Equity to a 2hr/day co-founder


5

I'm a tech founder of a startup in the very early stage. I'm looking to add a business development, sales, and marketing co-founder. However this guy is looking to invest 2 hours per day while i'm ready to go almost full time on this (I'm a freelancer).

Duties

Me:

+ Looking to invest around 7-8 hours per day

+ I came up with the idea (i know ideas are useless but whatever)
+ I cover the whole tech side of the startup
+ I already made a small prototype
+ I'm going to get the CEO position
- I live in a country where tech investors are literally rare
The co-founder:
- Looking to invest around 2 hours per day ( looking to go full-time after funding)

+ He'll cover the Business Development and Marketing
+ He'll raise funds and has a decent network
+ The startup really needs some decent business work to operate
+ He lives in a country where tech investors are much more accessible
What would be an appropriate equity to the co-founder considering that he pretty much won't bootstrap at all after joining because the project needs funding so it's our first step. In other words, The only thing that the co-founder would do without a salary is help making a business plan & raising seed funds.

However, My startup's business model requires funding anyways before doing anything in both business dev and marketing.

P.S. I'm already making the full version now.

Equity

asked Jan 27 '12 at 03:51
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Mark
31 points
  • I'd give him 0 equity. When he is ready to go full time then you can talk about equity. He deserves NO equity as there is NO risk. Perhaps he can have vested options over time, but you are better off finding someone else unless he can make a HUGE change to the status of your company quickly. But I am skeptical of a biz dev person being effective 2 hours per day. – Tim J 8 years ago
  • @Tim the thing is this guy is married and he has a high position/salary in a well known tech company, and has a large network of investors/advisors/entrepreneurs including big names, That's why i considered him, What do you think? – Mark 8 years ago
  • @Mark Did you ask him what is his expectation? – Karlson 8 years ago
  • @Mark - I understand - but what is he bringing to the table? If he was able to meet specific goals and milestones then it is worth it perhaps - but just an open ended partnership with equity based on what you say is not something I would consider – Tim J 8 years ago
  • @Tim So are you suggesting equity vesting? – Mark 8 years ago
  • If you both agree that he should get equity (and at this point I would argue that is not a good idea) then of course, it would have to vest and I would put other stipulations on it like there have to be measurable milestones that he created that benefit the company. – Tim J 8 years ago
  • See http://www.brightjourney.com/q/bringing-money-new-idea-money-investors-get-ownership-stake-legal Not exact, but certainly highly related. – Chris Lively 8 years ago

9 Answers


8

Having equity in the company dependent on a time commitment is the dumbest idea I've ever heard.

So if your partner can pick up the phone and have one of his college room mates loan 100K to your startup, you think he should get a higher percentage if he spends 8 hours on the phone with this person than if he can do it in one? How long will it take you to write 100K worth of code?

I think you should establish certain goals for both of you to earn your percentage. Right now you own 100% of nothing. Work out an agreement on what you expect from each other. If he raises no money and doesn't develop any sales, he gets nothing. I don't care if he spends 80 hrs a week on it.

Nobody built a startup punching a time clock. There's plenty of crappy jobs that will give you that opportunity.

answered Jan 27 '12 at 04:54
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Jeff O
6,169 points
  • I am not sure of what your argument is - 2 hours per day is useless. – Tim J 8 years ago
  • @Tim - 10 hrs a day is useless if this person can't bring in any money. Well connected people could pull in a lot of money in two hours. Tracking time is useless. – Jeff O 8 years ago
  • Yes, that is true. I was not saying the person should get money just for showing up - but 2 hours per day is a clear indicator there is little if any commitment. – Tim J 8 years ago

3

I'm having a little trouble with the whole "I live in a country where there are few tech investors"; he "lives in a country where tech investors are more accessible" point. Investors may be more accessible in another country, but things get complicated when you're targeting investors abroad.

First: let's assume this guy is a good fit and will be able to get you some investment interest. If he gets an investor in country B (where investors are plentiful), and you live in country A (where you, the company, the product and the culture, taxation and legal jurisdiction which govern the aforementioned apply), where's the investment going to go? What's that investor going to get, in what country and under whose laws?

There's a reason why people invest locally, as in angel groups: they want to be in reach of the money and the people they gave it to. There are examples where people invest across borders, of course, but if you're banking on this person to be your credibility to draw in the money, ask yourself what will happen when the investor invests. In what country is the company they are investing in? Your "hookup" could be as connected as all ...., but does his contact network contain investors savvy in investing in anything with an international office, business entity, founder, etc.?

Other posters have covered other aspects of whether to take this person on, and done so quite thoroughly. I'll just add that you should try to assess his/her real worth more deeply than vague promises of business development and fundraising (which can translate into "sure, I'll make some calls for you") before you commit.

answered Jan 27 '12 at 05:26
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Nicko
840 points
  • Well of course i'm going to move to the co-founder's country at the final stage of the investment. – Mark 8 years ago
  • Ok, but that's something you're going to have to package in a believable manner. Meaning, you have the requisite visas and have a realistic idea of the expenses of a re-loc, and that the investor believes the re-loc is truly necessary. I didn't want to come off as poking holes in your reasoning just to project my opinions online, but I've founded a company with offices and business entities on both sides of the atlantic, and fundraised four rounds - I've been through this. – Nicko 8 years ago

3

Two things jumped out at me as being very bad.

First, two hours a day? Really that's it? Sorry, but no equity. That is by no means enough time to do "marketing" or "business development". Full time dude. BTW, those terms are extremely nebulous and can mean almost anything. If he is actively doing sales then comp accordingly. However marketing and business development is more of a strategic thing and may have almost zero value to you in the early stages. Sales on the other hand mean you get to eat and consider your marketing message... Which the CEO should have direct control of.

Second, if you are the CEO then you are the one raising funds... otherwise you are a very weak CEO and will have a very hard time acquiring funding. He can certainly introduce you and you can offer to pay him a small percentage of funds acquired through his contacts; but that's not worth any equity. For example, if his contacts lead to acquiring $1M then he might get $50k.

On the other hand, if he's willing to actually invest in your business himself, then that could lead to an equity position. Otherwise it sounds like he's trying to leech off of you.

Rereading this: the CEO is the one in charge of making the business plan. Not this other guy. He might help you with it, but it should 100% be your baby.

All of this kind of feels like maybe you have no idea what you are doing but want the title. I think you need to look deep and decide: do you want someone else to actively run the company or will you step up and figure it out?

Hopefully that didn't make you mad. By way of explanation I was asked this very same question when starting mine a few years back. I'm a developer at heart. Quite frankly at first I had no idea. I liked the title and the idea of control but I certainly didn't know the first thing about raising money, making a business plan or really what it meant to be CEO. Eventually I figured out that if I was going to be on top I better learn.

I have to admit it was painful at first. But once I started to figure it out I was able to see how we had some really bad contracts in place with existing people and how the business was on the path to failure. I turned it around and we are now thriving. If I had let my "bus dev" guy make the calls we'd be out of business today.

answered Jan 27 '12 at 04:09
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Chris Lively
443 points
  • The business and marketing work will be done after getting the funding anyways because my startup's business model requires it, I'm a foreigner while the guy lives in a country where tech investors are much more accessible. – Mark 8 years ago
  • @Mark: You should still be 100% responsible for the business plan and proforma itself. Also, you can contract the guy to make contacts for you, but again, those are usually on a commission basis. – Chris Lively 8 years ago
  • I'm not sure about the funding commission, The funds go to the **company's** bank account to help it grow not to my pocket, And i don't think that investors would be happy about this transaction. What do you think? – Mark 8 years ago
  • @Mark: When I was starting to look for funding, I ran across a lot of people who said they would leverage their contacts to get the funding I wanted for a percentage of what they found. The percentages were pretty small and the people I spoke with said it was a fairly common way to approach it. Yes the money goes to the company, but the company pays the commission. – Chris Lively 8 years ago

2

About 5 years from now I used to have a co-founder for a startup, similar to your case, I worked full time on it (I was living with my parents, and had subtle savings) whilst he was married, with a kid, and thus worked from his home late, and weekends mostly. He kept his regular work and assisted me remotely, I remember calling him many times during his coffee breaks and so. He would stay late night, talked with the customers, contact prospects, give me a hand with support and so on... I am very thankful because all I learned from him.

The description you wrote is more similar to an advisor, not a co-founder. IMHO you are better off with a more committed partner than now, and if you happens to meet people which would fund you, give him a sales commission after that but not more because both marketing and customer development start from day 1.

Good luck!

answered Jan 27 '12 at 09:32
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Pdjota
532 points

2

2 hours a day and he keeps his day job? He's taking no risk, whatsoever. Zero to a couple of percent equity and a position on the board of advisors sounds about right to me.

answered Jan 27 '12 at 04:44
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Nick Stevens
4,436 points
  • that might even be too much unless the person invests money himself – Tim J 8 years ago

1

Equity is for employees.

Employees are people that work for the company as their full-time/primary position.

I think you could reach an agreement with him where you set some milestones and a target start date. If the milestones are met, and he joins on/by the target date, then there would be a previously agreed-upon equity package.

However, 2 hours a day from almost any person is not enough to be fully engaged in any sense, or to make a real contribution or save you significant time resources. He is basically acting as an advisor/contractor right now.

answered Jan 27 '12 at 09:46
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Brian Karas
3,407 points

0

I think a lot of the answers are pretty harsh. Look at it this way, you might need him more than he needs you. My startup has 5 engineers, including myself, a graphics person, a tech writer, a QA person, and business person. Most are working 10/hours a week, which is just about 2 hours/day. None of us are drawing a salary, it is all equity.

I know if I only offered 1 or 2% percent I'd have an exodus. I need them as much as they need the company. You need to take that into account also.

answered Jan 27 '12 at 10:54
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Paul Cezanne
649 points

0

Here is a slightly different perspective based on the following:

  1. You don't think you can raise money in the country you live in.
  2. You think you need capital prior to actually starting to sell the app.
  3. You want to move to a different country upon acquiring funding.
  4. This guy is going to handle sourcing of funds, "Business Development" and "Marketing".
  5. You want to give some percentage of your company to this guy.
The very first thing to do is establish what "Business Development" and "Marketing" really means. Those are extremely generic terms that could mean almost anything. You will both have to agree on them.

Next, I would suggest you move now. Assuming this guy can find some interested investors they are going to want to meet you in person. I don't know of anyone that is willing to write a significant check to someone they've never met in person. Also, if this is important to you at all then you will want to be right smack in the middle of it.

Finally, establish metrics. 2 hours a day is just silly. Earlier I mentioned paying this guy on commission for finding funds. If that isn't feasible/acceptable, then make any disbursement a condition of sourcing funds. Think about how much money it would take to build what you have so far. Compare that to the amount of funds you expect him to raise. I'd say that you want to distribute no more than 40%.

Bear in mind that the moment you bring an investor to the table those percentages have a high probability of changing. You might think you have 60%, but once the negotiation is done you might end up with only 20%.. or less depending on how it's written.

The point is everything he is bringing to the table needs to be spelled out. Otherwise you are going to find yourself giving up a significant portion of the company for nothing.

answered Jan 31 '12 at 01:37
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Chris Lively
443 points

0

I would turn the question around a bit on this and ask you:

How much is his network seed funding and other skills that this person brings to the table worth to you? If the answer is 60% of the company I'd offer 50% if it's 30% of the company I'd offer 20% and negotiate but I would also consider whether or not you can get the business off the ground without him or a person like him?

In general for co-founders you want to be equal partners so the equity would be split 50-50 or if you have more then just divide the number. The problem in these scenarios however always is what does the other person want so an equal split is always a good option to go.

answered Jan 27 '12 at 04:07
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Karlson
1,779 points
  • I disagree with the 50-50 split. Someone needs to be de facto in charge. It's too common to split something down the middle and within 6 months have both stakeholders wanting to drive the company into a new direction. – Chris Lively 8 years ago
  • @FindingTrouble And it is also common for the person bringing money and marketing to the table not to want to do it for less then that so that's why I posted other questions to answer first. – Karlson 8 years ago
  • If the guy was actually investing his own money, then I could see the case. However it sounds like the guy is going to be finding money. Which is an altogether different type of relationship. – Chris Lively 8 years ago
  • @FindingTrouble Which is normally compensated by the finders fee, which I am assuming out of the question. Secondly the target is for the person to join the firm and run Sales and Marketing which means that at the time of him fully committing to the project Mark will have to give him equity otherwise there is no motivation. – Karlson 8 years ago

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