

Ask HN: How to split equity - clistctrl

I'm working on a startup in its early stages. So far its been me, and another guy for a bit now.  I may have found a third co-founder to join, and she just asked about equity.<p>A bit how the work is split right now.<p>Myself, I am the technical cofounder.  I will be doing the design, the programming, and hosting etc.  The idea for the site was also mine.<p>Person B is handling the business related inquiries, as well as the things related to marketing etc.  He also knows way more about the process to get funding.  His importance probably will be greater in the future.<p>Person C if she decides to join will be our domain expert.  She would be playing a huge role in our success. In terms of helping us get the initial content, and being a liaison with the domains community.  Her opinions also will matter a lot to the directions we take.<p>I just handed this task to Person B, but I would like to get an idea of what you think I should expect.
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trevelyan
Reality check... you just gave B the job of deciding how much equity he should
have while you're busy doing the actual work of starting the company. That's
like paying someone to pick your pocket.

If you don't know how much these people are worth, it is probably because they
aren't doing work that is of any tangible value to the company yet. Sure...
they'll be invaluable to the company in the future. Everyone is. But do
yourself a favor and get them to articulate exactly what it is that they will
do and tie a value to THOSE milestones. Then link their vesting to hitting
those clearly-defined milestones. And make sure those milestones push the
business forward and don't include random stuff like "define equity split".

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DevX101
"link their vesting to hitting those clearly-defined milestones"

Great advice here. If I bring on a business guy who claims he can land the
first 10 major accounts that will be critical for the business, that's all
well and good. But unless he's a proven rainmaker I wouldn't give up equity
unless it's vested to hitting these key milestones.

And by the way, don't put this off as a "task" to your secondary business
partner. Both of you need to sit at the table and discuss.

~~~
petervandijck
Question: I hadn't heard of vesting based on milestones before. Is that really
a commonly used option? Since milestones are so hard to predict, and depend on
lots of factors, not just the work of that one person. What would an example
of a clearly defined milestone be?

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tptacek
This has to be one of the most frequently asked questions on HN.

It may help to consider carefully all the reasons you give equity:

* To repay effort (like, doing all the up-front coding)

* To compensate for risk (taking a job with an uncertain future)

* To compensate for financial investment in the company

* To incentivize future effort and risk-taking

* To delineate control of the company

* To access valuable tangible/intangible assets held by other people (such as a network of contacts in your problem domain, or a valuable endorsement)

Make sure you're not just thinking about equity in simple terms. You can
sabotage your team by creating even superficial imbalances. You might think,
"I'm doing all the coding up front, so I should get more equity because I'm
valuable on day 1". Maybe that's true. But it might also be true that your
partner took the same amount of risk as you, got less equity, and now also has
a reason to blame you for every setback on the business side, because you
delivered crappy code that prevented him from realizing his equity stake.

This is an absolutely utterly basic problem in comp package design, something
that anyone who has ever hired a salesperson will tell you right off the bat.
In the context of comp plans, if a conflict can happen, it will happen. Make
sure your fiddley equity plan is worth the effort.

Remember, if your business is unsuccessful, 60% of 0 is 0. If your business
_is_ successful, you'll have other levers to pull besides day 1 equity grants
to portion out upside.

(I personally wouldn't allocate a single share based on someone's supposed
ability to land funding, though. Assume you won't get funded.)

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petervandijck
It seems to me that you are the most important person in this company (because
you do most of the work right now, and because of your comment that "PersonB's
importance will probably be greater in the future" and "I just handed this
task to person B"). If you're handing tasks to people, you're the boss.

1/3 each does NOT seem fair.

To be honest, I don't understand why you are getting person B involved at all,
give them equity and treat them as a co-founder if they don't have much work
to do right now (as you seem to suggest). From your description, quite
honestly, it seems like you might as well have hired an intern or gotten an
accountant instead of giving this person a large part of your company.
"Knowing a lot about funding" is NOT a reason to make someone a cofounder.

That's my 0.02c, sorry if that sounds harsh. I just don't want another post in
12 months about how to split up with my cofounders who aren't pulling their
weight.

Person C is coming in later, so should get significantly less equity.

From what I'm hearing, I would not have personB involved with the expectation
that at some point in the future they'll start pulling their weight. If that
is the thinking, then wait until you really, really need them, and _then_ get
them involved (for a lot less equity). Person C sounds important, so make them
your second cofounder.

Not knowing about the details, from all your comments it sounds like personB
is not doing much. YOU found another cofounder. YOU are telling personB what
to do. YOU also expect personB to start pulling their weight in the future.
All this points to letting them go NOW, and asking him back later when there's
a need for his expertise. One more thing: having a business co-founder who
isn't doing much right now but "knows a lot about funding" may well hurt your
chances to get funding instead of improving them.

Get things right at the beginning. Don't get a business co-founder just
because you think you need one.

Of course, I may be wrong and there may be a lot of work for personB right now
that I'm not aware of :)

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petervandijck
Think about it like this: every day, the risk of your company is (hopefully)
going down. Every line of code you write, every action you take, should help
with that. So every day that passes, when someone new joins, they will get
less equity because they are taking less risk. More of the work is already
done.

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csallen
Given that you had the initial idea AND you're doing the coding and design,
I'd say you should probably get additional equity. (How many successful
startups had 100% hacker founders? A lot. How many had 0% hacker founders?
Very few.)

Of course, this is based on my entirely limited knowledge of the rest of the
situation. There are many other relevant questions to ask. Take a look at some
previous threads on this same topic: <http://searchyc.com/equity>

I will say, try to get equity taken care of up front, _before_ you bring
people on. It will prevent conflicts of a magnitude you would never expect.

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starkness
This post is insightful: [http://cdixon.org/2009/08/23/dividing-equity-
between-founder...](http://cdixon.org/2009/08/23/dividing-equity-between-
founders).

At the early stage, people tend to overvalue past contributions, and
undervalue future contributions. Equity grants should be for a person's
expected value over the next four years.

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abiczo
Since you are in the early stages, go with 1/3 each, anything else will
potentially cause a lot of headaches down the road.

Having equal equity creates a healthy environment where everyone feels that
they should put in as much work as they can. If the others have less equity
than you, they probably won't be as motivated as you are. And even if they
were, you'll likely start to question whether they are working hard enough,
whether they really want the company to succeed etc. This will cause a lot of
unnecessary tension.

So I think you should bite the bullet, give up some equity in exchange for
better odds of succeeding.

Also, some kind of vesting may be a good idea if you don't trust you
cofounders enough yet.

(I was in a somewhat similar situation like you about a year ago, went with
1/3 each and I'm still very happy with that decision.)

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sp4rki
To be honest to me it seems like you practically giving away a big chunk of
your company for free. Person B doesn't seem important at all at this moment,
and seems like the relationship is partly based on friendship. Was this a
friend you let into your business just because you think you need a cofounder?
Person C seems of utmost importance in comparison to Person B, but still seems
like she's not required at the moment. I made the same mistake once when I was
younger, but luckily everything got thrashed and I started again by myself
involving other people only when it was really necessary.

tl;dr: Only add cofounders when you're sure your really need them, and only
then assess the risk and their involvement as a measure for equity.

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bond
You 40%, others 30% each...

Assuming they will be co-founders with you from the get go...

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zaidf
Whatever % you go with, have vesting.

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timmy_k
A mentor once asked his entrepreneurship class "How do people decide what a
business is worth?" People threw out Cashflows, asset value, and other
thoughts. He disagreed: to Ken a business is worth only what people are
willing to pay for it.

It seems you are in the same boat: they are worth what they feel is fair.

All this to say that I have never heard of a uniform method. It's all up to
negotiations for your team.

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brudgers
Why not:

51 : 24.5 : 24.5

One person in control. Without the design, programming etc. there is no
company. Those whose work will benefit the company down the road should be
rewarded with equity that can be cashed down the road.

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erikstarck
1\. Write down a list of tasks that must be performed to move the company
forward.

2\. Decide together how many shares each task is worth.

3\. When the task is finished, split the shares betweens the founders in a
joint session.

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petervandijck
I don't think that's good advice.

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erikstarck
Why not?

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petervandijck
It assumes you can decide on a list of tasks now and then just menially
perform those tasks for the next few months. That's not how it works.

~~~
erikstarck
Ok, then don't make it tasks but measurable goals.

"We should have 100 signups." "We should have a first paying customer."

And so forth.

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petervandijck
This may help: <http://www.avc.com/a_vc/2010/10/employee-equity-options.html>

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michael_dorfman
There's no magic formula here: the objective is to estimate the contribution
each of you will have to the success of the company over the next stretch of
time.

Is there any immediately compelling reason why 1/3rd each isn't fair?

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petervandijck
Because person B hasn't done much yet, and because person C is joining later
than the original founder(s).

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michael_dorfman
"Done much yet" and "joined later" don't really matter much, in my book-- as I
said, the question is, when we look back at some future point (say, a year or
two from now) and total up all of the contributions, how much value did each
person provide?

Clearly, person A has contributed the most so far. That doesn't mean that the
trend will continue that way.

~~~
generalk
You don't assign equity based on work that isn't done. That's asking for
trouble, unless the person has a huge track record of doing the type of work
you have them doing.

Vesting is _key_ here. I'm not the first to say it, but setting up key
milestones and vesting based on their successful (and be sure to define
"success") completion is the only way to go.

~~~
petervandijck
Question: I hadn't heard of vesting based on milestones before. Is that really
a commonly used option? Since milestones are so hard to predict, and depend on
lots of factors, not just the work of that one person..

