Questions

How much equity should I give an engineer who I'm asking to join my company as a co-founder? (He'll be receiving a salary, too, and I'm self-funding)

I am currently a sole founder. I am not an engineer. This is a technical startup. So ideally I need a technical co-founder to join me. I'd been planning to just hire a couple engineers to build out the MVP, but this engineer and I really hit it off, and I'd like him to join the company as a co-founder. He also needs to be paid a full salary. I am self-funding the company to MVP on a bootstrapped budget. So two questions... 1. If he didn't need a salary, how much equity would you give him? (just looking for a range)? 2. Since he does need a salary, how much equity would you give him on top of the salary? (again, just a range, please)

4answers

You will find a lot of different views on equity split. I haven't found a silver bullet. My preference/experience is for:
1. Unequal shares because one person needs to be the ultimate decision maker (even if it's 1% difference). I have found that I have never had to use that card because we are always rational about this (and I think us being rational is driven because we don't want a person to always pull that card cause it's a shitty card to pull)
2. When it comes to how much equity, I like Paul Graham's approach best: if I started the business by myself, I would own 100% of the equity; if xxx joined me, he/she would increase my chances of success by 40% (40% is just an example) at this moment in time. Therefore, I should give him/her 40% of the company (http://paulgraham.com/equity.html)
3. In terms of range, it could go between (15-49%) depending on the level of skill. But anything less than 15%, I would personally not feel like a cofounder
4. Regarding salary and the fact that you will pay him/her, that's tricky but a simple way to think about it: If an outside investor were to invest the equivalent of a salary at this exact moment into the startup, what % of the company would they get? (this may lowball it if you think the valuation is high but then again if you think you could get a high valuation for a company with no MVP, then you should go raise money)

One extra thing for you to noodle on: given you are not technical, I would make sure a friend you trust (and who's technical) help you evaluate the skill of your (potential) cofounder. It will help stay calibrated given you really like this person.


Answered 6 years ago

Unless there's a strong imbalance in contribution to the company's success or finances, it's usually best to split equity evenly.

In this case there is in fact an imbalance in finance -- he needs a "full salary," which is the *opposite* of what a co-founder generally does with a new business, *especially* with a tech co-founder.

To me, this is not a co-founder, this is employee #1.

To see why, ask this: What is the risk this person is taking in joining the company? He's making a normal salary and can get another job if it doesn't work out.

If the risk is the same as an early employee, this is an employee -- maybe a KEY employee -- and should be treated that way.

I would say 10% sounds good especially if you'll need to take money later.

Put yet another way, this is just a contractor building the MVP for you.

Here's an article of mine with more of a math formula for this question if that's more helpful: http://blog.asmartbear.com/cash-equity-compensation.html


Answered 6 years ago

The best tool for this to provide you the ranges you're looking for is http://foundrs.com/ where you can plug in what is expected of each individual and get a suggested equity rate.

I would say that anything under 33% for a true technical co-founder is not proper incentive for this crucial role. The great thing about the equity calculator is it allows you both to have the conversation based on the inputs and arrive at what you both feel is fair.

The more you can de-risk your startup prior to this person joining, the more leverage you have. De-risking factors:

Funding / Revenue: If you've raised funding or have revenue (even small amounts), this should provide leverage (thus potentially decreasing the co-founders equity).

Customers (even trials): The more you've been able to do without the co-founder either by yourself or through outside contractors to get customers (even non paying), this is another point of leverage.

Of course, these two points work the other way too. The less these things are in place, the more dependent you are on their talents.

With respect to salary, I like to offer a range for the person to choose their own deal. In other words, offer a top-end and a bottom-end of equity, the bottom-end being you pay their full salary requests, and the top-end being no or deferred salary until funding.

At the end of the day, you both need to feel that the arrangement is fair and comfortable and that you are both aligned to see the business succeed, so really it's about having an open and realistic conversation, which is a great way to establish the kind of relationship you'll need to work together.

Given the complexities involved, I'm happy to have a conversation with you to expand on this answer and provide you more specific context. And last of all, make sure you are both on at least a 3 year vesting agreement, and if not 4. This ensures that if mistakes are made, it doesn't ruin your cap table!


Answered 6 years ago

Go ahead and check out Slicing Pie method. It can solve your problem www,slicingpie.com


Answered 3 years ago

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