Fair equity/cash for one year's contribution?


So I asked a broader question on this situation before, but am now trying to narrow it down to the core issue after negotiations failed yet again with my co-founders.

I am a tech guy who joined a startup as a third co-founder after the other two non-technical guys had been working on it full-time for 2 months and a few months part-time before that. We are all first-time entrepreneurs, although I had been an engineer at a startup for 5 years before this. We signed an initial agreement 6 months ago giving me 10% (4 year/1 year cliff) and $10k upon prototype completion. I agreed to this because I aligned with their vision, had to learn a new programming language, and it was agreed that we'd renegotiate after prototype completion. I was of the understanding at the time that a key customer was all but closed, which would have put lots of $ in the bank.

Fast-forward 6 months and we still have no customers, investors, or money. We have many promising leads but have not closed anything. We have gotten into an accelerator that offered a token amount of cash (about $6k for each of us) and lots of key knowledge/contacts, but required us to move across the country for 3 months. Meanwhile, I have developed a full prototype and should have a launch-ready product within a few months. I have also provided key mentor and customer contacts and have done a fair amount of selling in addition to development.

I went back to negotiate for more equity/cash recently, but there was a complicating factor: I recently got into a prestigious academic program that I've wanted to do for years, and it starts just before my one-year anniversary with the company. I can't say no to it or defer it without jeopardizing my spot. I have agreed to contribute part-time during this program and find a replacement and agreed to come back full-time afterwards (10 months later).

Where my co-founders and I disagree is how much equity I should get for one year's contribution for essentially no pay ($10k + incubator amount, but this mainly just covered moving expenses). They think my current 10% vesting schedule is fair: 2.5% this year, 1/3 of 2.5% during the program, normal rate after. I think I should get 20%: 5% this year, no vesting during the program, 5% per year thereafter. My salary either way would be the same as theirs before the program, 1/3 of theirs during, and the same as theirs after, but there is no money to be paid right now.

What I can't wrap my head around is how it's fair to work around the clock and sacrifice so much for this company for a year for as little as 2.5% + minimal cash. They refuse to negotiate or add deferred payment of any kind (which I would be willing to take in lieu of more equity) and said my choices are taking their offer or walking out. Me walking out would be mutually assured destruction: causing a disaster for the company, tarnishing all our reputations, and leaving me with next to nothing for my work.

It boils down to this issue: Who is right here and what is the fair compensation for a year of work on its own? With all else aside, what is the fair agreement to protect myself and for the company to protect itself if either me or the company chooses to cut off our relationship right after I begin this program? Thanks!

Equity Founders Compensation

asked Feb 27 '13 at 04:37
6 points
  • Oh, before someone asks, we have bootstrapped so far with the other guys putting in more $ than I have, but none of our individual contributions exceeding $10k. – User25060 4 years ago
  • Hello! I remember your question from before. Just out of curiosity, before I answer again, did you get a chance to consider this answer: http://answers.onstartups.com/a/47504/23938Jeremiah Prummer 4 years ago
  • Thanks for your answer - just commented on it. Waiting to see what suggestion actually led to a deal getting done before voting on an answer. Unfortunately it's been extremely difficult and I'm no longer confident something can be worked out. – User25060 4 years ago
  • You're very welcome. I'm sorry that strategy didn't work at all. Based on what you've said, I'm not so sure they ever intended to give you an equal share. Did you have a discussion that led you to believe that you would get a 33% stake? You could potentially make a case in court if they led you to believe that was the case (just to throw that out there). – Jeremiah Prummer 4 years ago
  • I made the mistake of signing a contract for a much lower percentage as an initial agreement, with the agreement to "renegotiate later". The way I read it, one guy thought 33% for me was fair and the other was thinking less (probably in the 20-25% range). The latter guy has always been extremely stingy in such matters with myself and others, and seems to prefer mutual destruction over making the tiniest compromise. Unfortunately the time to renegotiate coincided with the news that I'd be reducing my role temporarily for this program. I am skeptical that hearsay would hold up in court. – User25060 4 years ago
  • Yeah, you'd need a strong argument for that to hold up in court, and the contract won't help you a bit. Sounds to me like even if you weren't joining this program you probably wouldn't be getting a fair share. Is the program you got into related to your work with these two guys? – Jeremiah Prummer 4 years ago
  • The program is focused on a similar tech space and definitely makes me stronger as an employee and brings in huge connections, but does take lots of time away. Hard to weigh all those factors. – User25060 4 years ago
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Equity Founders Compensation