Need advice on assigning equity structure for 1 year old startup


2

I need advice and experienced views on establishing a proper original founder equity picture in a project.

Here are the details:
Founder A - Coder / Co-Product Designer / Co-Original Idea
Founder B - Visual Designer / Co-Product Designer / Co-Original Idea

An alpha version of The Product has been built. A sophisticated browser based web app that is in the social media, web design space. Founder A and B have worked together on ideas that led to this product for over 4 years. Founder A and B started actual work on The Product 1 year ago. The Product shares no specific code or design with any previous project either Founder A or Founder B has been a part of.

During the year of work on The Product, Founder A worked FT and Founder B worked PT (~5 hours/week). Founder B was available for much higher levels of work, but the project required a much higher ratio of code vs visual design than originally anticipated.

Both founders agree it is time to setup a company, bring on a CEO (talks with a compelling CEO candidate have begun), and raise capital. Founder A is available FT to continue work until funding is secured. Founder B will not be able to work FT until after sufficient funding is secured, but will continue to oversee all visual design aspects and collaborate on product design and direction.

Both founders agree that Founder A will have a higher stake and are learning about the ins and outs of vesting and cliffs etc. The actual division of equity is what is not clear to us. We're looking for what methodology to use to weigh and allocate based on each founder's inputs.

[Note: we're aware of the dynamic equity split model. Still not sure that's the way we want to go however.]

We know there are many viewpoints on a situation like this. Nonetheless, it would be extremely helpful to get some outside opinions to help us zero in on something fair, and to make sure we are setting ourselves up appropriately for the future.

Co-Founder Equity Startup

asked Feb 25 '14 at 18:49
Blank
Dan Newman
21 points

2 Answers


2

While I'm sure both the founders will do this from the next time, setting up the equity structure before you start has the least chance of screwing up a relationship / startup down the line.

Since you're both co-founders and don't have any employees, my suggestion would be to split the equity now based on the time each of you spent in that 1 year. It's fair to both parties as Founder A put in more hours and took added risk while Founder B worked ~5 hours / week.

Founder A had added risk of not having a source of income during that 1 year as well.

My suggestion would be 75% : 25% vested over 4 years with a one year cliff (starting now, not including the year you've already been working on the product).

answered Feb 25 '14 at 19:32
Blank
Chrissie Gray
1,107 points

1

Chrissie's 75/25 seems fair to me. Here are some potential arguments that each side might have:

Founder A might feel like he's worked proportionately more hours (80% if he worked 40 hours a week and 5 hours for founder B).

Founder B might feel like he put in a focused, solid 5 hours a week and should have more than 25%.

Based on the information you've given us, 75/25 seems fair is it's a good middle ground.

A key question is will Founder B continue working 5 hours a week or is now going to come aboard full time?

answered Feb 25 '14 at 19:42
Blank
Nishank Khanna
4,265 points
  • Thanks a lot for the reply. Founder B will continue to work 5 hours/week until sufficient funding is in place to come on FT. In this case "sufficient funding" means enough to pay them something close to market salary for a year. – Dan Newman 6 years ago
  • Is the product (and validation) at a stage where you feel confident you'll be able to raise a round within the next 12 months (the cliff period)? – Nishank Khanna 6 years ago
  • Yes. – Dan Newman 6 years ago
  • But to be clear, more likely the first round will be seed round and first hire after CEO will be another engineer. – Dan Newman 6 years ago
  • Then the 75/25 feels fair to both cofounders. – Nishank Khanna 6 years ago
  • So Founder B would vest at same rate if working PT vs Founder A at FT? – Dan Newman 6 years ago
  • Yes, the vesting should be the same for you both. – Nishank Khanna 6 years ago
  • Thanks for the info. – Dan Newman 6 years ago
  • Do have one more question - on the math. Is the 75/25 just a common FT to PT ratio? Because 40/5 is obviously quite a different ratio. Just trying to understand the logic. – Dan Newman 6 years ago
  • It's likely not exactly proportional to the hours each of you worked, but 75/25 feel like a good middle ground. Basing it purely on the numbers of hours put in will likely make Founder B feel short-changed. – Nishank Khanna 6 years ago
  • Got it ...thanks! – Dan Newman 6 years ago

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Co-Founder Equity Startup