Equity distribution among Co-Founders Pre-Money


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I teamed up with a student at school to help him launch a new business. The student I teamed up with has been running a legacy company for the past two years, which I am also involved in. The new company we are launching is a spin-off/pivot of the old legacy company he has been working on for the past two years. I have been working on this project now for 5 months helping to build out both the old business which was dismal, and did not have much business in the prior two years, while also working on this new business which is to be launched in September. Here is the break down:

Student I'm teaming up with:
- Launched legacy business 2 years ago with little business. About 3 events in the past two years.
- Since I joined we have really ramped up and now have 8-12 events lined up for the coming year.
- Has invested his full time and money on launching the legacy business and continues to do so for the new pivoted/spin off business as well.
-Has great networking skills and contacts.
-Asked me to join to be in charge of operations and to be a co founder of the new spinoff business, but not of the old legacy business.

Myself:
-Joined 5 months ago
-Working on the project part time while I still have my full time job
-Am ready to leave full time job once funding is secured
-I bring 7 years of ops and technology experience as well as a Babson MBA and a real estate startup company.
-I have been working 20-25 hours per week on this project, have taken off work to attend events and meetings and work with my student co-founder on strategic direction and milestones.
-I am working on re-launching the existing legacy website and planning and creating the new website.
-I have been to all VC meetings and am the only other co-founder.

What is an equitable equity distribution among us? He offered me 10% with "VP of Operations" title, while he gets 60% and keeps 20% for equity of employees and another 10% for VC and Angel funding.

I rebutted saying that I don't think that is fair given the tremendous amount of work ahead since the idea is just an idea and in infancy, sacrificing my 85K salary and other businesses I could launch (opportunity cost). I rebutted with 25% equity and title of COO.

What do you guys think about this situation? I almost feel that this is still too low. I should ask for 35% of the new company... yes/no???

Thank you

Equity Distribution

asked Jul 9 '11 at 03:35
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Dem
1 point
  • Nothing we say here really matters - it is a decision you both have to agree to. Not us. – Tim J 9 years ago
  • Thanks Tim, I hear you, but I'm looking for a more scientific approach based on the variables above. – Dem 9 years ago
  • Do a search on this site for similar questions... and the answer is still the same - you both need to agree... – Tim J 9 years ago

4 Answers


1

First off, drop any talk about titles. Title's don't mean shit, especially in a company that hasn't started yet.

You guys have a confusing business relationship, especially since you are working for this old company while building the "new" company.

First off, are you doing all this work for free?

Secondly, is this equity for the new company only or both companies?

What happens to the old company when the new company is launched?

This isn't easy because you guys are dealing with a lot of variables.

answered Jul 9 '11 at 06:46
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Nick
96 points

1

So life is a negotiation -- Your MBA should have told you so much :-)

It sounds like you are just the two of you (for now)... Difference is that he has put more time (=money) into the legacy, but that you somehow are not using that as a base but starting from scratch in a new venture.

Offer to match his investment and go 50-50 on the ownership.

If that does not fly, ask yourself if you can do a better job by doing it alone and starting your own company -- or do you actually need him for something? If so, you need to make you mind up on how to value your contributions.

For a Series A funded company 10% for a VP of Operation is very good -- but you are not a hire after Series A valuation, much more a founder. I have seen people with that title getting 10-20% as a founding team member, but that is without putting equal stack into the company.

Hence if you create a situation where you are equals -- I.e. match any investment, time commitment etc -- then you stand a better chance of negotiating higher equity if not a straight 50-50 .

Alternatively, as a straight up employee rather than founding team member, VCs typically use a rule of thum that they are looking for 5 time return on investments for companies which exits with 3 years and 10 times returns for companies which exits within 5 years -- now with your cut in salery and fair-market values of your skill, calculate cost to yourself based on less money earned, and project that out over 5 years, and then figure out whether your shares will be 10 times worth that then. That should be your absolute minimum -- anything less than that and you are better off getting a job with whoever pay the highest salary.

Hope this helps

answered Jul 10 '11 at 16:41
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Soren
131 points

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There is no formula. It depends on how much you guys need each other. It is possible that your assessment of how much he needs you doesn't match his, or vice-versa. In that case you may not be able to come to an agreement. And this is also why there isn't a standard scientific approach: there isn't some objective authority you need to convince. You just need to convince each other.

To simplify, ignore dilution for investors and employees for now; you'll figure those things out mutually (with those parties) later. You have one situation where he owns 6x as much stock as you, and another that is much closer to even split. This is a pretty wide range but not an irreconcilable one.

Raise all your concerns, tell him what you want. It may also be useful to outline specific responsibilities and timelines for commitment. If you want a more comprehensive approach, check out the book The Partnership Charter.

answered Jul 10 '11 at 10:19
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Shimon Rura
216 points

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So, sounds like he gets 90%? He really doesn't have any obligation to do any of those other things.

I'd look at it like this. If you are making 85k now, and you quit your job to go work for this company and become a partner / co-founder you have to figure out how long it will take to get back to 85k ... and then to where you would have been if you wouldn't have started the venture.

So if there is lots of risk of you not being able to get your salary back to where you want it or more than you need more equity. If you are going to be making 85k right away, then 10% is probably sufficient. So there is a middle ground in there that you'll have to find.

Also, maybe you arrange something where you hold some of the % that will eventually be given to future employees / VC etc. rather than just him?

answered Jul 10 '11 at 10:31
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Ryan Doom
5,472 points

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