
Ask HN: 3 co-founders or 2 co-founders and employee? - tixocloud
We&#x27;re still trying to product&#x2F;market fit and I have been thinking about bringing someone on to help speed up the technical development.<p>We&#x27;re concerned that bringing on another co-founder will reduce the equity for everyone, including ourselves and potential investors. Are there other issues that a 3rd co-founder will bring?<p>The main benefit I see with another co-founder is that his interest will be properly vested into the project. I see him as eventually taking on a CTO role and managing the product development side.<p>The reason why we&#x27;re considering a 3rd co-founder is that we&#x27;re pre-revenue and we can only offer equity at this point. Have you guys heard of Employee #1 being paid with equity instead of a salary and is it enough to keep them in the game?<p>Thanks!
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trcollinson
I love companies that say they are "pre-revenue" as well as pre
"product/market fit". In the infamous words of Kevin O'Leary you are pre-
business, or what some might call a hobby.

Nevertheless, I don't say this just to rain on your parade. Businesses all
start somewhere. But what you are saying is you have no cash on hand or
ability to take on debt to pay for a software engineer to build your main
product. Let's make it relatively clear, you cannot pay a person in equity in
lieu of monetary payment. Why not? Because your equity isn't worth anything
right now. If you have no revenue, no product, and no investment, you have no
value. So if you were to "hire" an engineer who, at market value, might make
$100,000 per year, how much would you pay them in equity? You cannot make the
equation work.

So you are stuck with some other sort of agreement. You can make them a co-
founder. But you don't want to dilute your equity. That's a major issue. The
question then becomes how much benefit are you bringing to the organization in
comparison to them? I've been asked this, personally, a number of times in my
career. "Will you take 5%? If we take off with this production we will become
a $1,000,000,000 company and you'll be worth $50 MILLION!" My answer, when the
company is at your stage is no, I will not take .5%, 1%, or 5%. I will take
50%.

Of course, co-founders choke on this. But I have a lot of issues to weigh as a
potential co-founder. First, often times the other co-founders aren't working
on the product or the company full time. The aren't making any revenue and so
how will they live without a second job? On the other hand, as an engineer, I
must get that product out the door quick, so I am heads down full time.
Second, this is a huge risk for me and I do not want my co-founders making
poor decisions while I stand there with my tiny, non-voting amount of equity.

Some might say "But what happens when we need investors!" and this is a
reasonable question which does come up. I give up a percentage of my equity to
gain investors at the same rate as my partners. If we need to do a raise as
20%, I now have 40% and my co-founders have 40%. The math follows down to just
about any level. We make those decisions together.

Anyway, I just wanted to give you the other side of this sort of discussion.
Most entrepreneurs want to value their idea very high, while reducing the
value of product execution. By sticking to my principles, I have been quite
successful, starting 2 businesses and partnering in 2 others, all sold
successfully. I hope you find the right fit for you!

~~~
tixocloud
Thanks, I really appreciate your frank thoughts and sharing the perspective of
a potential co-founder before I actually insult anyone.

My initial thoughts were to have an equal split amongst 3 people. I was warned
that 3 co-founders would be too many and would not leave much on the table but
I don't fully agree with that notion. I was willing to bet that anyone would
want an equal share in return for what they bring to the table.

Just for clarification, when we raise at 20%, then all 3 of us would share the
80%? And how much do companies usually leave aside for employees?

~~~
trcollinson
If you were to come to me and say "Hey, we have this idea, we have a
prototype, and we'd like to make it a product. We'd like to get it in front of
investors and make you a partner. We know you are going to put in a lot of
time and effort to build it. We can offer you 33%, as we're both going to take
1/3 ourselves..." I would not be offended by that. That is actually a very
fair assessment and a good starting point for a fair negotiation.

As for splitting equity that is a bit more of a complicated conversation. Not
all equity is the same. In a fair world you might say: 10% reserved for
employees, 20% for investors, and 70% for us. That seems fair on the outside
right? You would each get 23.3% and you could each outvote any investor you
bring on board. However, often times you don't have straight equity deals when
raising funds. You might take a convertible note. You might have an investor
who will only accept preferred shares of equity with special arrangements.
Even relatively simple and underfunded start ups can sometimes have very
complex cap tables with multiple levels of shares of stock being given
different rules and right. If you're not careful, the cap table can easily run
away from you. I have known quite a few successful entrepreneurs who have
gotten screwed in the end, not because of co-founders, but because the cap
table went sideways. For example, one small start up was offered north of
$80MM 4.5 years after starting up. The co-founders each, after taxes, walked
away with a few hundred thousand.

So, to answer your actual question, it really depends. Getting a partner who
has been through those whole ordeal before can be priceless.

~~~
tixocloud
Thanks for your thoughts! I really appreciate your time to write the post out.

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webstartupper
If you are only paying him equity and no salary, he is a co-founder. How much
equity he gets depends on what each of you bring to the table and on the
negotiations with him. Google "founder equity calculator" to get a good idea
of what factors to think of. Those calculators are not perfect, but make for a
good starting point.

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AnotherMarc
Assuming you can convince him to join at whatever stock distribution is
acceptable to him, you, and your other founder, you might not need to worry
about what's left for future investors. That will be a separate negotiation,
and everyone will likely get diluted then, whether they own 5% or 50%.

3 founders can work fine. Many would consider it better than 2, all else being
equal, since with 3 you can break some decision logjams. But that assumes all
3 are good, and that you have developed a strong working relationship. Reading
your post, where you are technical, you are bringing someone on to help, and
eventually he may be promoted to CTO, makes me wonder if you view him as more
junior, currently. And whether he views himself more junior. That might drive
both the equity split, and whether he participates as an equal in routine
operational (or even technical) decisions.

~~~
tixocloud
Thanks. Yes, those are very good points for me to take into consideration.
Given this early stage, I was hoping to get something going faster without
having to worry too much about future dilution, etc. but I do worry about his
participation and perception of equality from his end of things.

That being said, I had a quick chat with him and apparently, he's doing
another startup so looks like the decision has already been made for me for
the time being.

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brudgers
Why are you worried about reducing equity when all that amounts to right now
is a bigger slice of zero? And if everything works out dreamily, the
difference is whether you spend your days rolling around on a 12" stack of
money or a 10" stack?

The reason not to bring in a third cofounder is that you don't have access to
the right person...a cofounder is like your spouse only there's more money at
stake and you spend more time together.

Finally, if you find the right cofounder, you can bootstrap, generate revenue
and have better control over the terms at which others may be offered the
opportunity to invest in your company. Having investors is not a goal, it is a
means to an end, just like bringing in technical talent.

Good luck.

~~~
tixocloud
Thanks, they are my thoughts exactly but I wanted to see what others thought.

There are already 2 co-founders but me being the only technical person, I
wanted to bring on another technical person to speed things up.

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gus_massa
Simplified version:

* If you pay 95% in money and 5% of the salary in equity, he is an employee

* If you pay 5% in money and 95% of the salary in equity, he is a cofounder

Also:

* An employee only gets a few % of the total equity, say 2%, 1% or less

* A cofounder gets almost the same equity of the other cofounders, in this case about 33% (perhaps 40%+40%+30%, not 45%+45%+10%) (In this case, it looks like you don't have a prototype, so 33.3%+33.3%+33.3% looks better.)

[In any case, remember to use the standard 4 years vesting with 1 year cliff
scheme.]

~~~
tixocloud
Thanks for the simplification and especially for the ratios for the co-
founders. We do have a prototype as I'm also technical but I think we would
benefit from faster development by bringing on another technical person.

When would it make sense to go 40%-40%-20%? And how would it look like when we
bring in funding from outside investors?

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jtfairbank
Investors will have problems if the gap is too large. They'll wonder what
discussions aren't being had with the 20% cofounder, if that person is
motivated to be part of the company for the long term, etc.

Unless you've done this many times before, its not really that big a deal to
do an even split. Assuming success, you'll likely end up with less than half
of your original equity, so what is a 20% gap now (huge!) might be 5% or less
when you exit (ie no big deal).

Of course, go with a vesting schedule and cliff. And to make up for them
coming on later, perhaps you start with 40 / 40 / 20 but have a plan (that you
share with them) to grant them additional equity each year until it's roughly
even, so as they prove their worth and commitment you make them an even
cofounder.

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rogeryu
So you want an investor who is also employee. If you can't find a good CTO who
doesn't need a salary, try to find an investor who wants to pay his salary.

~~~
tixocloud
Not exactly.

I'd like to bring someone on to help with product development, eventually
transitioning to CTO. Just wondering if that person should be a co-founder or
an employee. And how much equity stake would be right to offer?

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Spoom
If I was only being paid in equity, I would be offended being called an
employee and not a cofounder (and would likely not continue / take the deal).

~~~
tixocloud
That makes perfect sense. And I'm assuming that you would only be interested
in an equal split. Otherwise, I can't see why I would bother working on
someone else's idea without as much of the reward with the same risk. Would
that be accurate?

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nicholas73
"We're still trying to product/market fit"

So you've got nothing but want to convince the new guy you have value to
deserve more?

