

Ask HN: How should we split the equity? - meteor

We are planning to start a startup next month. I am investing 35% of total investment and the rest of it comes from friends &amp; family. I am the business guy and I ll be joined by a technical person.  He is not taking any pay cut while I ll be taking 50% of my original salary.  Now, should the other person be treated as co-founder or should he be treated as employee? How would you advise to split the equity?
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JamesVI
Break it down into the three roles that are described here, co-founder,
investor and employee.

You are both co-founders. He is taking considerable risk along with you and
neither the product nor the market have been proved yet. Split the founder's
equity 50-50 with identical terms.

Your investment, along with the rest of the F&F money should be written up as
convertible notes. You will get that money back (plus interest) in the form of
cash or stock (at a discounted conversion) when the company succeeds.
Obviously, since he is not an investor, your co-founder won't get any of that.

Finally, you are both employees. Since you are also both co-founders you
typically don't issue additional equity. However, if you both feel it is the
fair thing to do then you could issue stock options to yourself, as the CEO,
to make up for the salary cut. 5%, vesting over 4 years, would be typical for
a CEO (with salary), but then even a fully-paid CTO would expect to get 2-3%.
All things being equal, and assuming you don't both take employee stock
options (because it is just more paperwork) I would say that your 50% salary
cut is worth a couple of percent in options, at most.

The big variable here isn't your personal stake in the company, it is the
success of that company. It is important that all parties feel that the split
is equitable and they are full engaged in the process. Treating the guy who
has chosen to join you at this early (and very risky) stage as anything less
than a cofounder could make the difference between him making a superhuman
effort to help the company succeed and treating it as just a job. Deal with
the investment and compensation issues seperatly.

Oh, and take the hit to pay a decent attorney to get all this written up (corp
docs, co-founder docs, stock plan, convertible notes) and filed properly. A
few $k now will save major problems down the road and make your company much
more appealing to investors.

Good luck with the startup :-)

~~~
meteor
That's an awesome piece of advice. Making everyone feel that we are making an
equitable split is the key.

~~~
brudgers
The key is that everyone feels the split was equitable in 1,3,5 and 10 years.

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ColinWright
None of this makes sense?

    
    
      > He is not taking any pay cut ...
    

Pay cut from what?

    
    
      > I'll be taking 50% of my original salary.
    

What original salary?

    
    
      > I am the business guy ...
    

This really does not bode well. What will you do? What do you know? What
experience do you have? How will you be spending your time? How much time will
you be putting in? How much time will the technical guy be putting in? What
other activities do either of you have? Why do you call this a "start up" and
not just a "small business"?

Does your "technical guy" know you're posting this? Why would you consider
having an employee when you have no income?

~~~
meteor
We are working in an enterprise now. We both are in same team. The pay cut is
from the actual salary which we are drawing in the current company.

I have 10 years of experience and the other guy have 6 years of experience. I
ll be handling product design, marketing, sales and investor relations. We
both are going to work full time on this.

We are yet to discuss about equity. I want to make sure that I handle it in a
fair way.

~~~
brudgers
If what you see as fair involves more equity for you, then at best your
position _might_ be seen as biased. If your goal is to be wealthier than your
cofounder should things go well, then perhaps.you're optimizing on the wrong
thing. Unequal equity is unlikely to increase the odds of success.

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chrisbennet
If the technical person is not making an "investment" [in uncompensated time]
they sound like an employee. I would think that equity for an employee should
be enough that they want to stick around.

That said, don't expect "co-founder" performance from an employee. If you
think you need the technical person to be as committed as you are, you should
align their goals with yours i.e. make them a co-founder.

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obayesshelton
I have just started a little project with a business guy and we both know we
need each other. HE has frontend some cash to get it off the ground but was
willing to give me 49% of the business which means we are both happy and we
both have enough of the business to want to stay up late and bust our balls.

From my point of view equity is to keep people interested , feel that they
need to really put in the effort and it can be a trade off for a lower salary
whilst it is starting. An employee will always want to go home at the end of
the day.

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reach_kapil
Sounds more like a Quora question. Lot of such questions could be answered on
that forum. Try checking it out. Plus, its not always easy to start a startup
and have name tags to your roles. If you are doing that, you have missed the
most fundamental part of startup101. but i know a lot of startups still do
that, and I don't like that.

