I would really appreciate your guidance and advice. Great community.
I am a co-founder of a two year old start-up that is finally getting proper VC funding ($1MM injection). Currently, the founders all have full-time jobs and have been running the company part time. We both thought we would quit our full time jobs if we get the funding.
Well, one of the partners doesn't want to quit his full-time job and as one of the VC requirements (after negotiations) is that at least one us quits. Looks like I will have to quit my full-time job to make this happen. I am not happy at all - as the chances of this company making it with only 1 partner diminishes. My partner still commits to 10 hours week or so, but this is a very optimistic view.
My partner still wants to keep all his shares (~40%) and do this part-time. Moreover, I will be getting paid a salary from the funding we receive. However, I am trying to understand what is the norm in this situation?. Something about my partner sitting on %40 share while I go on a limb to run the company is not too encouraging.
My objective is to save this company and maintain a healthy relationship with the co-founder. What normally happens to co-founders facing this scenario?
Thank you very much
Funding Founder Equity Fulltime
Hedging the bet both ways is dangerous, as much as you want them in.
I'm surprised the VC hasn't put in a clause which says you need to "earn" your side of the shareholding over the next say 2 years.
I think the retaining all the shareholding without providing the same contribution is unbalanced and longer term will not go well for you ... but keeping them in and giving the the option to contribute is I think where you should focus.
You could build in a sliding shareholding based on contribution.
If they want to do less and be more of an advisor role then maybe a 5-10% stake would be more appropriate for the part time effort put in so far and their ongoing adivce.
The salary your drawing now that you have VC funding is only part of the picture. As the company grows you will be gaining a massive amount of understanding and experience, stress and sleepless nights that the other partner won't be in their safe 9-5 job.
At some point if the company is going really well they may want to come across to the "now safe" envrionment and expect to slot into a top job ... without the background, understanding that comes from having been there and done it.
If I was the VC I would be very nervous about this with someone having 40% of the vote who isn't involved and really has no downside. Your relationship with your VC is now or should be now a fairly high priority next to your partner.
Don't get hung up on the "part-time" label. And, don't chuck your co-founder simply because he/she is unable to commit to the exact same degree as you. I know a lot of people obsess on the "if you don't commit fully, you are dead weight" idea, but that's just over-simplification that comes out of frustration on the part of those who carry more weight, but don't get more equity.
What should normally happen is that you have to take a holistic picture. Not just time, but skills, expertise and other factors and equitably distribute the equity. (pun intended) Look at this recent post of mine, or use a few internet equity/founder calculators out there. Lots of recent posts have links to them.
Essentially, for a startup, every hour anyone can give is mighty precious, but overall should be weighed relatively against the sum total of contributions.
Re-evaluate often. At some point, your partner will be diluted into amounts that won't bother you, or he will join fully, but have been dinged a little by not having participated fully at all times...
Robin has covered most of the bases in his answer. I'd just like to reinforce that it's very surprising that a VC would agree to a partner who worked part time and is not quitting his day job to retain 40% of the stock. Maybe you haven't reached that stage in the negotiation yet.
The bigger red flag to me is when you say "while I go on a limb to run the company is not too encouraging." This would really scare me as an investor that you're considering running the company going on a limb. Most entrepreneurs I know would be very excited about finally having the money to build the company up and realize their dream. It sounds like you both prefer the security of your day jobs which is is going to be problematic for people who want to run a startup.
To answer your specific question, no, it's not fair for your partner who's going to work part time to keep his 40%. Usually, these things are covered in the initial incorporation papers. You should each vest over 3-4 years, and that way if someone leaves or doesn't do their share, there are relatively easy legal solutions.