Is this equity split unfair?


0

Ok, so I'm a developer. I was approached the other week by a friend who had an idea for a website that he wanted to make, and he came to me because a) we know each other, and b) I've given him useful information before. He pitched me his idea and I agreed it had potential.

A week or so later, he's given me a potential contract to sign, which gives me a percentage in the high 20s, which will probably get reduced when we bring on the second developer (for the front end, which I can't do).

Although he has the ability to bring in capital, I don't think much capital will be needed. I feel as though I should be given the equity of a full co-founder. It's not a huge website idea, but I'll be responsible for all the back end code. I'm not getting paid at all.

What should I counter his offer with?

EDIT: I don't know if this changes anything, but we're both in college and will be doing this part time.

Co-Founder Equity Website

asked Jan 9 '12 at 18:03
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Semisight
103 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • Aside from capital, what else does he have to bring to the table? – Henry The Hengineer 8 years ago
  • Marketing. Those are his two (biggest) strengths. – Semisight 8 years ago

3 Answers


5

I completely understand and appreciate your point of view, but here are some things you may want to consider (if you haven't already) before you try to negotiate a larger stake.

  • Engineers tend to underestimate the value of non-engineers (and vice versa). It sounds like your partner has the vision to drive the product forward, and that's a huge asset. Perhaps he has special domain expertise (which could greatly inform the direction/development of your product -- even if you will be doing the coding), and he may have the knowledge and skills to manage and implement many other aspects of the business (marketing, sales, operations, customer service, etc.). Even well-engineered and useful products don't thrive in the marketplace without all of those other business elements.
  • He clearly values your relationship and trusts you. He invited you to participate in the development of a product that -- you agree -- has good market potential and is probably the center of his world right now. He could have "hired" a developer for equity, and the equity would likely have been far less than what he's offering you. (I think even early-stage CTOs might only get 2% - 5%.) If you reject his offer, he could still go find someone else since he's the one with the vision for the product... especially if the product isn't too complex. It sounds like he wants you because of your prior relationship, and for that he's willing to give up more equity than he would have to otherwise.
  • Raising capital is no small feat. Depending on the type of site, your target consumers, etc., some amount of financial capital is almost always necessary for a startup's success. It's important for many things, including: A.) Gaining traction and market share relatively quickly. Branding, advertising, sales... these things aren't cheap unless your idea is
    incredibly unique and therefore worthy of great earned media (a.k.a.,
    news coverage) and viral adaptation. B.) Compensation. Having the cash to compensate
    employees (including the founders) is important, as it enables
    your team to be completely devoted to the product and consumer, as
    opposed to being stressed about personal finances, being forced to
    moonlight, etc. C.) Product improvement. After your beta site is done
    and launched, you will presumably start working on new features,
    improved usability, etc. Maybe you'll need an iPhone app
    developer, a UX expert, etc. D.) Operations. Office space, equipment, hosting, travel, legal services, accounting, etc.
    Early-stage capital is not super easy to find; having someone on your team who knows how to bring the right people and dollars to the table is important.
If you really feel like your friend's only contribution to this startup would be the ability to raise money, and he wouldn't assume any of the other responsibilities I mentioned above, you may be right that you deserve a larger stake. However, my guess is that he probably sees his role in broader terms than that, and you should have a good conversation with him to define more clearly your respective roles and responsibilities. Only then will you be able to feel comfortable accepting the equity he has offered or make a solid case for a larger stake.

Just my two cents. Good luck!

answered Jan 9 '12 at 19:55
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Caligirl
204 points
  • p.s. Check out this answer (http://answers.onstartups.com/a/2389/14963) from investor Mark Suster. – Caligirl 8 years ago
  • I've read stuff like that before. The thing is, he still has just an idea. No working prototypes, or anything of the sort. To the comment at hand, I *completely* understand. I just feel like the way he views me is simply as a developer. In all likelihood I'll have much more to do than just developing. I'll be promoting it as well, and I'll be involved with the layout as well. – Semisight 8 years ago

2

Ok, not sure how accurate this actually is but I went through it and it seemed right to me:
http://foundrs.com/calculator/index.php This is a calculator to determine the equity ownership percentages of each founding member based on their contributions to the project / company.

answered Jan 9 '12 at 23:49
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Tim
670 points
  • I got just under 40%. – Semisight 8 years ago
  • I did this one and got a 38% as a tech co-founder. Seemed right to me. – Tim 8 years ago

1

Only you can answer that, but maybe a few "back of an envelope" calculations will help.

Consider the following:

  • How much time is it realistically going to take?
  • How long will it take until your equity is worth more than vanity?
  • What is the earning potential of the idea?
  • How much equity will you have left, after dilution?
  • Is it going for IPO, private-capital, acquisition, etc, or is it to build for the long-term?
  • Will there be shareholder distribution of profits, or will any profits be re-invested?
  • What is the competition like?
  • Do you need to work while this ramps up, and if so, how much time can you dedicate to it?
  • Do you trust this guy and do you genuinely believe in the idea and his potential to deliver?

If you think about all of these questions, it should hopefully help you to become clear about your path.

answered Jan 9 '12 at 19:11
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Steve Jones
3,239 points
  • 1) Months to do everything. 2) Doubtful it ever will be, it's a long shot but a decent idea. 3) Low, but who knows. 4) I don't know. 5) No one is looking that far ahead yet, as far as I know. 6) A combination. 7) Low, within the niche. 8) YES. I can give 10-20 hours a week, depending on school workload. 9) I think so, I have some faith, and he can deliver on what he's good at. – Semisight 8 years ago
  • As I said earlier, only you can decide, but judging from your answers, I'd say pass, unless you are really passionate about this, which you don't seem to be from your responses. Good luck, either way. – Steve Jones 8 years ago

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Co-Founder Equity Website