In evaluating a co-founder offer, how do you value the benefits of failure?
I'm a tech guy looking to join a company as a co-founder. Quite often companies are in various stages.
For example for 2 different business offers, pre-seed/pre-series A: Lets say founder A, spends $X dollars and 1 year, pivots and comes up with a NEW AND IMPROVED business plan. But, compare this to founder B who spent $X/100 dollars and 1 month to produce a business plan.
From my perspective both business plans have merit. However, founder A will point out that a considerable amount of time and money have been put in the existing company, any new founders (who didn't invest at the start) should get a lesser share. In comparison to founder B, there is less investment in time and money, but more equity to offer!
Founder A offers 10%, while founder B offers 40%.
From a competitive point of view, founder B's offer is a bigger chance of something currently worth nothing. But the same can be said for Founder A's plan, something of nothing = nothing!
I'd much rather have 40% of something, rather than 10% of that something else. If you ask about potential money to be earned, well no one knows the future!
The core of my question is:
How do you respect previous investment (time/money) that didn't result in success in an equity offer? If you do respect it, isn't that believing in sunk cost?
TIA!
Co-Founder Founder Equity Compensation
3 Answers
First, let's pretend you are an investor that will bring money. The decision is just a matter of estimating the risk associated with each company not going beyond Series A, B and C (so that you lose everything), and also to determine the horizon of profitability of each company (2, 3 or more years).
A typical investor will split his/her money unequally in order to smooth the risk curve.
But you can decide in a better way by estimating the probability of success. In your case, if we imagine that the odds for A to succeed are X% and the ones of B are Y%, since with A you have 10% (equity) and B you have 40% (equity), you have to chose A if X > 4Y and B otherwise. This is the only rational way of choosing (maximising your expected revenue).
Microeconomic studies showed however that people are not choosing this way, there is a theory behind that called the utility expectation. In fact, depending on how much money they already have, depending on the perceived risk, most people will chose in a (somehow) non rational way. Here, most people will chose B, since it looks like someone that fails already will fail again...
Personally, if A and B did not have any other experiences in founding company other than the one you mention, I'd go for A. A already failed on some things, so he is supposed to avoid the main common mistakes.
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Every founder/co-founder believes in the idea, thus I wouldn't go into a business unless I was 75% sure it was going to succeed. However, as a rule, only 33% of start ups succeed. Wouldn't the above math be subjective, since the chance of success can't ever truly quantified? – Daniel 13 years ago
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Like I said "personnally". The studies (see http://www2.druid.dk/conferences/viewpaper.php?id=502457&cf=47 for instance) show that failure in the past do not have any effect on the likelihood of success in the future. – Sylvain Peyronnet 13 years ago
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@daniel : it is of course difficult to quantify, but statistics and actuaries are here for that. – Sylvain Peyronnet 13 years ago
Follow Your Passion I know this isn't a mathematical answer, but I would choose whatever idea you are more passionate about and whatever founder you like better. Also, it's a good idea to be a 50/50 partnership with a cofounder, because if one of your has more equity, then one of you may carry more weight in decisions.
Cofoundership is Like a Marriage Each partner brings different skills, and should be treated equally.
Without a tech person, it's just an idea If this a tech startup, your contribution of time, thought and sweat in the early stages will be MUCH greater than your partner's contributation. You will probably change the company's original idea and the business plan will be pretty much useless. Also, services are so cheap right now that money is kind of a moot point.
Most companies can't get off the ground without a tech cofounder, so don't sell yourself short. Good luck!
I am a math nut and I must say that all this math is just hocus pocus. You (and we) have no idea if either company will succeed or to what extent. Go with the one you have more passion about. That will be made up of how much you like the problem being solved, the solutions the company is pursuing, the people you will be pursuing it with, the environment in which you will be doing it, and the chance you will have to make a big impact in the company and in the world. Face the truth that you cannot quantify it and seek your decision making criteria elsewhere.
