

Ask HN: How to bring on co-founder almost two years later? - dalerus

Hey all!<p>I am the founder of a small company, mostly consulting work for large organizations, but we do have our own SaaS product that is gaining traction in our small market. I&#x27;m in a strange position and would love if the HN community could help with some advice.<p>I&#x27;ve been able to bootstrap the company so far, I feel like we could grow more significantly in areas if I had another high-level person come to help us in areas that I just can&#x27;t do and don&#x27;t have the time for. I have a person in mind, but I am worried.<p>Without getting into too many details about the company, I&#x27;ve bootstrapped the company, put my own money into it, built the technology, networked to close the deals with our customers, and we&#x27;re profitable! I don&#x27;t make a lot from the company yet, but enough to provide a modest income for my family and I employ one other developer.<p>My question is, do people generally bring in co-founders years after the company launched? And if so, what do those deals generally look like?<p>The person I have in mind wants a share of the equity, but I have an impression he wants to come in around 50&#x2F;50, which to me doesn&#x27;t make any sense. I was thinking something more like a smaller salary (we don&#x27;t have the capital for what he would want) and something like 5-10% with a vesting period, but honestly I have no idea how you even begin to calculate this type of arrangement. Or if it&#x27;s even something I should do.<p>Is this even considered a co-founder? Or should I treat him more like an early hire?<p>Thanks!
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davismwfl
Ok, having started down this path a couple of years back and trying to bring
in a co-founder here is my 2 cents. btw, I ended up not doing it but learned
some really valuable lessons. Also, I am identical to you in that we are a
consultancy that has 2 SaaS products.

This will rarely work if you are using "co-founder" as a way to get a higher
dollar (caliber) employee for a cost which you can afford today. Co-founders
are either all in and you have to forget what you have already done or you
have to admit they are not a co-founder and instead are a critical employee
hire.

There is nothing wrong with offering a lower than market salary and giving the
employee a 5-10% ownership with vesting. That is completely legit.

I think the main problem is don't call someone a co-founder and mislead
yourself or them if they will not be splitting decisions and the hard times
with you. A true co-founder may be taking a salary when times are good, but
has to be willing to forego it when times are tight (bootstraped especially).
If not, they are not a co-founder they are an employee.

As far as an equity split, I do not feel every co-founder deserves an equal
share, but I would always start there and then see what other facts might
affect it. For example, 15 years ago in a startup I was an early contractor
for, a group of people started the company but one of the co-founders had
family to support. So he kept his day job quite a bit longer until the company
was more solid and could afford his monthly minimum without struggling. They
all agreed that meant he wasn't going to get the equal split, and I remember
even he felt that was fair and they were great people to work for/with. And no
one was trying to be an asshole to him, just he didn't have the same risk and
skin in the game.

~~~
dalerus
Thank you for the advice.

You've hit my major concern, which is trying to figure out if he is the kind
of person that can do the co-founding thing, or if he just wants equity
without the risk.

~~~
davismwfl
You are welcome, good luck!

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charlesdm
Let's keep this simple, and say you split this SaaS off in a new company (i.e.
no consulting revenues).

He could be a co-founder. You have created some value. That is your
achievement. But, do you want him to be to a co-founder? Does he have
complimentary skills? Will co-owning the business mean you can achieve more,
with the same resources?

Some partnerships end up adding up to 3 when you add 1+1 together. If that
would be one of them, it's worth considering it.

What kind of business is it, and what is the exit plan? If you're running this
as a profitable business without the intent of raising VC, you could get him
to buy part of the equity at market rate (part of the payment could be
deferred). Or you could 'sell' him half the equity, with vesting in place, but
defer the payment by reducing it from future dividend payments.

Lots of possibilities, but in the end it depends on what he'll add to the
business and if you are comfortable working with him.

As a friend of mine once put it, is he a creator of wealth or a taker of
wealth? Most people are takers.

~~~
dalerus
"As a friend of mine once put it, is he a creator of wealth or a taker of
wealth? Most people are takers."

Great point. My worry is he is looking at this at a take opportunity.

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AnotherMarc
Congrats on the progress you've made so far. Personally, it doesn't sound like
a co-founder. It's not clear whether you think he wants that title
specifically or just a lot of equity. The former would be a red flag to me
without some context.

As far as the amount of equity to give, 50/50 after a couple years, when
you've gotten the company profitable, seems high. But that depends on why you
started the company in the first place, and more importantly, where you want
to take it from here and how he can help with that. If he's uniquely capable
to accomplish things that you really want for the company, but can't or don't
want to do yourself, you'll compensate him highly. If you can't afford the
salary, you'll give him more equity. And that's certainly a valid decision,
even if it's not typical. That said, the fact that you don't think it makes
sense leads me to believe that it doesn't. I personally would have to have no
doubt before giving up that much of the company that I"d made profitable.

Whatever you do, I would vest any equity too.

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debacle
50/50 doesn't even remotely make sense here. You've taken on a huge amount of
the risk in starting and pushing your company to profitability.

Calculating the equity distribution should be easy:

4 * (His current salary - what you would be paying him) = His risk (I use 4
here because that's the usual vesting period)

Your profit * [5-10] = Your valuation (You'll have to work out the coefficient
on your own, as it depends heavily on your market and growth potential)

His risk / your valuation = His equity

This should give you a really rough number. This is the absolute upper limit
of what you should be giving him in equity (otherwise there is little to no
risk). Keep in mind that if you are growing 20%+ year over year then your
valuation doesn't conform to the formula above and should be adjusted much
higher (or just think about what you would be comfortable selling the company
for today).

Equity is all about risk/reward. Because you are profitable, much of the risk
is already out of the equation. Consider also how much greater the
responsibility in having 30%+ equity to the company - do you think this person
will be loyal to that?

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alain94040
Disclaimer: I provide co-founder advice for a living [1], so take this with a
grain of salt

I can see a couple of scenarios playing out here, here is the one that I think
applies to you, but let us know if something else is going on:

That new person is mostly a sales person and you expect them to grow a fairly
new product which is independent from your existing business. Fine. It's ok
for them to have a huge incentive plan, where they earn most (half) of the
profits of that new product. Compensation: decent base in cash, huge cut of
sales, a small piece of equity (always vesting of course)

[1] [http://foundrs.com](http://foundrs.com)

~~~
dalerus
Wow your site has some great resources, thanks!

He's not really a sales guy, most of our sales are high touch, and very
technical. So I am the guy that handles all of that.

I would put him more on the marketing/strategy side of things.

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brudgers
Why doesn't 50/50 [with a vesting schedule] make sense?

The sunk costs are sunk. Presumably the cofounder will more than double the
rate of growth and value of the business.

To put it another way, if you're going to treat your business as a startup,
then assume it will fail and that 80% is as valuable as 50%. And if it gains
startup style growth, your life will be roughly equivalent with 50% or 80% of
the exit.

On the other hand, if this is hard negotiating then there's a poor fit because
the relationship is already adversarial. If the potential cofounder is not
someone you want to become rich, don't marry them. 5~10% equity is not "co"
anything.

Good luck.

~~~
dalerus
Thanks for the reply!

You're right, sunk costs are sunk costs. I guess I am try to also figure out
if I want a "co-founder" or just another early hire.

~~~
brudgers
Cofounder implies is that there is a new company founded and that the person
involved is someone you trust enough to build a business with. Anything else
is just a "what goes on the business card" distraction from real work.

If you're negotiating terms, then it's a finite pie model and you're in the
hiring business. That's a distraction from the core business mission - it's a
means to an end -- [but an often necessary one]. Founding a company is about
grabbing a slice of an infinite pie, it's outward focused. That means bouncing
ideas off each other.

I'd be wary of anyone who is looking for the title. That's resume building,
not business building. I'd be wary of anyone who is negotiating for a founder
role. Founding is about doing not getting.

On the other hand, I'd be wary of anyone who wanted to be a founder without
equal equity. Anything else creates friction on the relationship between
founders. 50/50 equity is simply a way of testing whether it's a cofounder
relationship or not.

I'm not saying you should give away half your company. But I'm not saying it
isn't the right business decision either. It's a hard problem because the
decision is about whether or not to take a leap of faith.

As a final thought, 10% or 50% if the person you are considering is not the
right person, the business is going to suffer. Be equally selective in either
case. Pick people you want to be in business with.

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siscia
A very naive idea could be just to get some money from the bank and hire
somebody.

Why you need a co-founder anyway ? It sound that you just need a great
technical leader.

~~~
dalerus
I wish I could, but we don't have enough cash on hand to commit to that level
of employee.

~~~
siscia
Well, still you can pay some one part time, doesn't need to be a full time
hire.

