

Ask HN: Yet Another "how to split equity in new startup" - throwaway817

Me and a co-founder are planning to launch a startup. We are having trouble splitting equity in a way that seems fair to both of us, so would welcome any suggestions. The gory details are:<p>Me:
Technical contributor from coder to manager a team of devs.
Will need to travel across the world (and ready to do so) to make this work.
Full time with no pay (leaving 6 figure job for this).<p>Him:
Main Visionary, came up with idea, documented scenarios, conducted some sort of user study.
Will supply seed funding - 10-15k/month. 
Part time until company can sustain both of us. 
Can be the CEO, good at generating connections with non-tech world.<p>I looked at the equity calculator[1] and it gave me 55-45% split in his favor without considering his investment. Per Chris Dixon[2], initial seed investment should be treated as a loan converted into equity at time of external funding at the same rate. We don't ever want to take external investment given that he's rich enough, so he's not interested in this model even if I agree to some upside while converting loan to equity.<p>Having all said and done, he's ok with something in the range of (55-60%) for him, (20-25%) for me and 20% for key employees. I just _feel_ this is too low for me given the kind of sacrifice I am putting in - several folks we are trying to hire to help from a tech perspective are hard to get, as always, and I have a track record of understanding other people's visions and running with them (not too good with coming up with ideas myself)<p>References:<p>[1] http://foundrs.com/calculator/index.php<p>[2] http://cdixon.org/2009/08/23/dividing-equity-between-founders/<p>Edited for formatting
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TheSkeptic
Frankly, I think you're looking at this the wrong way.

From your description, your wealthy friend:

1\. Came up with an idea that he would like to pursue. 2\. Has the money to
finance the venture. 3\. Is willing to contribute his time on part-time basis
until the venture bears fruit.

You are the technical person he is going to rely on to build the product or
service, and will be responsible for much of the early heavy lifting. You are
leaving a job with a $100,000+ annual salary.

What's wrong with this picture?

1\. Your friend came up with an idea that he ostensibly can't execute on
without the skills you bring to the table. At the same time, he apparently
isn't entertaining the possibility of _paying_ you for those skills in
anything but equity. There is certainly a reason for this, and it's not likely
a good one.

2\. Your friend "can be the CEO", but CEO isn't a part-time job. The fact that
he's only willing to work part time on this until the company can sustain
itself says a lot about his true confidence in the venture.

3\. Your friend has committed to $10,000 to $15,000/month in seed funding. How
long is he willing to continue with this arrangement? Is there a limit to the
total amount he'll invest? What if you need more than $15,000/month? What
assurance do you have that your friend won't seek to renegotiate equity if the
business requires more investment than he originally anticipated? Given what
you've written, I suspect you have no satisfactory answers to these questions.

Bottom line: you should not be worrying about equity - you should be worrying
about the _entire_ deal structure.

You are effectively being asked to relinquish a six-figure job for an unpaid
position that provides a minority equity stake in a company being "co-founded"
by a person who a) won't be dedicating all of his time to the venture until he
thinks it's worthwhile and b) who has only committed to injecting cash into
the venture in small, monthly chunks. This is a wonderful arrangement for your
friend as he receives almost all of the protections. You, on the other hand,
risk the most and get virtually none.

Caveat emptor.

~~~
throwaway817
Things aren't as bad as they seem. 1\. He is actually helping my wife get a
job so that we can sustain ourselves. I don't want to take a salary to
maximize my stake, he won't say no if I ask. 2\. He will be working in another
job to fund this. I agree I don't have a good answer from him on him being
part time 3\. Yup, we are discussing this and will be coming to a specific
number and putting it into legalese.

Essentially, it is the amount of risk I am taking compared to the reward
that's raising the alarm bells for me. Let me know if you have any other
concerns after I incorporate staunch's comment to this thread:

<http://news.ycombinator.com/item?id=2700484>

~~~
TheSkeptic
1\. Involving your friend in your wife's employment is a huge no-no. It only
makes you more dependent on him, and he certainly knows this. If he places
your wife in a job, don't be surprised to see him leveraging this in the worst
way possible if things don't work out as expected.

2\. You are maximizing a stake that isn't yet worth anything, and may never be
worth anything. 20% of $0 is $0, just as 25% of $0 is $0. Perhaps a better way
to look at this: figure out how much this venture would need to be making
before the total value of your compensation package (equity and any eventual
salary) would exceed what you're already making now at your six-figure job.
The number is probably much larger than you think it is.

3\. If your compensation is stock granted outright for services, you should be
aware that this may create undesirable tax consequences for you. You should
speak with an experienced accountant about this.

4\. The fact that your friend needs to continue working to fund the venture is
a huge red flag. What if he loses his job? What if he has a medical emergency?
What if his wife divorces him? If you're going to get in bed with an
"investor", he should be putting in most if not all of the cash up front.
Which begs the question: if your friend says he's prepared to invest
$15,000/month for 10 months, is he capable of transferring $150,000 to the new
company tomorrow? It doesn't sound like it.

Again, the risk you're concerned about is a result of the fact that you are
pursuing a deal structure that makes no sense. I would highly recommend
retaining competent legal counsel before you go any further.

~~~
throwaway817
Thank you for all the advice. We discussed this further and have been able to
resolve the concerns above. Please let me know if there is a way to send you a
token of appreciation.

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staunch
IANAL.

I don't think that's unreasonable: 55%/25%/%20. A little more either way would
be fair too.

You drawing a very basic salary ($2k/mo or something) to cover basic expenses
would be reasonable too.

What is _absolutely_ essential is that he doesn't get his equity just for
promising to put in money. You should start out as 50%/50% and make it work
out so you end up with 55/25/20 after the option pool and investment.

He only gets his additional equity by actually _purchasing_ stock. That means
if he agrees to put in $300k in exchange for 20% (or whatever) he only gets
that stock if he _actually puts in the $300k_.

You probably want a "Subscription Agreement" whereby he buys a pro rata
portion of his shares at fixed intervals (monthly/quarterly).

Setup the 20% option pool right away too. Putting it off will just make it
harder and more likely to cause a problem.

You absolutely have to have a good startup lawyer do this for you.

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teyc
Like what TheSkeptic said. You need to de-risk this deal. From what I read,
you don't know too much whether this business will work out or not.

