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How do you create a fair equity package for cofounders when one has already done a lot of work?

What is a standard way to divide equity where Co-founder A has been building the product for a year and Co-founder B is just coming on board. Co-founder B is coming in to own and build the business side, and Co-founder A will continue as chief of product, roadmap, etc. Co-founder B is 100% in on the venture (leaving job) but obviously a 50/50 split isn't right. What's the best way to approach this, with vesting, ownership, etc? Or metrics to consider?

27 Replies

Tim Scott
0
0
Tim Scott Entrepreneur • Advisor
President, Lunaverse Software
A thought. 50-50 split with 48 month vesting with a 12 month cliff where existing founder gets 12 months acceleration, and everyone accelerates to 100% on an early exit. That's assuming no traction. If there's any traction Co-founder A deserves more, maybe 60-40 or better depending on the quality of the traction.
Leena Chitnis, MBA
3
3
Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Co-founder B is leaving his/her job for the startup company? I don't see why a 50-50 split wouldn't be right in this circumstance. I've worked on my business for over a year, sunk a lot of money into it, and am still willing to give a co-founder 50% if they can bring skills and contacts. I don't understand why/how retaining more of the company puts co-founder A in a position of advantage. What's the use of Co-founder A having more money/equity if Co-founder B doesn't feel like the thing he risked his day job for is not at least half "his baby"?

This is how many co-founders set up a future rankling of morale, unless there are partners out there who are ok with less (and there are many, and there's nothing wrong with that). However, I've found that things get done a lot faster when partners are motivated by generous offerings that are worthy of them, and which also loses the language of control. It keeps things very, very simple and equitable. All parties involved feel equally responsible and motivated to create as profitable a product as possible -- and that's the most important thing.

I have found that when there is an uneven split, with partner B getting less, the latter feels less urgency in getting things done. And that's really a critical point, because urgency is the most important feeling, after passion, that founders should have in getting their startup going and profitable.
Rashad Bartholomew
6
0
Rashad Bartholomew Entrepreneur
Business Development at PassCash
I like the CoFounder equity calculator: http://foundrs.com/ I've dealt with this problem before if you'd like to discuss in detail. R
Raphael Londner
10
1
Raphael Londner Entrepreneur
Developer Advocate

Leena,

I apologize I have to disagree with you, but why is a 50-50 split fairer than valuing the work that got done and will get done? I feel that you so desperately want a co-founder that you're willing to give half of what you already started to build. After all, co-founder B is taking a risk by quitting his job but so does co-founder A and she tookthat same riska year ago. Isn't that worth a premium, especially if something has indeed been built during that period of time?

The Grunt Fund model devised by Mike Moyer (author of Slicing Pie)ensures that co-founders get "paid" with equity rights as if they were working for real dollars. The amount of equity rights they vest each month isbased on their fair market salary and it may be indeed fair to agree on the same fair market salary for both co-founders. But co-founder A should start with an amount of equity rights commensurate with the effort he already put in. You can and probably should put a discount on the value of that effort as part of a goodwill effort towards co-founder B, but my opinion is that if co-founder B genuinely thinks or simply agrees thatco-founder A's work is worth nothing, then they're off to a wrong start.

With the grunt fund model, you can also accelerate co-founder's equity rights vesting by taking revenue generation into account: for instance, if co-founder B can be credited with generating X amount of revenue above a certain threshold, he canearns more equity rights. So the potential for co-founder B to get to 50% or more exists, but it depends on the value he brings, not on some pre-determined agreement.

If you value your 1-year work to basically nothing or you're willing to give it away, that's your choice, but you can't say that it's the fairest choice for everyone. After all, Bill Gates always had more shares than Steve Ballmer, who joined Microsoft a few years after it was founded and I don't think it affected their business relationship in any negative way. That tells me that smart people value and respect each other's work and are willing to acknowledge that at the end of the day, entitlement feelingsare detrimental toany relationship (business or personal).

My 2 cents,

Raphael.

Vadim Oss
0
0
Vadim Oss Entrepreneur • Advisor
Co-founder at Rentini
Agree with Raphael, there is no numbers set in stone here. 50/50 could sound fair for the co-founder B but would it be fair for the A? At the end coming on board after product was built and perhaps market validated will inherit so much less risks than starting from scratch when nothing is known. There could be many ways to create incentives for both founders with vesting schedule that accelerates on certain events/milestones. A vesting cliff for both sides could be also a good idea to make sure parties can work together as a team. Otherwise a few months down the road one can walk away with a descent chunk of equity without providing much value for the company.
Leena Chitnis, MBA
2
6
Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Wow. You have a terribly disparaging and condescending way of getting your point across. Good job, Ralph!

I didn't say my method was for everyone -- that's why it's called "two cents."

Here are my answers to your questions. Keep in mind that they are, in fact, opinions, and not law. That way you and future dissenters won't get worked up:

Ralph: I apologize I have to disagree with you, but why is a 50-50 split fairer than valuing the work that got done and will get done?

Me: Fairer? How fast do you want to get to where you're going? Take out the complexities and do what it takes to get there. Some people like to get into the nitty gritty of grunt funding and whipping out calculators and lawyering up to split equity. That's fine, and I said so earlier. However, others just like to start businesses and get a product out without endless calculations, haggling and loss of time. I fall into the latter camp. Is that ok?

Ralph: I feel that you so desperately want a co-founder that you're willing to give half of what you already started to build.

Me: You can't be serious, right, fellow Entrepreneur-Also-Seeking-Partners-Through-Cyber-Dating? Did you ever think this has less to do with getting a cofounder on board than it does with the fact that I don't care about the money? I'm a serial entrepreneur for the joy of it, and made some money along the way.

Ralph: After all, co-founder B is taking a risk by quitting his job but so does co-founder A and she tookthat same riska year ago. Isn't that worth a premium, especially if something has indeed been built during that period of time?

Me: Nah, not always. Co-Founder A should do himself a solid and not take himself so seriously. After all, if Co-Founder A is looking for Co-Founder B, that means A has a need for B. Depending on where the startup is in its life, it might make sense to offer generous equity if you're going to get the best in the business (or damn near) to partner with you and really put you on the map. Read the Isaacson biography on Jobs for a reminder. It's no secret that talent -- real, bankable, name talent -- is scarce in Silicon Valley because A) these guys are extremely hard to find and B) those who have been found are getting egregiously sweet deals to be retained where they are.

Ralph: The Grunt Fund model devised by Mike Moyer (author of Slicing Pie)ensures that co-founders get "paid" with equity rights as if they were working for real dollars. The amount of equity rights they vest each month isbased on their fair market salary and it may be indeed fair to agree on the same fair market salary for both co-founders. But co-founder A should start with an amount of equity rights commensurate with the effort he already put in. You can and probably should put a discount on the value of that effort as part of a goodwill effort towards co-founder B, but my opinion is that if co-founder B genuinely thinks or simply agrees thatco-founder A's work is worth nothing, then they're off to a wrong start.

Me: That's great. I've started a business in the time it took for you to write this paragraph.

Ralph: With the grunt fund model, you can also accelerate co-founder's equity rights vesting by taking revenue generation into account: for instance, if co-founder B can be credited with generating X amount of revenue above a certain threshold, he canearns more equity rights. So the potential for co-founder B to get to 50% or more exists, but it depends on the value he brings, not on some pre-determined agreement.

Me: Ok I agree with this to a certain extent. But I'd rather partner with someone whose progress I didn't have to continually monitor so I could throw him peanut points every time he did a good job. Jobs and Woz didn't work that way. I mean, what a drag, and what a way to not stay focused on creativity. I guess I value working on the product more than anything else -- which is not to imply that others aren't (I guess I should start disclaiming everything I say as to avoid misunderstandings).

Ralph: If you value your 1-year work to basically nothing or you're willing to give it away, that's your choice, but you can't say that it's the fairest choice for everyone. After all, Bill Gates always had more shares than Steve Ballmer, who joined Microsoft a few years after it was founded and I don't think it affected their business relationship in any negative way.

Me: You don't know me and have no clue as to how I value my work, so it's a bit amusing that you feel qualified to opine on how I view my past efforts. Just because it's not in dollars and cents, it doesn't mean it's worthless.

Ralph:That tells me that smart people value and respect each other's work and are willing to acknowledge that at the end of the day, entitlement feelingsare detrimental toany relationship (business or personal).

Me: I guess I'm just a stupid, multiple award-winning, business-selling, cash-acquiring, patent-drafting,summa-cum-laude graduatingFulbright Business Fellow who has depended on sheer blind luck to succeed in the startup world. What would I know?

Kate Hiscox
0
0
Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
Agreed. This is a two way street that runs on respect. Seeing potential enough to quit your day job.. and then the founder offers 50/50? As founder B, I'd start to experience concern.
Caleb Garling
4
0
Caleb Garling Entrepreneur
Writer
Hey everyone, thank you so much for your thoughts. Leena/Raphael, you both have wonderful perspectives -- that are probably close enough that a couple beers couldn't help find the middle ground. :) If other folks have thoughts here, it would really be wonderful to hear them. I recognize there is no "answer", just very much looking for past experts' thoughts to shape the decision.

Thank you again!
Caleb
Robert Birchall
1
0
Robert Birchall Entrepreneur
Digital Marketing Consultant with a Passion for Helping Businesses Grow.
I went to a great seminar with a guy (can't remember his name) but he ran 5 incubators around Europe and recently published a book, he was highly qualified.... He said, it should always be 50/50 split. But obviously the first founder is owed something at-least for there time, so he suggested an agreement that when the company starts making money they are paid out for there efforts, such as 1 year equivalent salary or whatever. The 50/50 split was stressed as being very important as anything else reflected badly from a moral standpoint and raised questions in investors eye's. I'm just telling you what I've been told, I'm in no way qualified.
Mike Moyer
2
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Hi Caleb, Piece of cake. No problem. There is an exact solution. Its called a Grunt Fund and if you email me at [removed to protect privacy] I'll email you detailed instructions on how to implement. You will all get exactly what you deserve. No more and no less!
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