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Co-founder or employee?
17 points by solofounder on Oct 12, 2009 | hide | past | web | favorite | 28 comments
I am the sole founder of a year old software start-up that is modestly profitable. At this stage I need another technical person to help me develop the product further. I want to hire a top notch engineer, and am willing and able to pay a market salary. I recently pitched my start-up to a grad school classmate who is currently working at major tech company in the Seattle area, and he seemed very interested. This guy is one of the best engineers I know, and if he joined it would be a huge help to me, both from the point of view of sharing the technical work, and just the emotional burdens of start-up life. I have been looking for a kick-ass 2nd employee for a while, and this is the first one I have found who is interested in my start-up. The problem is that he wants to join as a co-founder instead of as an employee.

However, I feel that I am the one who took all the real risk in taking the start-up from scratch to where it is today. I don't want to give up half of my start-up to another person!! I am willing to pay him more than what he currently earns, plus 5-10% equity in the start-up. But I have a feeling this won't be acceptable to him.

If I am not able to hire my friend, I don't know when I will find another equally talented guy. So I am in a bit of a dilemma. I would like to get some advice on this from fellow hackers. If someone else has been in this situation from either side of the equation, and he can share his own experience that would be very helpful in making up my mind. Thanks.

I'm a solo founder, and think 5% is way too much. Your classmate has already decided that earning less is acceptable to him. If you're offering him more than he currently earns, you're already paying more than market rates. And you want to add ownership in the company?

You (and him) seem more concerned about issues of face than issues of compensation. This is dangerous. Quantify the value of your business and the value he brings. If you're not sure how much value he brings (emotional support? you're kidding me!), don't give equity. Come up with a plan to evaluate things in six months, or make a commitment that require hitting aggressive performance targets that are linked explicitly to his work. And make sure things vest.

One approach might be giving him the option to purchase up to a certain percentage of the company at a set value. Then figure out the value by asking yourself a simple question: if you had to sell the whole company, how much would you want for it? If he really cares about ownership he can purchase equity out of his salary over time. If he doesn't want to invest that is a warning sign he won't be contributing to growth.

And ultimately, remember that friendship and business is hard to mix. You will have a working relationship with him. He could easily come to resent working for you for "so little" at the same time you may come to resent giving him "such a good deal". People's relationships change when money is involved. At least by focusing on the numbers you won't toss away your business for nothing, and can be dispassionate with him when discussing what you can offer.

If he's such a great engineer, go through the sums with him. Get him to sign an NDA, then talk about the value of the company. If he wants shares, he should pay for them.

Rough order of magnitude - Supposing your company has a turnover of 100Kpa and is 20% profitable. Finger in the air, the company is worth around 700K, and 10% is worth 70K cash (ignoring the details of pre-money/post-money investment).

Is he willing to put in 70K for 10% shares, and then work for dividends? Probably not. However, that's what you're doing (in effect) so why should he get a better deal?

Do the sums. They are more convincing than woolly ideas. Better yet, get him to do the sums. Then you can see what he thinks things are worth.

If he's so good, don't alienate him, get him on side. Work through the issue with him. Negotiations can be win/win and don't have to be zero-sum games.

this post is the reason programmers shouldn't be business guys. There is no dilemma here, the guy is offering to rape you over a barrel and you are actually thinking about pulling down your pants and bending over. Anyone who takes advantage like that is no friend to you.

Want some real numbers? At this point there are two choices: a) Full Salary + 1-2% equity. or b) 8-10% equity vested over 4 years and minimum wage salary.

Paying full salary AND 10% equity, when the startup is already beyond ramen profitable stage is insane, it only makes sense if the guy is a real genius. I mean Larry Page/Sergey Brin level, and on top of that his knowledge, is something that you MUST have. Noone else in the world has that knowledge, and you NEED it to get your product to the next level. Then, and only then can you even consider that sort of deal

You are right, but you're not explaining where you're getting your numbers from, nor are you suggesting how they can find an agreed way to proceed. Maybe his friend really just doesn't have a clue and simply needs to be educated.

I think your rhetoric is unhelpful, even if the arrangements you suggest are right. Try explaining why, otherwise it seems like more unjustified advice from someone random.

You are right, I am not very business savvy, but I am learning along the way.

>Want some real numbers? At this point there are two choices: >a) Full Salary + 1-2% equity. or b) 8-10% equity vested over >4 years and minimum wage salary.

I have actually offered something roughly similar to option a) to several other promising candidates, but nobody was interested. I really need to hire another engineer, and I have already been searching for several months, and the search itself is a distraction, so I want to get it over with.

The other thing is that I have known and worked with this guy for several years, so I can be confident about his technical abilities to a greater degree than I can be about some random guy that I interview. Unless you have worked with somebody, you never really can tell how good they are, at least I can't. That's why I am willing to offer my friend a generous package with full salary and 5-10% equity. The way I figure, with him on board, the overall pie should increase by more than enough to compensate for the 5-10% equity that I would give him.

One thing worth considering is the relationship between you two, mixing friendship and business relationships can in many ways destroy you both and whatever you're building. Be sure of your roles. Be very clear with what your roles are.

I upvoted you, but i think you underestimate many programmers.

People who can't code but want to earn big bucks on development projects always do :)

Some points to noodle on:

1) The emotional side of not wanting to call him a founder is something for you to get over. His title won't matter to you if he helps you become a billionaire.

2) He's part of your founding team at the very least.

3) 5-10% equity is very generous. More than I'd offer.

4) If he's the right guy, do what it takes within reason to bring him in. If he wants to call himself a founder, let him. The real story is known by you and that should be enough.

5) If you do bring him on board as a founder, you need to internalize it or you'll constantly struggle every time you see his name alongside yours in print or on the site and it will be a source of conflict.

I understand where everybody is coming from when they say that salary + 5% is very generous. Really, I do. However, I would caution OP to consider the following two (which it sounds like he has, at least for item 2 below).

First, biggest reason to go over 5-10% + market salary: if you think he will bring in that much additional money. Say you pay him $100k + 10%. Suppose your current profit is $50k / year (you said you were mildly profitable). If he ramps this profit from $50k to $200k, you're still ahead of the game. Yes, it is possible: with only 1 founder, OP is stuck doing a lot of overhead work, which would take less time of a second guy. Plus, there's: 2) The emotional support. Fresh blood can definitely help the weariness and solitude of running your own company. Sure, employee #2 may not bring in another $150k, but he could help you increase what you bring in due to more enthusiasm (and, more impt, quality of life).

If you ever want to take a vacation, you will need a second in command. Higher percentage means more (emotional) ownership, so this guy is also less likely to treat it as another job. He probably doesn't want to work for someone else ever again (a common thought), so he wants more ownership.

If you can edit your original post so that he wouldn't be offended if he read it, it might be worth pointing him to this thread to see the "consensus" view among other startup founders.

This could make it less emotional -- "you know, this is the done thing".

Alternatively you can assemble a short case with several links/references to show that what he's asking for is a lot.

How much stability are you asking for him to sacrifice in order for the deal? ownership of the company should be thought of in cash terms, it can then be traded off directly between salary and equity. Give him a generous full package of what you honestly think he's worth, keeping in mind his current position + stability of that position vs potential stability of the position in the new organisation, and then let him pick out the details of how he wants to split it between investment in the company and raw salary.

The results should be pretty illuminating into what he really thinks of your venture.

don't give in, ask him why he thinks he deserves co-founder status. If he is being reasonable he will realize you have done far more than what him walking in the door offers.

co-owners brings more issues than you may expect

Trust me, there's no win-win situation in your case. just give him salary, if he's really good than give him a really good salary. That's it ;)

As soon as you start giving shares away, the one who's taking them will get greedy and ask for more. How does that end ?

You'll stop being friends ( trust me ), he'll get way much more from something that you've built than you will,

If you want to work 'in percentages' with him anyway, than do it with new projects and businesses.

If you do decide to work together, be sure to have a strong legal agreement between you two. Especially, if you bring them on as a co-founder.

Key points: - Stock vesting - Dispute resolution - Out clause - the usual boiler plate

Otherwise, if things don't work out (and if they are a friend, it can get nasty) you want to have a clear plan that everyone has agreed to.

If he is really that good, make him an offer that he cannot refuse. In the end , if he is really gonna make a difference , do not hesitate. Why not make him a cofounder/employee and offer him say 20% . U can also tell him to start as an employee and he will be promoted once u start making more money and need to grow.

i'd pitch your best non-cofounder option first. it sounds like your offer is an appealing one, and something that i don't think anyone would be offended at receiving.

if they reject it and push for cofounder, sit down and figure out which one you want more -- to retain total control or to have this person on the team.

How much do you think your company is worth? If you're considering making him a co-founder, then estimate the value of the additional equity he's asking for, and ask if he'd like to give up an equivalent amount in salary over his vesting period.

Don't hire him yet. Hire him at the earliest employee 5. At that point he'll understand he's just not the only chick in a sausage fest, instead he's getting paid for his value.

Or don't hire him at all. There are a lot of quality engineers out there right now.

I think you can still make him a co-founder without giving him a 50% stake. Give him 10% and make him a Director of your company (or whatever works).

In my opinion, don't hire your friends unless they complement perfectly. Even then, have a backup ready in case that person wants to move on.

I've had your experience, I lost both money and a friend. People tend to over-value their contribution. If things are already working well and you're making profit, then you need to quantify how and when this guy is actually going to add value any offer should discount such a projection with an incentive component to reward over-performance.

If you need emotional support, then either book a series of sessions with a shrink or get a puppy. Long-term personal success is a function of your emotional resilience. So wanting to get your friend involved at any cost is a warning sign. For some people a mentor might be a good alternative.

If he is a 30+ guy, let him join as Co-founder.

Care to explain why?

He will me more productive as Co-founder because his technical and business skills would reach peak stage by 30+

What's the product?

5-10% plus pay!? And you're already profitable? Sounds like a kick ass deal to me. Give him a nice title and the deal sounds amazing and nearly too good. Especially at 10% equity. Just make sure to have vesting on his shares over 2 to 3 years.

You should give him 100% of your company on the condition that he thinks about giving you a job for $2 an hour plus all the fruit snacks you can eat.

That way you'll never be accused of being a capitalist oppressing the working class!

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