

Ask HN: How to decide what percentage each founder gets? - 10smom

What do u do when bringing in a founder for the purpose of having a certain skill set on the team?  What is fair for all?
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techiferous
Whatever you do, make sure you vest each person's share in the company
(including your own)! See [http://www.vcreadylaw.com/blog/2009/09/14/founders-
agreement...](http://www.vcreadylaw.com/blog/2009/09/14/founders-agreements/)

~~~
borism
How often does that actually happen? I can't think of any examples.

Most start-ups hardly live full 4 year vesting period either failing or being
acquired.

~~~
techiferous
The length of time of vesting is not as important as protecting the rest of
the team if one of the founders walks away two weeks later with a significant
portion of the company. If a one year or six month vesting period makes sense,
why not? But having no vesting can be very risky.

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danshapiro
Here are some rules of thumb, with SWAG percentages attached.

1) Fulltime hours worked (with no salary) count more than part time hours
worked (done in your free time from a day job).

2) Having the initial idea counts for 5%.

3) A difficult to replicate beachhead (patent, nontrivial code, brilliant
design) counts for 10-20%.

4) Being the person who actually incorporates and recruits others counts for
10%.

5) Money invested is ignored. It should either be even contributions for
everyone (and thus nulled out), or invested in a convertible note with very
modest terms (and thus counted separately).

6) Holding the CEO role counts for 10%.

7) Having a reputation that will meaningfully impact the company's probability
of being funded counts for 2x-4x.

8) If, at the end, you and your cofounders have equal shares, you did it
wrong.

9) Once the company has had the validation and de-risking of a financing
round, everyone from thenceforth is an employee, not a founder.

~~~
nick007
could you elaborate on #7?

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danshapiro
Generally it means you have an entrepreneurial track record, but it could also
mean you have amazing investor connections, an executive track record of
tremendous success in a relevant business, an EIR arrangement where the VC
wants to fund you, etc.

Going from nonfundable to fundable or from a premoney valuation of x to 2x
(which is what someone should do to merit this sort of disproportional value)
gets rewarded by a corresponding increase in ownership.

~~~
nick007
thanks for the follow up

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DirtyAndy
I hate to sound too negative, but 99% of that "Rate My Startup"'s I see on
here are worth nothing now, and will be worth nothing in 5 years. Don't spend
too much time debating whether you deserve 90% or nothing or 20% of nothing,
because they both equal the same thing.

Unless there was a overriding reason for one partner to have more equity I
would only ever do 50/50 or 1/3rd each etc. Equal shares means everyone has
the same amount riding on it. Everyone suffers the same stresses. Everyone
gets the same wins. Reasons that would make me do it differently, if one
partner has a proven track record (has had a major success in the past, that
they were truly part of), if it was an extremely technical project (getting
better search results than Google for example) I think the technical co-
founder is probably worth more - if they can deliver, similarly if it is a
very hard sell the marketing/business person might deserve more (although if
it is that hard a sell I'd stay away). Lastly if the business needed money and
someone had a contact that could bring in that money it would be worth
considering giving them more equity (if it was me, I'd be demanding more).

I'm pretty sure in general YC gives the company equal money based on number of
founders. I would imagine as a general rule that means they see all founders
as equals. Seems like a pretty good guideline.

(Would be interesting to hear what PG and co do when they meet a team and
think 2 out of 3 are awesome - do they fund, not fund, tell them to lose the
other guy etc?)

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bartman
My last startup was founded by 4 people with equal shares and rights. We
failed early partly because we couldn't go into a clear direction, too many
votes, too many opinions. We didn't turn out to be a well matching team
either, though.

For my next startup I wouldn't do equal shares again, someone needs to be able
to have the last word.

edit: Initially we started with 2 people with equal shares, and got two others
in shortly after launch. We did an even split then, although in retrospect
30/30/20/20 would have been better. That is if you don't depend entirely on
your newcomers.

~~~
jmathai
The 30/30 would still be a problem though (from experience). There needs to be
one visionary who has the final say. Help prevent fights and wasted time.

~~~
bartman
I agree, I think it might have worked for our case though because my initial
cofounder was more business focussed and I was the technical one. He stood
behind my technical/product decisions.

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danielayele
What's the skill set? Bringing on a co-founder for a specific skill set at an
early stage is generally a bad idea because everyone will (and should) be
doing everything for the first few months. If you're pre-product and pre-
revenue you should be looking for partners...that is, people who have
complementary skill sets and are willing to do everything possible to ensure
that the company succeeds. At this stage companies should be split equally
among the founders. If you're at a later stage then the percentage should be
decided in a brief (emphasis on brief) negotiation process that accounts for
existing product value created. In this case, a good rule of thumb is probably
1/n^2 where n=employee number.

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shalmanese
Here's a tip I heard from a friend (assume 2 co-founders, can be extended to n
without loss of generality):

Have both founder sit down and write a list of things they think the other
founder brings to the table. Assign an equity value beside each point (with
the remaining equity belonging to you). Spend some time doing this, encourage
them to take it seriously.

After both of you have completed this, sit down and run through the entire
list. Have an open and honest debate about each point.

Once adequate consensus is reached, add up the total % of equity assigned.
Hopefully, this number will exceed 100%, if it does not (ie: both co-founders
believe they make an outsized contribution), it's probably a good sign you
need to go back and restart this process again. Multiply your personal equity
stake by the total % equity to get your share.

It seems like a good idea because it avoids making the argument self-serving
and talking about your own contributions. Instead, it's about getting the
partnership off on a foot of mutual respect & understanding.

Disclaimer: I've never tried this myself, results may vary.

~~~
shalmanese
So, as an example, with a business guy & technical co-founder, the business
guy believes the technical co-founder should deserve 80% of the company, the
technical guy believes the business guy should deserve 40% of the company.

80% + 40% = 120%. Thus, the business guy ends up with 40%/120% = 33.3% and the
technical guy ends up with 80%/120% = 66.6% of the company.

Both walk away happy that they got more than they felt like they deserved.

~~~
borism
since when tech guy gets more than business guy?

(to all the downvoters: I'm genuinely interested)

~~~
jarsj
It totally depends on the nature of the company. In many successful tech
companies like (Google/FB/DropBox etc..), I believe tech guys owns majority.

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robryan
At the start, I think equal shares is really the way to go, as long as each
founder is going to put in the same level of effort and dedication. Squabbling
over percentages is bound to create tension before things have even got off
the ground.

------
beh
Chris Dixon wrote an insightful post on this last year:
[http://cdixon.org/2009/08/23/dividing-equity-between-
founder...](http://cdixon.org/2009/08/23/dividing-equity-between-founders/)

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pcrawfor
Scott Farquhar one of the co-founders of Atlassian said this best in his talk
at Business of Software this week. Which I'm paraphrasing from memory... If
you're co-founding a startup equal shares is the way to go you should be doing
this with someone you trust and can work with and squabbling over pieces of a
worthless asset at the start is a sidetrack from doing what matters. I'd add
that vesting is never a bad thing but if you are so worried about people not
contributing you shouldn't be starting a company with the person.

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shivam14
See the Founder's Pie Calculator as a reference,
[http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Ca...](http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Calculator.htm)

~~~
staunch
That link doesn't work (for me). HN is stripping out the single quote. Here it
is with the quote encoded:

[http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...](http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm)

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lsc
I've been considering this... now, I've been pouring all my personal resources
into my company for five years now, so this is something of a special case.

The thing is, other people want to get involved, people who have skills worth
more than I can pay in cash. I know that I have more dedication than they do.
If we are where we are now a year from now, I'll still be plugging away at it.
No other rational person would feel the same way.

So, my thought is that every year or so, we simulate another round of funding.
We dilute all current stock by the amount of money we'd need to pay everyone
market rate, and distribute the new shares based on the difference between a
person's market value and the cash they actually got paid.

This would be pretty similar to the effect we'd get if we did everything in
cash, and got a new round of funding every year to pay salaries.

What I like about it is that if you worked for me three years ago but then
lost interest, your equity stake would slowly shrink as I kept pouring in
another $80K/year worth of unpaid labour into the thing.

Of course my case is a special case. most of the time the idea is that if one
founder loses interest, the company goes under and that's that.

~~~
staunch
It sounds like you just need to setup an option pool (with 4 year vesting) and
hand out equity to some senior level employees. Why do anything more
complicated than that?

~~~
lsc
so, if you don't stick around for four years, you get squat? or you get 25% of
that a year?

the former sounds a bit too draconian. I mean, I don't expect anyone (save for
myself) to stick around that long.

the latter would stick me with the same problem I have now... the thing is,
every year that goes on, I'm investing what amounts to a pretty large chunk of
cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon,
my ongoing contributions should mean something, too.

My point is that without dilution, as time goes on and I accumulate more (no
longer working) people with percentage ownership in the company, my motivation
to continue to invest decreases. If the company increases in value fast enough
(and if my free-market value doesn't increase dramatically) that the
percentage of the company I still own is worth the investment, we don't have a
problem. But if I become more valuable or if the value of the company
stagnates, my motivation for continuing to invest will decrease with my
percentage ownership. I'll be thinking more about how to buy out those who are
no longer with me rather than using those resources to move the company
forward.

I could issue a new options pool (that dilutes existing shares) every year,
but I don't really see the difference between that and what I proposed, other
than it's options rather than equity.

~~~
staunch
Normally the vesting would be quarterly over 4 years with a 1 year "cliff". So
0% until 1 year (then 25%) then every quarter they'd get the next chunk.

The equity they get should be a reward for work they've done, not work they're
going to do. So if they work their ass off for years they should get their
equity and you shouldn't feel negatively about it.

Their piece should be quite small relative to yours. If you gave out 15% in an
option pool only 7% of it might have been vested and exercised. That's not
very much if it meant you got to have really great people work their ass off
for you over years.

If you do it right you will not regret them owning a small piece of your
company because they should have contributed to moving it forward in a big
way.

You should be thinking "Bob quit and owns 1.25% but he did do X and that
helped us grow so quickly and smoothly it was totally worth it."

~~~
lsc
>You should be thinking "Bob quit and owns 1.25% but he did do X and that
helped us grow so quickly and smoothly it was totally worth it."

Now, admittedly, I'm somewhat irrational about my company. For the first four
years, I think only an irrational person would have stuck around.

But it still seems like it would be very easy to get into a situation where
I've spent away the company.

For example, say the company is worth $200K. (It's worth a little more than
that, but in this industry, you are talking around a year revenue plus the
value of your equipment, so valuations are really low compared to, say, social
networks.) so I hire someone worth $130K and I pay them $30K, because I can
afford that and they need to make rent. To make things fair, I need to give
them half the company for a years work, right?

Yeah, after that first year, I'd feel fine about it. they put in a bunch of
good work and improved the company. But, say they quit because I am an idiot
and I overestimated the value of the product we built, so the company is now
only worth, say $300K and still can't pay anyone reasonable salaries.

So, would I work another year? this time needing to grow the company twice as
fast to feel the same effects? maybe. but the year after that? yeah I'm pretty
sure I'd decide it's time to close up shop and start a new company or to get a
real job.

~~~
staunch
Give them tiny percentages that are only worth a lot if the company is a big
success. That means maybe 2.5% (with vesting) for an _amazing_ person. If
someone takes over most of your job (and does it better) maybe you'd give them
5%-10% but that's a very extreme case. Most people should be getting 0.15% -
1.5% depending on their contribution. You don't necessarily have to decide up
front. You can start people low and award options for performance.

Plan to distribute at most 20% of the company to employees over the next 5-7
years.

~~~
lsc
>Give them tiny percentages that are only worth a lot if the company is a big
success.

Is it possible to get good people who have other options for 1/4th what they
could regularly get plus what amounts to a few grand worth of equity?

It doesn't seem like a very good deal for the employee, really. (seems like a
fine deal for me if I could pull it off... but I'd laugh at you if you made me
that offer. Sure, pay me _market rate_ plus some tiny bit of equity, that's
fine... but if you expect me to work for peanuts, I expect serious equity.)

edit: thanks for engaging with me on this; It's good to hear another
perspective, I mean, mine is likely wrong. But I think that I might be trying
to apply equity rules that make sense for "get big or die" businesses to a
lifestyle business that only needs to double a few more times.

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giffo
Allow the existing founders to discuss and decide what the new potential co-
founder is worth and what they are willing to pay (in percentage/equity) to
get him/her onboard.

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js2
There are a couple posts from Jeff that address this topic -
<http://www.mcstartup.com/past-articles/>

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swah
My friends quit, so its 100% to me now.

