How much equity is fair for a non-technical co-founder joining pre-revenue with a product ready to launch
What is a reasonable equity split where two people have been working separately on a similar tech idea and are now looking to join forces. These individuals are friends. Despite both working tirelessly on their respective apps, and investing heavily, one has made more progress on the app and has achieved a fit for purpose ready to launch early version. She is inviting the other to join her for an equity stake in the combined business. The friend brings distinct skills and will be pivotal in developing a second market for the app (which is where she has been focussing her efforts). Both share a similar vision for the product, and passion.
The venture is pre-revenue (it hasn't officially been launched yet, and there are no customers), and pre-investment.
Is it reasonable to offer a 80/20 split?
Or is it fairer to offer higher for the person being invited?
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I'd say 50/50, with vesting for each. You're so early in the process of building a business that if any of you had less than the other, there'll be resentment later when things will get really tough if one feels a significant imbalance in equity. At most, I'd say 60/40. A business is not just a software. Besides, some investors might get spooked by hearing that co-founders split 80/20 – Frenchie 11 years ago
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Yes, I agree. My concern is feeling like an employee rather than a co-founder. – Hopeful 11 years ago
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Yeah, 50:50 is fair at this stage. Apart from anything else, it is impossible to say at this point who will end up having the biggest impact in the end. If you are both motivated (50% is motivating, 20% not so much), passionate and driven, you have a good chance of working well together. – Steve Jones 11 years ago
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Check out the website SlicingPie.com, it allows you to determine equity by the contributions made. So if somebody contributes money and little time and somebody else is all time, you can determine the actual equity split later. – Elenesski 11 years ago
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Thanks for all your comments. So the fact that the technology is already there and ready to launch is not the most important argument for her keeping majority share? – Hopeful 11 years ago
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By the way, this is a totally different question to the one suggested by the moderator. For the question "Forming a new software startup, how do I allocate ownership fairly?" the founder has an idea and hasn't developed it yet. – Hopeful 11 years ago
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@Hopeful, I agree with you that it's a different question, but it is notable that the answers trend in the same direction. Most people here will tell you that a 50/50 split is the default, and not to diverge from that unless you've got a really good reason. Your question then basically boils down to "Is this situation different enough that it justifies a non 50/50 split?" Just looking at the comments, I'd say it sounds like the answer is "no", but if you edit your question to state it that way, I can't imagine that anyone would actually call it a duplicate. – rbwhitaker 11 years ago
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@Hopeful: "the fact that the technology is already built and ready to launch..." I recommended 50/50 because it seems that that's all there is. If the tech is already built AND it's market validated (ie. you'll be building on top of something that sells vs. building something and hope it sells), the company is formed, there's capital and, most importantly, a LOT of time invested then your friend would deserve more. I'd add 10% per year + 10% for market-fit + 10% for capital. So if your friend spent 3 years building something that has a market and that has some capital then that would be 80/20/ – Frenchie 11 years ago
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Thanks Frenchie! We're going to keep exploring this further to reach a mutual agreement. – Hopeful 11 years ago
1 Answer
When talking founders, the best default starting point is an equal split of equity (50/50 in your case). While I think your situation merits considering something besides 50/50, there are two items that I think ought to still push it back to 50/50, or at least closer than 80/20.
The first thing is, it sounds like the new person is a non-technical person and the technical side is effectively complete. Which means that the non-technical person still has their work cut out for them. They'll still be doing enough work -- likely enough to justify 50% of the equity.
The second point that I want to mention is that you can still split equity at 50/50, and have each person's shares vest differently. Founders often have their equity vest over a period of four years (or something like that) with a one year cliff (they get nothing until they complete their first full year). If founder #1 has been working on the project for a year already, they could just start 1 year into the vesting process, while founder #2 is starting at the beginning. In four years when both founders are fully vested, the fact that you started at different times will mean practically nothing.
50/50 may not be the only option, but 80/20 seems like a bad deal for founder #2 to me.
