Compensation for Co-founders, plus additional vested equity


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I have a company share proposal for co-founders of a web-application startup. I would like to if the structure makes sense, or if anyone can suggest a more suitable structure, which has the desired effect? Background 2 years ago (6 months actual work) I started work on a concept for a web application. Work commitments have made it a slow starter, but the base of a strong product has been created. The time has now come where I have the right team, and technology has developed to a point where we can create a superb product. Team: Myself (A): Concept, all design & branding, overall management; Person B: Development; Person C: Day to day management, business development, source financing & Person D: Marketing and growth. The design and development deliverables will be easy to define and we will endeavour to define the business development and marketing deliverables as accurately as we can.

Issues We will all be working in our free time until our first release has suitable user base numbers to take on our first round of financing. Due to this some team members may not commit or perform as well as others. Or may even leave for a strong job offer. Our structure needs to allow for all possible scenarios. We are good friends and want to start out on a positive note, rather than having everything prepped for disappointing performance. The Developer is obviously fundamental to the apps success. I want to show this without demeaning the other roles.

I would like to maintain control of the company, particularly when VC's become involved. My share will be well below 51%.

Proposal A 24%

B 12%

C 12%

D 12%

with a 40% share pool, of which we can all earn an additional 5-15% after 2 years, this figure will be agreed upon by the board based on time spent and deliverables met. There will also be a 1 year cliff in place.

Could A have more board votes? ie: 2 votes, other 3 founders 1 each.

Any suggestions are much appreciated. Thank you,

Mike

Board Co-Founder Equity Compensation

asked Feb 25 '11 at 06:03
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Michael Parks
3 points

1 Answer


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Be very conservative with giving out equity. As you suggest A & B are the really important roles, and that should be reflected in the split. Do you really have 4 "founders", or is it a CEO and CTO (the founders) and 2 key employees. Obviously it is a negotiation, but this is not a place to cave easily. You've already invested 6 months over 2 years. Don't undervalue that.

You'll want a structure that is fair to everyone, but protects you and the company.

Typically option pools are reserved for employees - who get stock options - while the founders take restricted stock (a must have). So if you have 4 founders, you'd normally all take restricted stock, but you don't have to do it that way. Depending on what's possible to negotiate, you could for example give C and D options (meaning they aren't shareholders immediately), while A and B take restricted stock. If you can control the company as the majority shareholder, that would be ideal.

The additional 5%-15% you mention is fine (though those numbers seem high), but I'd keep things simple. If people need / deserve a re-up later, you can determine it then. To start, just split the pie and overall vesting period (common scheme is 25% at 1 year cliff with the rest vesting monthly over the next 3-4 years). Word of caution on using deliverables as vesting milestones - unless you can define the deliverables very clearly (and it makes sense for the business to set those rather inflexible deliverables), it is better to have time based vesting (flexibility and less chances for disputes over whether the milestone was hit).

Also, keep the board simple. Early on, there probably isn't a need for 4 board members. If you can be the sole board member that is easier. Once you get funding you can negotiate the number of board seats for founders / the investor. If everyone does insist on having a board seat, then yes you can play with how many votes each board seat gets (usually put this in your certificate of incorporation and founders agreement).

answered Feb 25 '11 at 12:55
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Zac
211 points

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Board Co-Founder Equity Compensation