How much equity to give up front


3

Myself and my partner are both sales guys. I had a terrible business idea but after meeting with my future partner over lunch one day he made it better by with a few suggestions that I knew were pure gold as soon as he said them. I had to learn programming and I built the solution we discussed that day and now its looking like clients actually really want what I've built. We agreed that day over lunch four months ago to a 60/40 split. I would build it, he would sell it. The problem is I have killed myself building this thing over the last few months and he has hardly been heard from. To hedge my bets to get sales up front I brought in a buddy of ours that agreed to a 22% equity split and the partner who wanted 40% agreed to go down to 28% so I could keep 50%.

Now I am concerned that even 28% is too much if he doesn't bring alot of sales and the other guy does. The new guy has suggested a small issue of common shares up front for each for their input so far with stock options for each sale up to their agreed upon split. I can't be the first person who has wound up in this kind of mess so I am hoping to hear ideas from the community on the best way forward from here. The first guy is upset that there is a new guy around at all but I am very concerned that he likes the "idea" of being a founder far more than actually being one. If I do issue 28% of the company to him am I potentially stuck with a third of my company being deadweight if he doesn't close deals or should I just agree to the 28% and then deal with it later? Somehow I doubt thats a good idea.......

Co-Founder Equity

asked Feb 17 '12 at 14:34
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Dev Newb
118 points

2 Answers


2

There is a question critical here: what did you mean by "partner"?

  1. If you discussed working together, then it seems to me that the normal solution to your issue is to agree a vesting schedule. That way, if your partner doesn't commit the time and effort, then their equity position will freeze at a low level.
  2. If that wasn't part of the discussion, then it seems to me that you have agreed equity essentially in exchange for that past, foundational input, improving your idea with "pure gold." The principle of your revised split - both diluting to accommodate a new team member - is sound enough in that case, but the level seems questionable. So if this is where you are, either you lay down in this bed you've made, or you have a grown-up conversation about the future. Work out what you need going forward and what everyone is offering. Value the contributions to date. And see if you can knock out a sane schedule that everyone can agree. If not, stick with the status quo and focus on getting out to the market.
answered Feb 17 '12 at 20:30
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Jeremy Parsons
5,197 points
  • This is exactly what I was hoping to get from the community. After posting the question I stumbled across vesting with a cliff which I think fits my scenario perfectly (Very scary I've never heard of this before). We DID discuss working together in the future and I feel his input has been paltry since that first day. He is promising the moon now that the software is built and vesting gives him the opportunity to prove that or move on. Then I have the choice on how to compensate him before i let him go if comes to that. Thank goodness for this forum! May have just saved me millions. Literally.. – Dev Newb 8 years ago

1

You have a distorted concept of "up front". Up front was "that day over lunch four months ago" when you agreed to a "60/40 split."

I can understand buyers remorse, but it is important that people act with integrity and honor their commitments. In fact that is why we have evolved the rule of law as opposed to cultures where one would simply eliminate potential partners and no longer useful friends.

Look at this another way; do you plan to attempt to entice venture capitalists or customers to do business with you? If you were to say to them "Please do business with me, and lets work out the terms now. And oh by the way if later I decide I didn't make a good deal I am going to try and figure out how not to honor it."; how many people would want to do business with you?

answered Feb 17 '12 at 23:15
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Jonny Boats
4,848 points
  • Wonderful comments and helpful moral advice, thank you. I have alot to think about and sometimes its helpful to get a few more perspectives to see if I'm thinking clearly on the issue. Thanks again. – Dev Newb 8 years ago

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