FoundationLab
I have been through a few partnership agreements and it's always complicated with a lot of details and options. I always rely on a lawyer to present the options and would suggest you do the same. Eric
Jordan Plosky
0
0
Jordan Plosky Entrepreneur
Co-Founder and CEO at ComicBlitz LLC
Paul, short answer I would say that our exit strategy is to sell the company in 5 years. So, if we sell for $100 million, after dilution, what we're left with currently is most likely something like $15 & $5 million respectively, or somewhere in that ballpark. This is just very quick, 3 rounds, selling 25% each time math.
so, that's a potential outcome, with all optimism.
Chicke Fitzgerald
0
0
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
Jordan - do the two of you have someone that you could trust to help you talk through this together? I agree with Roger that if there is already a feeling of inequity (either in work or in ownership or both) that there is potentially more going on than just the equity piece. Like marriage counseling, it is best to have someone that you both trust to help you talk through the issues.
Jordan Plosky
0
0
Jordan Plosky Entrepreneur
Co-Founder and CEO at ComicBlitz LLC
Chicke, Roger, it was a very cordial discussion. Not bitter, or anything. Just that things have changed, and evolved over the year and a half we've been working together. With more information, sheds more light on the situation. I don't fault him for asking, he's busted his butt, and works a ton on the project. He's responsible for not only the website, but our app, so, on the tech side, he's absolutely producing value for us.
I'm truly not opposed to giving him more, just have to figure out how much, and HOW.
Michael Meinberg
2
0
Michael Meinberg Entrepreneur
Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)
Sounds like you have a good partner, and a good partnership. So ask him how much he thinks is fair. I bet it will be lower then you would have given him anyway! :-)


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