Ask HN: how to divide shares for unknown valuation

[prefernow]

A friend of mine has approached me initially with a contractual agreement to develop his idea into an enterprise saas. As I was further got interested, I suggested a partnership (myself: technical, him: op/marketing/etc...).

He agrees to the value of the partnership, but unfortunately we both have no clue as to how to divide the shares.

More inputs: - Enterprise app. - He's capable of financing. - Difficult to identify revenue at this stage.

He proposed a 1 to 9 just for something to start with (with potential to grow), and he's suggesting I'd put a scope for my 10%.

[brk]

You need to make an honest assessment of what value prop you each bring to the equation.

He has an idea. You can implement it. How many other people in his reasonable circle of contacts (meaning that he might actually have to go and look for someone) could implement his idea on-par with you?

It does not matter that you are "the technical guy". If (for example) his idea is to create a forum targeted towards people who have imported right-hand drive cars to the US, well, that's little more than installing a few basic packages and there are 8 million people who could do that, which makes your unique contribution very marginalized.

If his idea encompasses things that you have more specific domain knowledge of, and more value-add, then your unique value goes up significantly, as does your appropriate % of the equity.

Most likely, it's somewhere in the middle. He has an idea that to implement might be 80% "work" and 20% "invention". You're probably the best guy he knows for the job. I stress knows, because there are probably 10,000 other people that could do equally good work, but they are an unknown to him. This gives you an edge, but it's on the order of a few %, not a few dozen %. At some point it would be more valuable to him to find 1 of these other 10,000 people and take the risk instead of doubling your stake (again, generalizing somewhat, but you get the idea).

Conversely, how easily can you find another "idea guy" who would also make you a good deal? If you have many "idea guys" to choose from, then his unique value to you is diminished and he would have to lure you to his project.

If you are just loping along in life and have no better options, you're probably looking at something in the neighborhood of the 1:9 he proposed. If you have better/more valuable/more lucrative options in front of you, you're probably more like 1:5. If you have a solid track record and have been-there-done-that (which I don't suspect, else you wouldn't be asking this question...) then you might be 1:1.

[prefernow → brk]

I was about to ask about the financial aspect, but it seems touched in other response.

[pg]

If it's going to be a startup and you have roughly equal abilities in your relative domains and you're going to work equally hard on it, you should tend to split the stock evenly.

Don't forget vesting.

If he then also finances it, pick a valuation and dilute accordingly.

[BobbyH → pg]

Here's an example of how the math works:

* You decide upon a $5 MM pre-money valuation for the company, and you agree that you both get half of this

* He invests $1 MM, which makes the post-money valuation 5+1 = $6 MM

* Let's say you will be unpaid for a year. You might treat that like an investment of $100,000, which takes the post-money valuation to $6.1 MM

In this example, you would own:

* $2.5 MM in founder shares + $0.1 MM sweat equity

* $2.6 MM total out of $6.1 in total equity

* your ownership would be ~43%

Vesting would apply to founder shares (over, say, 3-4 years) and the sweat equity would vest over the year you sweat. No vesting would apply to his $1 MM cash investment.

[johnrob → BobbyH]

You're assuming that the financing partner is taking a salary, which he probably would not do. Thus there's no need to factor in that virtual 100K investment.

[BobbyH → johnrob]

To clarify, I was assuming that the 100k (or whatever number) is salary that is not taken by the technical cofounder who posted the question. However, if the technical cofounder takes a full salary, there would be no need to factor that in. I agree that the financing partner should not take a salary.

[prefernow → pg]

Splitting evenly might not be an option at the time being (the business founder is opting for contractor rather than a cofounder).

[mbrubeck]

Along with percentages, be sure to consider the vesting schedule. Make sure your shares vest over time (4 years with a one-year cliff is common in technology startups) so that you both earn your equity. For a two-person venture, a shotgun clause is probably a good idea too.

[known]

Hope this helps http://www.netmba.com/econ/micro/comparative-advantage/

[kapauldo]

also, if you're working for no pay, then you need to consider the value of your hours as a cash equivalent investment. if you're bringing $50,000 of services to the table, and not getting paid for it, you're creeping toward a 50/50 split, maybe even a 60/40 split. what is he bringing to the table- the idea? the idea isn't worth much. ideas are free. are you going to work 20 hours a week while he waits for you to work, or are you both working 20 hours a week unpaid?

if he's paying you a salary, it's totally different. but the honest question you both should ask is, without each of you specifically, will this idea sit around for another year as just an idea?