Is it necessary for a co-founder to invest money when starting a startup?


1

Is there a requirement for such stuff where a co-founder actually have to invest a proportional amount of money when setting up their startup as a business/company? What if they just come with ideas/technical skills and the other guy comes with money? What is the usual rule for this?

Equity Investment

asked Apr 11 '11 at 12:35
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Equino X
111 points

3 Answers


4

It is not necessary.

Co-founders doesn't necessarily mean proportional equity. And as we all know it rarely means proportional work!

The critical issue is that the members of the business/company feel comfortable with the details of their relationship. Really. Not just they say they are -- but they are. Times are going to get tough and relationships are going to be strained. The founders need to layout the original equity, the sweat equity, the performance bonuses, the compensation.

The co-founders need to remove the doubt by having the conversation fully and documenting it on paper in a way that both of have taken ownership for their approval.

answered Apr 11 '11 at 13:44
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Joseph Barisonzi
12,141 points

2

Nothing is necessary. A co-founder must ultimately bring value. However you do the math works. Money has value. Work has value. The problem is that it is like comparing apples and oranges, but in your heart of hearts (Shakespeare!!) you should know have a feel for who is contributing how much value.

answered Apr 11 '11 at 15:07
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Genadinik
1,821 points

1

It doesn't matter but there are a few things you should get straight if that is the case:

What is the value of what you are putting up if not money? Is it your time... if so put a $ value per week or month. At some point you are going to want to say "we are even or I have paid my side". Agreeing this will help at the other end.

Share split guideline from our blog (cut and paste):

We typically have a few standard metrics we use to run through how much a share is worth:

  1. Idea: 3% - 5% - Ideas these days are cheap, everyone is having them it's execution that counts.
  2. Technical: 15%-35% - all developers (including myself) think it's worth more but if you don't have the rest in place then it's just a cool thing that sits on the shelf being worthless to everyone. That said, you want the developers to have a good stake in the product so they are suitably focused in the end result.
  3. Marketing / Sales: 15% - 30% - This is pretty important, if nobody knows about you, you're nowhere ... but put KPIs against it - X new customers / sales in a timeframe.
  4. Business: 20% - 30% - The leadership and vision, this is typically one or two people and they will make or break the company on its own, set the direction.
  5. Finance: the remainder, depending how much they put up, others adjust accordingly.

Employee shares is the outlier here, for key staff you want to reward them ... either they get split under each of the headings above and are a part of those shares or they are a seperate block ... around 10-15% is reasonable to balance incentive against dilution.

A few notes about these splits

  1. Again for all of them it is to be qualified ... everyone should have a 1-2 year "buy-in" period where they have to perform at their role in order to receive the shares ... it's only by everyone pulling together that you will get anywhere.
  2. To start with 1 person may wear several hats, thus have more shares.
  3. Really these are pure guideline or a starting point for negotiation. At the second round fund raising, these all get diluted by the new party coming in.

See also (from our blog):

answered Apr 11 '11 at 16:52
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Robin Vessey
8,394 points

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