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Think I've found a tech co-founder, now what? Equity, accountability, timeframes etc'

Hi guys, thanks for all the great feedback to my post 'What else can you do to be as attractive as possible to a tech CoFounder?' - I may have found that person. Here's my next questions:

If I've spent 3 months full-time doing nothing but coming up with idea, validating the market, wire framing, paying a designer, getting the MVP coded and building a customer network and delivering proposals, and constantly talking to prospects.... how do we structure the equity to make both parties happy? He suggested 50/50 and I responded with 60/40. The discussions have been very healthy so far. Here's the situation:

He is showing great interest and is becoming emotionally connected by the idea, even suggesting an additional direction within my target market (its a B2B product) which I hadn't thought of and sounds great. He is qualified, great experience, Top 25 school MBA grad, certificate from Stanford etc, startup experience and big corp experience. Lately he's more a CTO / infrastructure type tech-person, big on strategy and gets the big picture, less a coder. He has an offshore dev team for his current business, but is confident he can code the thing himself.

1. Yes there is no '100% complete product' as of right now, but with paying clients I could fund development (or part of it) myself if I had to. I certainly don't feel comfortable giving up 50% to someone I just met, having put 3 months full time into it (without salary) and paying a designer. Am I justified at 60/40?

2. Should I have him commit to a 'cash injection' to match my time and cash payments made to the product so far, in order to be an equal 50/50?

3. I don't want to de-motivate either. But yet, I feel strongly about maintaining control. I can't see myself going anywhere less than bare minimum 51/49 if it came to that.

4. Am I greedy, am I over-cautious, am I stupid? Would love the thoughts. Whatever we proceed with, I need to make sure this person can 'get it done' and in 'reasonable timeframes' otherwise I could be locked in to something taking forever to build. So am considering a performance-based equity operating agreement which I can have an attorney friend put together.

38 Replies

Chris Phenner
7
2
Chris Phenner Entrepreneur
Director, Enterprise Sales @ Gimbal
50/50.

Three months of your 'head start' will be a blip of a rounding error compared to what you risk by putting that spread between yourselves.
Sean Cassidy
3
2
Sean Cassidy Entrepreneur
Senior Software Engineer at Limelight Networks
About maintaining control: if you two can't come to an agreement almost all the time, you're doomed anyway. So that 1% should not matter.

If I was your technical cofounder I would think you're either undervaluing my contribution or were power hungry, both of which would make me consider leaving.
Detrick DeBurr
8
0
Detrick DeBurr Entrepreneur
Co-Founder at Game Time Giving
I've never seen a deal where 50/50 is "really" fair. Take a look at setting up a grunt fund.... check out Mike Moyer and http://www.slicingpie.com/... Get 2 copies of the book.... One for you and one for your co-founder... I wouldn't make another move till you both understand the "Grunt Fund" concept... then the conversation should get a lot easier.... Good Luck
Stas Oskin
1
0
Stas Oskin Entrepreneur
CTO at eyecam
I double recommend reading slicingpie.com, just started reading it, but I already see how much headache and nerves it would have saved me in the past, if I've read it first.
Andrei Savchenko
0
0
Andrei Savchenko Entrepreneur
Software Engineering Leader | Agile Product Development
went through this exercise the other month. Found these resources useful:
Erin-Michael Johnson
1
2
Erin-Michael Johnson Entrepreneur
Principal Software Engineer at Shelvspace
50/50 - your lawyers will write up language that protects either one of you if the other walks away (clawbacks, etc). Or consider using a "grunt fund" to assign equity on a liquidity event.
Raphael Londner
3
0
Raphael Londner Entrepreneur
Developer Advocate

I'll back up Detrick 100% here. No matter what you choose to do, Slicing Pie is an absolute read. You might or might not like the Grunt Fundconcept, but I'm sure you'll get your head a lotclearer after you read it. For $12.55 on Amazon, you really don't risk much and it's a great investment.

As far as I'm concerned, I would never agree to 50/50 in that situation. You've put some effort already and should be rewarded for it. Period. In any case, 50/50 can put you in a deadlock situation, and I don't think any VC or business angel will recommend such an even split if you'd ask them.

Joe Zott
1
1
Joe Zott Entrepreneur
VP Engineering and Operations at AccuVein
Having been screwed more often than not on startup equity and yet also having had some great partnership experiences I will share a few of my opinions: ? Long-term the best partnership is 50:50. I have had this discussion multiple times and I have been on both sides. There should be a way of getting to parity. Anything less than that creates an issue that never goes away. ? Some people who seem really interested flake out. Lots of techniques work. I have seen earning of equity over time or forced sale of equity at purchase price if he doesn't stay both work. Your idea of performance driven milestones is also a good one. Not every partnership works out. If you ask for these things be willing to accept the same from your future partner. ? You shouldn't feel that you are being taken advantage of. Both sides have to believe that things are fair. If matching your cash investment and having some compensation for your time is necessary for you to believe the deal is fair then that is what it us. Keep in mind though that the deal needs to be fair to your partner too. Put yourself in their perspective and ask yourself what you would want. ? These things should be dealt with at the start and not after the VC are involved and things become more complicated. Little feelings become big feelings in time.
Jason Wang
1
0
Jason Wang Entrepreneur
Founder & CEO at TrueVault. A HIPAA Compliant Secure API to Store Health Data.
I second what Chris offered as the reason for the 50/50 split.

I used to be in the 60/40 camp, then moved to the slicing pie camp. I'm now in the, 50/50 camp.

Someone wise once asked me, how much will your 3 month ahead-start matter to the company in 4 years? Is it worth a 50% premium (in a 60/40 split, you have 50% more shares than he does)? How much is it worth to you to avoid a riff between you and your co-founder?

John Wallace
2
0
John Wallace Entrepreneur
President at Apps Incorporated
If he wants 50/50, then I'd want him to inject money into the company to match your contribution. If he's unwilling to do that, then a 60/40 split seems reasonable. I'm not a fan of the Grunt Fund because I don't like the economics. (I find it unfair that labor is valued at 2x and cash is valued at 4x. Mike and I discussed this, but I'm unswayed.) I would also make sure that all parties put additional money into the company up front to fund ongoing expenses. There are many other issues which your agreement will need to address (IP ownership, buy out clauses, etc.).
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