Equity for a part-time founder?


3

I'm a co-founder of a new startup with two other partners. I'm a designer and they are a developer and biz dev guy respectively. We are in the initial prototyping phase for the project and will be rolling out a private beta version in the next month or two. My partners are both ready to make this their full-time work, despite there being no funding yet. I, on the other hand, have very significant work commitments and am not ready to work on the startup in a full-time capacity. In other words, I'm hedging. I'll be designing the project and doing all front-end development, but will probably only be able to offer between 10-20 hours per week on the project.

So, here's the question: considering I am a founding member, have been heavily involved in the conception and will be functioning (for the time-being) as lead designer - what would be an appropriate share of equity (with the 2 other partners full-time and holding equal equity). Are we talking 5% or 25%?

We'll be signing an operating agreement based on these terms shortly.

Thanks!

Co-Founder Equity Part Time Partnership

asked Dec 22 '11 at 04:32
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Local79
21 points
  • I would not base equity on the amount of time spent, but rather the importance of the work done. – Tim J 8 years ago

4 Answers


1

As Patrick mentioned, start with 1/3 split and then adjust as the business develops. The adjustment terms should be written in the operating agreement. Make sure that all partners need to agree on any future adjustments to shares before they take effect (also should be spelling in the operating agreement). I wouldn't start with something different that 1/3's because at this point all three of you have contributed the same amount of time and energy (right?). What will change is the fact that the other two partners will work more in the FUTURE while you will work less (=contribute less) going forward as compared to the other two partners. Note the "= contribute less," because that's what counts, not how many hours somebody spent (e.g., I can be in from of a computer for the whole day and accomplish less than somebody who has spent one hour).

Then as time goes by and the other two partners indeed contribute more than you can (b/c you have a full time job), you can start adjusting the partnership shares to reflect your past contributions at the time of adjustment (say, every 3, 6 or 12 months). Say, in a year the share distribution will change to be so that your share is reduced 20% and so forth.

Talk to a layer and/or CPA to make sure the operating agreement is set up correctly from the legal and taxation standpoint (e.g., changes in shares may have tax consequences).

answered Dec 22 '11 at 14:47
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Vasiliy
323 points
  • Although I understand the principle of what you are saying ie. equity should be based on contribution - I would hate to be on a startup team where I was continuallly negotiating shares like this. I think it's a recipe for discontent and disagreements. – Susan Jones 8 years ago

0

This is a question you and your partners need to discuss together. First, what you need to think about isn't your contributions to the company now, but what you will be doing with them in the future.

Have you or will you invest your own money? For that you will want equity or consider it a loan with interest. Both of these are options for investors, and you want to be an investor (you already are).

When determining equity share, most think in terms of the value of the company as a trade for money or 'in kind' services like you're doing. So, put a value on your time and services (including cash you've contributed). Multiply that number by the percentage stake you're thinking of and bam! That's how much you personally are valuing the company at.

But there's more - what are projected sales? What do you think the true value of the company is or will be in 1-3 or 5 years? Now compare that figure with the value of what you're putting into the company now and in the future. Do the calculations still stack up?

Go to your partners armed with some of this back-of-the-envelope calculations so you can bring it up if needed. Then you can document that everyone agreed with the value of your contributions vs the future value of the company. It could also help you write-in things about what it means to be an equity holder in your company, like "if Jason doesn't continue contributing 40 hours/week average over six months without adding the equivalent cash, his equity in the company drops."

answered Mar 22 '12 at 01:40
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Paige
129 points

0

It's not clear from your question if you've formed a business yet. If not, by default you have a partnership - if you go to market. Sounds to me like you're three equal partners, so I would say 33%. Founders can also be paid a salary, which can serve to equalize the full-time/part-time thing - but you'll have to work that out.

answered Dec 22 '11 at 07:40
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Patrick Ny
300 points
  • Your answer is legally correct, but I'm not sure if it's really helpful. It's unlikely that any successful startup ends up with equal split due to the default partnership rules. – Alain Raynaud 8 years ago

0

Yes, you are hedging, and therefore you are not entitled to receive the same level of equity distribution. If you do receive the same amount, the other partners will quickly resent you when they are working late fixing problems while you're pulling in a paycheck every week. Future investors will also question the team's judgement and commitment.

Another factor to consider - by not having you full-time, the company's development will be slower than it would be had there been someone else in your role working full time. It's a drag on production.

If you're doing 10 hours, based on an 80-hour week, that's 12.5%, which would be the upper end you should receive right now because you don't have the same emotional skin in the game.

If I were the other two founders, I'd start you at 5% with an additional 10-15% that vests over a relatively short period (say 12-18 months) from time from the start of your full-time employment, with a clause that states that you must begin work full-time within 12 months. This is a check on you screwing around for three years then jumping into the company after it's profitable and saying - "I'm here! I'll take my extra 10% equity now!" Twelve months is plenty long enough for you to develop a migration path from employed elsewhere to committed to the team.

answered Dec 22 '11 at 10:05
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Scott Sambucci
66 points

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