What's a fair share when calculating equity for a co-founder?


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  • <2007 Nov> - company founded (with idea "A") by 1 founder, who's an engineering graduate, with no job experience but lot's of entrepreneural spirit
  • <2008 year> - Idea "A" does well in providing the service and makes a good amount of money with only 4 employees (incl founder)
  • <2008 Nov> - a co-founder joins with 8% equity and 30% pay cut from his market salary. His objective was to scale up the model and make it tech oriented. But he fails and leaves the company in a few months to go back to his job.
  • <2009 Mar> - I join with a 60% pay cut from my market salary(no equity) only because i wanted to startup and found faith in the founder. Though im not a techie, but i have almost 4 years of work/job experience and i am good with ideas, processes, team building/people mgmt, relationships, sales, Bizdev, PR, networking, etc.
  • <2009 Oct> - After 6 months, I request a raise and a share of equity which was promised to me before i joined. Following this, my salary is increased but remains 20% lower than the market standard at that time + 8% equity.
  • <2009 Nov> - i come up with a business idea ("B"), which is unique to our industry but still works towards the same objective which our already established business (idea "A") has been in. However, my idea ("B") is highly scalable (from the looks of it) and taps into a bigger market, which our earlier business (idea "A") wouldn't have been able to.

note: now the revenues (combined by "A" and "B" ideas) of the company have increased marginally (by about 40-50% from 2008 figures) but nothing extra ordinary yet - we've been profitable since day 1. Our team has increased from 3 to 13 + 2 of us. Though, the ideai ("B") that i came up with, is still not making lot of money - it's enough to pay 13 employees' salary and office rent. While our established business' revenues are used to pump us ahead.

  • <2010 Sept> - I'm not comfortable with my salary (but can manage it somehow since we're still in startup mode) BUT more importantly the equity share offered to me, I feel, is unfair if compared to the value and contribution i bring in terms of experience/expertise/efforts/dedication.
Founders' argument is a) im taking a higher pay than him. (let's say if im taking 3x then he's taking a lil above 1x)

b) he needs to retain equity for VCs (in future) or other co-founders we might need for the technology scale up in future.

c) if i want higher equity, i'll have to take a major salary cut

My argument is a) my involvement in the company + risk + pay cut + business idea + unflinching dedication (work hours) = much more value for the company (more than 8-10% for sure).

My confusion/questions are: 1) How much is a fair share in such a situation?

2) Is there a way/formula to calculate a number/avg?

i know this might be too long a post to spend time on for many of you - but each answer will be highly appreciated, and i'll be grateful to you for some good advice.

Co-Founder Equity Entrepreneurs

asked Sep 25 '10 at 05:27
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User4405
3 points
  • A few more details will help provide a good answer. Why is the founder taking such a small salary compared to yours? Can the company not afford it. Who owns the other 92% of the stock? What country are you in, or at a minimum which region are you in? There are cultural and legal differences between different regions – Dror 8 years ago
  • @Dror - answers to your questions are below: * founder has no obligation at home (has extremely well off family background). However, he's a person who doesn't believe in living/funding off Dad's money. He takes the pay for his personal expense, nothing else much. Where as i have a middle class background, with quite a heavy family obligation/household expense, loans, etc. * 5% of the remaining 92% is owned by our mentors who help us on an ongoing basis - with advice, contacts, strategy, etc. (they've not provided any seed funding). Rest 87% is owned by founder. * India – User4405 8 years ago

4 Answers


1

I think you are getting a fair deal.

You have to decide if you want to continue with the venture with him. The founder told you what you need to do in order to get more equity. It is up to you now. Or make a different offer.

You should ask for a plan for when/what milestones need to be reached in order to get pay increases and/or more options/equity.

I think you got a fair deal. You can always walk away.

answered Sep 25 '10 at 06:29
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Tim J
8,346 points

1

I think there would have been a lot of learnings in the previous idea "A" which led to the transformation / working on the idea "B", which you might have not included in the equation & the credit to the learnings / failures goes to the person who started.

You might find PaulGraham's article on equity useful here -> http://paulgraham.com/equity.html

answered Sep 25 '10 at 16:21
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Viv
482 points

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Who owns the other 92%? Is there an option pool? Do the employees own any stock or have options? Does the 2008-Nov founder own all 8% or was he vesting? Are you vesting?

It looks like you joined 18 months in or so.

I agree with Tim -- I suspect you are getting a fair deal or something close to it. Mostly I suspect this because you signed on knowing what you're getting yourself into. Generally, one cuts his best deal when he comes in door.

However, I think your question also reveals the importance of having an option pool. Founders and employees want to get reloaded with stock options; it's an important motivational tool. I'd work to increase your shares (and adding shares for everyone else!) by trying to create an option pool if there isn't one.

answered Sep 25 '10 at 11:24
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Mitch
659 points
  • answers to your questions are below: * 5% of the remaining 92% is owned by our mentors who help us on an ongoing basis - with advice, contacts, strategy, etc. (they've not provided any seed funding). Rest 87% is owned by founder. * no options pool yet. * no employees own any stock * the 2008 founder left with nothing. * I'm vesting over 4 years under the cliff method. (@rate of 1/4 every year) – User4405 8 years ago
  • Certainly this is not a model that is going to enable incentives for other executive hires. I wouldn't be comfortable working at a start-up without an option pool available. I'd position this argument as not only do you want to be reloaded, but there needs to a plan and comp matrix in place for other execs who might be needed later (Sales, Marketing, Biz Dev, etc). 1/4 every year isn't typical either; 1 yr cliff is one thing, but then you should vest 1/36th per month. I've never heard of 4 cliffs. Yikes! – Mitch 8 years ago

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I'm assuming that other than you and the founder there are no other major contributors.

Let's start by examining the arguments.

Founders' argument is
a) im taking a higher pay than him. (let's say if im taking 3x then he's taking a lil above 1x)

That actually is not relevant. The more relevant question is what kind of pay cut is he taking compares to market rates. In other words, if he's a developer and taking a 20% pay cut, and you're a CEO and taking a 20% pay cut, it doesn't matter that you're making 3x what he is. You're both getting the same ration compared to market rate.

b) he needs to retain equity for VCs (in future) or other co-founders we might need for the technology scale up in future.

That's a false argument. Let's say that there are one million shares and you have 80K and he has 920K (let's ignore the others in this example). The company can allocate you 100K new shares and now you own 15% of the company. Let's say VCs come in and you want to give them 25% of the company, you allocate them an additional 466K shares that you give them. There are now a total of 1466k shares. They now own 25% of the company, you own 12.27%, and the CEO owns 62.75%.
It's a common mistake to think that new stock comes out from existing stock. New stock is allocated, and everyone else gets dilluted.
All of the above is based on my knowledge in the US, it might be different in India, but even then, I don't think this argument holds water.

c) if i want higher equity, i'll have to take a major salary cut

See a) above.

My argument is
a) my involvement in the company + risk + pay cut + business idea + unflinching dedication (work hours) = much more value for the company (more than 8-10% for sure).


My confusion/questions are:
1) How much is a fair share in such a situation?
2) Is there a way/formula to calculate a number/avg?

This is one of the hardest thing to quantify, and without really understanding the situation and everyone's contribution it's hard to tell. I'm surprised that there are people willing to say yes it's fair without knowing more about the situation.

At the end of the day, there are three ways to resolve this issue, the good, the bad and the ugly :-)

  1. Agree with the founder on targets and compensation based on the target. Something like "Our sales are $250,000/year, once our sales reach $1M, I'm going to get an additional 100,000 shares" You have great fate in your contribution to the company, get it translated in concrete numbers into equity. Get it in writing.
  2. Start looking at finding a different job. At the end of the day, that's the biggest leverage you have. If you and the founder really can't agree on how much your contribution is worth, there's nothing like saying "sorry, I found a different job" to make the founder realize that he's risking a lot by your leaving. Don't do this unless you really are willing to take a different job.
  3. Ratchet down how hard you're working. Keep working for the company and doing a good job, but slow down and spend more time with your family.

I would, by far prefer to go with 1, but sometimes you have no choice, and go for 2, when there's just too much difference in perceptions of the value of the contribution.

answered Sep 26 '10 at 06:02
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Dror
1,833 points
  • **His market rate is difficult to determine because he never did a "job". Started straight out of college. Whereas, i joined after completing close to 4 years of work-ex. Hence, i had a benchmark to determine market rate. **Dilution method is same here too. If VC comes in, my stock (irrespective of share amt) will get diluted proportionately. **I think option (1) seems more do-able. Though (2) might be my backup if push comes to shove.. but i really wouldn't want to see that happen ever. >>>> but what you said makes complete sense - the difference in perceptions is what needs to be bridged. – User4405 8 years ago

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