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How much of my company should I give up to new "co-founders"?
15 points by echo77 on Sept 13, 2008 | hide | past | web | favorite | 20 comments
I have a web site that I created by myself about two years ago and it has been floundering. I met a couple of people who have a similar vision. They have some good contacts and would be picking up the marketing/product side of the business while I continue to concentrate on the technical side of things. We are in discussions to partner up but I am wondering how much of the ownership of my company I should give up to them for their involvement in the company. Right now, revenues are zero so it would almost be like they were co-founders, but I have put a lot of effort and a little bit of money into the company over the years.

Do forget about the effort I have already put in and treat them as co-founders and evenly divide up the company? I know its hard to comment without the details, but any advice would be appreciated.

Use this framework to split the equity pie. http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...

Obviously, your initial code base has some value to it. The above framework nicely value the past/future contribution of each party to remove much ambiguity.

The best part of that document is the line "the founders who join the company full time and are committed to making it a success are much more valuable than founders who are going to sit on the sideline and be cheerleaders."

That said, if the three of you are equally committed, you should probably be equal owners, based on the information you've shared.

If I was the guy turning your idea into gold and you held significantly more equity than me just because you built a prototype, that fact would bubble up and bother me exactly when you don't want it to - when things get tough.

That's actually a pretty cool document... Thanks for sharing.

Why give up equity?

Will these people be offering genuine marketing (tailoring and designing your product to address specifically identified markets) or will they just be 'sales guys'?

If these folks will just be bringing in contacts and shilling the work you create, I'd recommend offering them a very lucrative commission on sales instead. Say, a ridiculously high percentage for the first n-years, with that amount declining over time to a regular commission as scale and sales revenue increases. Then, these people will only be rewarded (and rewarded handsomely) if they deliver on what they say they can produce while you retain full ownership of the intellectual property you will have 100% role and responsibility in creating.

it sort of reminds me of that post a few months back, where the guy's business was going very slow so he got some VP from a sector leader and 3 months later he had to fire him because the guy was just doing such a horrible job.

Granted in that story I believe the guy was getting paid..but here its even worse, since you'll give up a chunk of your company and there is zero guarantee that the guy will live up to his resume.

Okay - this is tough to do in person but even more difficult to do from just a few sentences on the web. I've just gone through this actually (well, technically still going through it as papers aren't signed [being reviewed]). It took us nearly ten weeks of back and forth but I had revenues and sizeable growth.

Let's call your potential partners "Dave" and "Joe"

Question #1: How much would you sell the company - lock, stock, and barrel - for right now?

Question #2: What do you think the valuation of the company is if you were to raise money?

Question #3: What will the company be worth in each of the following situations: -- If Dave joins but Joe doesn't -- If Joe joins but Dave doesn't -- The assumption is that, if both join, the valuation bump will be equal to the two above


#2 is likely different from #1 by a wide margin but not necessarily.

Let's say that you felt that #1 was $250,000 yet your potential partners felt it was $100,000. You agree to compromise at $175,000.

I would explain these to the potential partners in terms of, "I'm bringing $175,000 to the table. Dave - we agreed that the company would be worth $225,000 if you joined. Joe, we agreed that, without Dave, the company would also be worth $225,000 if you joined."

Now, if all else is equal, then you could use the formula: $175,000 + $50,000 + $50,000 = $275,000 You: 63.5% Dave: 18.25% Joe: 18.25%

But it generally isn't equal. Dave may agree to a $3,000/mth salary while Joe needs $7,000/mth.

Tie it to milestones and accomplishments and make sure you have an opt-out clause if the thing falls apart with nothing to show for your work.You do NOT want to give permanent ownership of your labor in exchange for a loose promise to deliver the stars.

As a fellow developer, I imagine you have worked on this for ages, and will likely continue to work on it even without them. It is important you avoid getting yourself put in a position where you cannot do that, or end up delivering IP to someone else to monetize. If selling your product ends up being more difficult than they think, will these bail and still demand compensation if YOU pick up the ball they drop and run with it? How serious are they and what signs are they giving you that they deserve equity at this point.

If all they are doing is sales, you can set up a commission structure, and tie equity in your issues to the company's hitting successful sales milestones. If these guys want ownership to start, another approach is to license your existing codebase to the new venture. Be sure to get this license down in paper!

Paul Graham's "The Equity Equation" (http://paulgraham.com/equity.html) clarified my thinking on this. In brief, if average outcome of the company is $X right now, and would be $Y with the new cofounders, you should be happy giving away X/Y of the company.

So if $X (suppose) is $1000 and $Y would be $5000, I should be happy to part with a fifth of the company. You're SO right. Yet wrong.

If a cofounder is good enough that the company is 5x as valuable with him, it speaks very poorly of you.

I think the point being made was that the equation given (I haven't read the article, only this thread.) implies if X = $1000 and Y = $1001, then you should give away X/Y or 99.9% of the company. I think it should be "keep", not "give away". Or, alternatively, give away (Y-X)/Y.

Big, round numbers make for easy examples. Picking on examples makes...

Actually, you should be happy keeping X/Y or more: thus giving away up to (Y-X)/Y.

The paths "you create a company and bring in two more people" and "two people create a company and bring you in" are equivalent: In both cases, you end up with three people working at the company. As such, they should have the same outcomes with respect to ownership.

Rather than asking yourself how much ownership of your company you should give your new partners, look at it the other way around: How much ownership should they give you?

Be very careful, because people can claim to have contacts and be worth nothing in the end. So, don't sign away your company without actually being sure that they bring the value in.

Think of it this way - these people are getting a technological product that would take years to build for free basically.

Make sure you are also getting a good deadl for yourself.

Do the two people coming in know each other, have they worked together in the past? I'd be concerned that they would act as a single unit, so if you gave them equal shares, you'd be giving up all control. And that might not necessarily be bad, as long as you realize it, and have appropriate safeguards for your new minority shareholder position.

I'd divide it up based on what each person is bringing to the table. You're bringing a codebase; they are bringing some contacts and marketing experience. The group of you need to agree on the relative worth of those things.

The saying goes, sunk costs are sunk unless you sunk them. But for founders, the way to split equity is to focus on what each will do not what has been done. The present value of the company is basically zero so it's hard to claim much credit there. Another good blog is prof. Noam Wasserman's at HBS: http://founderresearch.blogspot.com/

This is the situation vesting was made for. Four years vesting, one year cliff, if they don't work out you fire them. Even a cofounder.

0 - Nada

The secret to being rich is 100% ownership.

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