Ask HN: What equity percentage for a co-founder joining after de-risking?

[curioustechie]

Bob, a business guy, is trying to recruit Alice, a coder, as a technical cofounder for his startup, Frittr. Frittr has no revenue or customers yet; it will require software to operate, but software won't be the main revenue source. Bob is currently the sole founder. He believes in the business and his projections suggest it can be very profitable.

Alice agrees the business can work, but by working on Frittr she would be giving up opportunities, and she sees two major risks that could kill it, neither of them technical. Alice doesn't want to commit until Bob has reduced those risks. Bob has a plan for how to do so, but points out that since Alice will be assuming less risk at that point, she should expect a lower equity stake than if she signed on right now.

What does the HN community have to say about this scenario?

* Bob isn't really assuming any risk, since he currently bears all the risk in the venture, but he will have to spend time on reducing it. How should Alice value Bob's de-risking, besides the value of time spent? * Should signing on later reduce Alice's stake by an order of magnitude or by a smaller factor?

(All names, including the name of the startup, changed to protect the innocent. This is vague for obvious reasons, but if with more details you'd be able to give a more helpful response, let me know and I'll provide what I can.)

[brk]

He believes in the business and his projections suggest it can be very profitable.

He damn well better, otherwise, what's the point?

This "how much equity" thing comes up ALL the time here. There is no pat answer, but it often seems like every founder/co-founder and first employee has delusions of grandeur about the whole thing.

I'd guarantee that whatever risks you eliminate now are less than 5% of the risks and roadblocks you'll have to knock down in the next year. In otherwords, until you have a product and customer and enough data to make a real extrapolation from, your value is essentially 0.

Alice's risk is exactly the same before or after Bob addresses these theoretical risks.

If Bob wants to haggle over small equity proportions now he probably has his head up his ass.

[jaydub → brk]

Great point.

I can imagine how "Bob" must feel. But execution on the idea is the most important thing.

Until you've created version 1, you're still at the theoretical stage. And while in theory you may see your company being worth (m|b)illions in a few years, the reality is that you need to implement.

Again, like brk suggests, why get mired in an argument over whether you control 100% or 90% of "0". Building a startup and creating value is a lot harder said than done I would imagine. Use your judgement and do whatever it takes to get the best person on board.

[petervandijck]

It sounds like Alice isn't ready to join until Bob reduces risks. Fine. Then they shouldn't agree on a percentage now, they should negotiate AFTER those risks have been reduced. Else you're talking theory in lala land. Alice should walk away, saying "call me when". Bob should reduce risk while continuing to look for cofounders.

In any case, this doesn't sound like cofounding, this sounds like first employee.

[curioustechie → petervandijck]

Thanks for pointing out this option, it's one I hadn't fully thought through.

Could you explain what about the scenario makes you say that Alice sounds like a first employee rather than a co-founder?

[neilmix → curioustechie]

Because (apparently) there's no option for Alice to join and remove the risks herself. Bob is the sole executive.

[joolz237]

I've been in this situation a couple of times - as Alice. What it tended to come down to was my other opportunities were well-paid jobs that I could take but that didn't have the potential pay-off of a startup. Because most startups fail the choice was between high guaranteed income + not much fun or a lower income, more risk and more fun.

The answer in both cases was that Bob produced a sliding scale of salary vs. equity. The more salary I took the less equity I got. If I wanted the startup life without the risk I took a bigger salary and got less equity. The only question then was what the top and bottom ends of the scale looked like.

As the other comments point out, risk is a dynamic and subjective thing, so it makes sense to review the ratio from time to time to make sure it's reflecting reality.

[volida]

"but points out that since Alice will be assuming less risk at that point"

Why is it going to be less risky for Alice? As I can see there is no software and no revenue/customers.

How are risks going to be lowered exactly so that is attractive for Alice to join?

While there is no product yet, practically this means you will put money into this. If that is the case, then relative to the amount + what your contribution worths vs Alice's, then you find how to split the percentage.

[curioustechie → volida]

> As I can see there is no software and no revenue/customers.

Wouldn't changing one of those "no"s to "n potential" make the venture less risky?

[brk → curioustechie]

"potential" has little value.

You have boundless "potential". I just dreamed up an idea for a new online social networking viral game. My "potential" userbase is billions of people (my game can do accurate language auto-translations on the fly, so Chinese people can play with Russians seamlessly). My "potential" income is huge, my "research" shows that people will pay $1/mo to be a part of this game. That's BILLIONS of dollars in MONTHLY income.

Only problem is that, well, I haven't written any of the software yet (but I sketched everything out, and priced my servers, so I've "eliminated" that risk). I even checked with a bunch of people I know and confirmed that they would pay $1/mo to play this game.

There is a TON of potential here. I'll give you a 20% equity stake if you'll sign up to just write the initial code.

[volida → curioustechie]

You are not clear enough.

[curioustechie → volida]

Sorry, I was being overly cagey.

As you correctly point out, the business has no customers. Wouldn't it be a less risky proposition if it had commitments from potential high-value customers?

(N.B. I said "less risky", not "risk-free".)

[volida → curioustechie]

"commitments from potential high-value customers"

Without more information, I think you are in better position to judge that. But, commitments without any contract is something very volatile.

[peripatetic]

I cannot imagine what you could do to "de-risk" a company with zero capital, zero customers and zero product.

[petervandijck]

Whatever you are both slightly unhappy with, while still beig able to live with it, is probably the best answer. If one of you feels they got a good deal, it's probably not right.

[zackattack → petervandijck]

I disagree. It's better to think win-win. Both parties should walk away feeling good about the negotiation.