Note: This potential co-founder happens to be one of my close friends. I'd like to know what issues we should talk about and how the negotiation between us should take place.
Also, the start-up is most likely going to be a platform business.
Another thing to be really clear about is the level of commitment expected. You'd probably have to work 60 hours/week to make a startup work, especially in the start. Startups are not exactly a way to get richer faster, but to get more work done in a week.
All the founders should be expected to go in full time or overtime with no other jobs, no part time jobs, and definitely while not a student somewhere.
At the very least you can make it work with 40 hours/week. Maybe even part time. But both of you should have the same expectations. Because if one person works 50 hours, the other works 40 hours, it can lead to a lot of arguments. I also had an issue with my first cofounder in that he expected to keep his high paying corporate job and do minimal work, except for negotiations, handling nothing on the ground.
Investment amount needs to be worked out - will both of you put in money? Is one person going to put in money and the other puts in more time? If one person is more qualified than the other, she should expect to put in less money and time than the other partner, for the same equity.
You also need to align on values - I had this issue where I wanted to pay my employees as high as possible, and my partner wanted to skimp on paying them, even getting interns to work for free whenever possible. Some people want to donate the company's money to religious causes. Some might disagree strongly on environmental issues. I had a potential partner once argue that it's fine to use toxic materials because customers will get cancer for something else anyway.
A usual mistake is to overlook all these problems because she was your friend, and nothing went wrong. But these problems come up even more in a startup.
It's all negotiable. But come to written terms on it instead of assuming.
By default, if it's an even share, everyone should put in an equal amount of money and time. But if you have a $100k job and your friend has a $150k job, then if both you quit your jobs, your friend will have invested more.
How long will everyone be vested? 4 years is the norm, but I had a recent deal for 2 years.
IMO the shares should be split roughly equally among founders. Ideally everyone should admire the other and think the other person deserves more shares
As a ground rule, someone who is initially taking salary from the startup or refusing to work more than 40 hrs/week should only have one digit equity. The corollary applies: if someone is taking less than 10%, don't expect them to work overtime.
We, students at Wharton Business School, will be publishing an equity split guide a little later this summer.
Here is a short excerpt related to the topic at hand -
• Explicitly agree on the problem your startup is solving, the long-term goal, and the short-term plan. This will both drive an understanding of likely contributions and appropriate equity, and best position the venture for creating value.
• The goals of equity splitting are procedural fairness and the perception that the split is just.
• To create procedural fairness, follow an understandable process. Be open and honest both about the process and
the factors considered. Allow individuals to first consider their contributions alone, then come together to
discuss splits
If you must start a company with family or friends, consider two things: what needs are they filling, and whether you can talk to them about an anything-but-equal equity split.
Are they filling a financial, social network, or human skills vacancy in your business, and can you reward them appropriately for that? If they are filling only a psychological need for you: “I need someone on my side, and who better than my best bud?”, consider making them an advisor or an early employee instead, not a cofounder. Remember, avoidance of damage to your social relationships will be at least part of either your or their problems; you will want to avoid tough discussions to avoid the appearance of distrusting your friend. Consider whether you could fire this friend or family member due to underperformance. Build safeguards and explicit house rules surrounding communications, disagreements and arbitration to be able to move forward successfully.
Starting up with family or friends, or anyone you’ve had a prior social relationship with, but not a professional one, is fraught with peril. And yet, Wasserman notes: “Unlike actual strangers, friends and relatives have to undo a prior relationship (at least while on the job) to build something very different and potentially contrary—a professional relationship…Teams of friends may start off strong and enthusiastic, but as the realities of life in the workplace begin to settle in, professional issues can creep into cherished personal relationships”
Because friendships and family relationships are based on social structures that value substantive fairness, it seems that founders often bring in those thoughts when splitting equity with these cofounders, namely, splitting equity equally (and quickly!) to maximize objective splitting and to avoid painful negotiations with people they cherish. Martin Ruef’s research, however proves that this is fairly disastrous for a startup venture: “…Family relationships can skew equity stakes: When a core founder included a family member on the founding team, that family member received an equity stake that was 1.11 times the stake of a comparable non-family cofounder. This can make for a serious misalignment if the family and non-family cofounders are not actually making roughly equal contributions to the startup.”
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Keep an eye out for our equity split guide, that provides a broad sweeping survey of literature and interviews with over 20 start-up CEOs and founders about exactly what you should be thinking about and talking about equity splits, with co-founders, VCs, advisers to name a few parties.
All the founders should be expected to go in full time or overtime with no other jobs, no part time jobs, and definitely while not a student somewhere.
At the very least you can make it work with 40 hours/week. Maybe even part time. But both of you should have the same expectations. Because if one person works 50 hours, the other works 40 hours, it can lead to a lot of arguments. I also had an issue with my first cofounder in that he expected to keep his high paying corporate job and do minimal work, except for negotiations, handling nothing on the ground.
Investment amount needs to be worked out - will both of you put in money? Is one person going to put in money and the other puts in more time? If one person is more qualified than the other, she should expect to put in less money and time than the other partner, for the same equity.
You also need to align on values - I had this issue where I wanted to pay my employees as high as possible, and my partner wanted to skimp on paying them, even getting interns to work for free whenever possible. Some people want to donate the company's money to religious causes. Some might disagree strongly on environmental issues. I had a potential partner once argue that it's fine to use toxic materials because customers will get cancer for something else anyway.
A usual mistake is to overlook all these problems because she was your friend, and nothing went wrong. But these problems come up even more in a startup.