

Ask HN: How would you split ownership in this scenario? - Axsuul

My friend, who is the CEO of a company in this industry that this startup will be in, and I came up with a great idea and we're going to pursue it. However, he wants to split it 50/50 but I'm not comfortable with that because<p>* I don't have a job so I have more to risk<p>* I will be the one developing the product (he is non-technical)<p>* He is already running another company, there's only so much time he can invest in this one<p>What he brings to the table is strong connections within the industry. He'll be able to get a lot of customers on board initially. Do you guys think 50/50 is fair in this scenario?
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tptacek
The problem you have here is not that you're unemployed and your prospective
partner isn't (that actually hurts you, as it decreases your opportunity
cost). Rather, the problem is simply that your partner isn't working for the
company.

The tricky issue here isn't the split. If you think your partner is going to
add significant value to the company (and: you clearly do), stop obsessing
about the split, because how you carve up equity isn't going to change your
outcome _nearly_ as much as how well you two work together. Both negotiating
for a better split, and, worse, executing the company as an unequal
partnership are going to cost relationship capital. Save that capital for
something that really matters.

The tricky issue is vesting. DO NOT ENTER A PARTNERSHIP WITHOUT VESTING.
Anyone who gets equity, YOU INCLUDED, needs to be on 4-year vesting. Since you
can't really "vest" someone who isn't even working for the company, you have a
bigger problem than the split.

My suggestion is, don't offer your prospective partner any equity until they
start. That default starting equity, while significant, won't be equal to
yours; it'll be, as Joel Spolsky puts it, "second stripe" equity. (Joel's
stripe examples are 50/10/10/10/10/10, but you'd obviously change that;
perhaps 30/20/10/10/10/10).

At the same time, offer them an option to purchase equity equivalent to yours
(ie, to buy 5% of the company). The price of that option should capture the
value of the time you spent working on the company PLUS the added risk you
took; think of it as a premium on your salary to prevent the partner from
waiting- and- seeing how well things go before joining up (if the cost of the
option was just your salary, it would be dumb for them to pay it until they
had to, and they'd be disincentivized from joining).

Be aware that your prospective partner is probably going to balk at this, in
which case, oh well; there's lots of ideas out there. If you're not in a
position to amicably walk away, no-harm no-foul, you have no business
negotiating at all.

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hoodwink
These are some creative structuring ideas. In addition, you could keep the
50/50 split and structure some sort of "promote" or disproportionate share of
the company after a return of capital or above a certain value. For instance,
you guys could be 50/50 up to a $10 million valuation. After $10 million, you
could be entitled to an extra X% as an incentive.

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trueneverland
Different people will have a different of opinion on this. As full disclosure,
I am NOT a fan of 50/50 splits in general and have had my fair share of
businesses and startups.

Here is my take:

1\. Your first bullet point is irrelevant. You not having a job doesn't mean
you couldn't get a job to lower risk if thats the way you think (although
thats not a good way to think at all). Him having a job doesn't mean much.
What matters is what you each bring to the table and what you contribute. If
your argument was more base on time commitment rather than risk, I'd agree.

2\. I HIGHLY disagree with this argument. A lot of HN love to downplay the
non-technical founder (with good reasons) but a valuable non-technical founder
who have the skills (which many who start out don't) is worth their weight in
gold as well. The non-technical argument here is more of a bias use case than
a fair assessment of what each is bringing to the table and how that will
contribute towards the startup.

3\. This one is valid. As someone else noted, check for liabilities regarding
this. The fact that you are going to be putting in more time makes it somewhat
valid that the split should not be 50/50 starting out. Unless he is investing
some money and willing to put in equal time, among other things, it would be
very difficult to justify a 50/50 partnership. That said, if you value and
trust him, and he does bring the goods as you say (not just perceived), then
you will need to figure out fair compensation otherwise.

TL;DR 50/50 probably doesn't make sense in this case but some of the arguments
presented are invalid in my personal opinion.

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tptacek
Equity splits have at least as much to do with risk as they do with
contribution. But it's risk in a more general sense; you don't get compensated
for being so financially insecure that the venture might wipe you out
completely. Instead, it's "risk" that captures opportunity cost.

Unfortunately for the poster, despite the fact that his prospective partner
already has a well-paying job, his risk in starting this company could be
_higher_ , because the opportunity cost to an established CEO of joining on
with an unproven venture is very high. CEO's tend to "trade up" to other CEO
roles at established companies.

~~~
trueneverland
I think doing a startup is risky for a lot of people in general. Comparing
risk in the manner the OP did is poor. I think to succeed you have to have a
certain level of risk tolerance. There are a lot more things to consider and
compare than who risks more financially or in opportunity cost. Getting into a
startup requires more commitment than that in my personal opinion.

Now if you're talking about risk appetite in doing things and jumping into a
startup, then I'd agree risk is a factor worth taking note of.

~~~
tptacek
"Contribution" can actually be measured in terms of risk; the risk is the
opportunity cost of the value of that contribution to any other business you
had the option to be a part of.

Risk is more important than your writing seems to indicate. Equity isn't an
achievement award.

~~~
trueneverland
I think you read my comment wrong then. I never undervalued risk in any way. I
agree its one of the most important factors. But I think the type of risk is
more important than what you lose out on as opposed to the other guy.

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koopajah
There was a discussion a few days ago about splitting shares :
<http://news.ycombinator.com/item?id=4379079>

CodeCube provided a link to Joel Spolsky's answer on how to do this. He speaks
about your specific case where you'd work full time on it while your co-
founder does not : [http://answers.onstartups.com/questions/6949/forming-a-
new-s...](http://answers.onstartups.com/questions/6949/forming-a-new-software-
startup-how-do-i-allocate-ownership-fairly/23326#23326)

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aauldy
I think you guys should sit down together and write down a list of what you
will be contributing to the company. Im sure it will become very clear as to
how you should break up the company. In my opinion after reading your post it
doesnt look sound like you should be splitting the company 50/50

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thiagodotfm
Vest his 50% equity but instead of using time, use "customers" he bought on
board(or define a different way to measure his value) and decide an amount of
customers he should bring in order to make it worth those 50%.

Give him them the equity that he deserve based on this performance. :)

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vladd
If he's CEO but not the owner, be careful about non-compete provisions in his
employment contract which might create legal liability for your company in the
future, especially if he brags about bringing "lot of customers" with "strong
connections within the industry".

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russtrpkovski
Can you acquire customers on your own? If your product truly solve a problem,
it doesn't need someone with "strong connections"

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NonEUCitizen
If he also puts in a few million dollars, you might consider it. But
otherwise, no.

