

Ask HN: What is a reasonable equity to give to a late co-founder? - brownieman

I am a single founder of a company that is generating a million dollars in revenue. What would be a reasonable equity to give to a co founder I bring in at this stage?
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jorangreef
Firstly, assuming that your revenue exceeds your costs and that your business
is in fact healthy, why would you want to bring in a co-founder and not an
employee, if you have managed fine so far? I would say it's likely to be a
mistake. Especially if you have employees, since you would be bypassing them
for promotion and bringing in someone from outside, sending a signal that
you're not committed to employees working their way up through the business
(see Jim Collin's books for more on this). Rather hire a great employee and
train them up and promote them.

Secondly, your question takes it for granted that you should "give" the equity
away. Why? Surely, your prospective co-founder should buy his share if you
both value your equity? If it's not bought it's not worth anything. You can't
give it away, and certainly not for something promised which may never
materialize. A bird in the hand is worth two in the bush.

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mswen
First of all, congratulations on the revenue and from your statement that it
is not even close to failing I infer that you must have at least 15% to 20%
profit margins and have replaced salary and benefits you personally would be
earning working elsewhere.

Working from that scenario it seems that you have taken out a significant
portion of the risk. That is you have built/created "X" it is not just a great
dream. You have proven that "X" is a business by convincing people/businesses
to pay for "X" at a price that produces a profit.

Your risk in bringing on a co-founder is that in trying to grow the company he
will screw up the current secret sauce or distract you from what has worked to
get to this point.

My own experience has led me to believe that many people who say they can
deliver high growth to early stage enterprises cannot. In some cases it is
because most of the growth they take credit for in another firm had little to
do with their personal performance and much to do with firm brand/reputation,
well established sales processes and other intangible factors. They get into
this new environment and cannot reproduce former results. Other times, people
in sales and marketing are much better at selling themselves than they are at
selling the product. And, then there are those that really deliver results!
How can you be certain this potential co-founder will really deliver growth?

Other comments point you in the right direction. If you decide to go ahead,
then vest over 4 years - that is very common. Also I would make some
milestones around sales growth. If certain growth targets are hit, this person
can choose to take a cash bonus or to accelerate vesting. Finally 25% seems
high to me since you have taken out so many of the early stage risks -
something more on the order of 15% seems reasonable.

Of course, be wary of accepting advice from strangers on the Internet.

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brudgers
[A corollary of Spolsky's analysis] [1]

Adding a cofounder should essentially, though not perhaps legally, mean
there's a new company. And the new company should be more valuable to the
point that the existing founder's equity goes up despite the dilution. Thus:

    
    
      100 / (number_of_current_founders + 1)
    

The value of adding a cofounder is solely based on the future value of the
company. Looking backward at sunk costs doesn't add value in the best case, is
a waste of time in the average case, and generates toxicities in the worst.

If you don't want to make the person rich, don't make them a
cofounder...they're the wrong candidate for you. If you want to negotiate with
potential cofounders then the relationship is founded at arm's length and down
the road when there's real money on the table is entirely within the explicit
nature of the relationship.

Good luck.

[1]:
[https://gist.github.com/isaacsanders/1653078](https://gist.github.com/isaacsanders/1653078)

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rajacombinator
25% to hire someone at a company making 1 million in revenue sounds insane.
Assuming you're running some kind of SaaS business you probably have a
valuation north of 10 million. So you'd basically be giving this guy $2.5
million. Is he really better than selling 20% of your company and hiring the
best people $2 million can buy?

Assuming you're not totally insane, the only reason you can be considering
this guy at 25% is you believe he has magical industry connections that are
going to add many millions to your bottom line. He's basically a sales guy. So
I'd give him a standard sales guy deal - some percentage of new business
brought in for first X years ... if he's really good give him a small piece of
equity too, like 2.5%. That way he's properly incentivized to bring his
industry connection through.

Also, you should probably seek out some reputable advisors and not ask
questions like this on the internets.

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staunch
Whatever amount you decide, make sure it vests over four years.

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Beached
Yes this, My ownership vests at a rate of 1% per year/ then i become fully
vested after the 5th year.

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detaro
What makes him a "co-founder" vs "just" a manager/employee?

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brownieman
The startup is still at an early stage (less than 2 years) and he would be
contributing significantly to its growth. In this case, co-founder is
interchangeable with being a first employee.

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smt88
There are probably too many variables here for us to ever answer this question
satisfactorily. Do you have investors? How much do the other founders have
each? Will the business fail without this person? What's he asking for? How
much risk is he taking by joining you? Etc.

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brownieman
No investors. Single founder owning 100%. Business is nowhere close to failing
but may not grow as fast without him. Asking for 25%. Risk being taken is him
quitting his stable job at an established company.

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notahacker
25% seems pretty reasonable if he's taking a substantial cut in income and you
believe he's the right person.

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M8
Steve Ballmer had x < 8% initially, if this helps :) (from wiki).

