Need advice on Startup Equity Distribution for a Social Network Website


3

I an a technical guy, plans to goes full time for a startup to build a social network site, with a friend who is a business guy. Initially, he will work for part-time until our startup is enough to support both of our living (I hope 1 year later he will work for fulltime), common scenario isn't?

Here are the quick facts:

  1. We will invest in $150K, with $75K each
  2. I work for fulltime, so I will receive 2.5K per month to support my basic living expense, which is around 1/3 of my current salary
  3. Since I need to work fulltime which suffer the risk of fail, and since most developments will be done by me, so I will own 80% of the company.
  4. After 1 yr, I hope my partner can work fulltime.

Questions:

  1. Is it fair?
  2. Since my partner is working parttime, but a business guy can't contribute too much to the company if he is working only for part time, therefore, I hope he will work for fulltime one yr later. But my partner want more % of share of the company when he join full time.

    Are there any reasonable way to increase the % of share say one yr later? e.g. I sell some of my stocks at some discount to him when he join working fulltime?

Any suggestions are greatly appreciated.

Equity Distribution Stock Options

asked Jun 10 '11 at 01:42
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Jack
26 points
  • For $75k investment (and half of the total investment) I would also expect a bit more than 20% – Tim J 9 years ago

3 Answers


1

The key question is what is your friend contributing to the success of the startup? It looks like for now, almost nothing (apart from cash).

So 80/20 split sounds fair to me for now. When/if he joins full-time, you can issue him stock options at that point and figure out how much, depending on how far along you are, and how critical he would be.

To put it another way, if the site takes off just with your work, then you don't really need him later on. He could get a few percent by joining, just like first employees do. On the other hand, if the site is struggling and he can clearly make a huge difference, then you maye end up closer to a 60/40 split by then.

Another approach is that you own 100% of the company and you treat the money in as a convertible note, if you intend to raise money later. There are some issues with the pricing of the stock, but any decent corporate lawyer will give you a structure that works.

answered Jun 10 '11 at 01:59
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Alain Raynaud
10,927 points
  • thanks for your advise, they are really insightful. – Jack 9 years ago

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A way to think about these things for me that has been very helpful is to recognize the unique roles that the individual members of the team play during the stat up -- and to keep them distinct.

There is the role of the "brains" the people who though it up. They get to spliit a percentage of the initial equity distribution. (For purpose of my analogy -- let's call this the Queen Bee.Produces the offspring, doesn't do much else, but wants to be treated as the queen of the hive.)

There is the role of the money. These are the people who put down the cash to launch the operations. They get to split a percentage of the initial equity distribution. (Let's call them drons. They supply an essential ingredients to keep the hive going -- but nothing else.)

Then there are the people who do the work. These folks earn their equity over time in proportion to the value of the work they provide to the start-up. (Let's call them the worker bees, they collect the pollen, build the hive, produce the wax, and make the honey)

Unlike the Bee Hive -- in your startup there may be individuals such as yourself who play multiple roles -- They thus have an opportunity to earn equity from each of the roles that they play.

I recommend reading some of the great answers on here to the question of how to divide up the equity. Then divide yours up first by the role -- and then the actual person.

A fifty/fifty split on the equity put aside for the "idea" is fair. In your model, if my math is right, the idea is representing 40% of the initial business. And then you are receiving 60% of the equity for committing to a full year of work.

My assumption is that after you review the answers to the other questions about equity distribution you might want to adjust the intial equity distribution -- and that while it may start at 80/20 of actual equity distributed -- that the overall equity distribution plan may keep some shares for other works, performance, for you to earn over the course of the year, for your partner to earn based on his level of employment -- especailly as it ramps up!

answered Jun 10 '11 at 04:28
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Joseph Barisonzi
12,141 points

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I think that if your friend is working on the business and contributing in areas such as product design, positioning and market validation (and I daresay in usability with real customer archetypes he finds), and also in the preparation of the business plan, deck, and sourcing of angels, seed financing sources and the like, he is contributing as a co-founder.

If he's sitting back saying "atta boy" and "I'm with you when the product is done" or "I'm willing to spend time on this when you can pay me" then he is not a co-founder.

He is a "friend of the company" and potentially an early hire.

If he wants to invest $75K in the company, write him a convertible note and take his money. However, this does not "buy" him a job or an operating role in the company.

He is a chicken.

You are the pig.

Think bacon and eggs.

The chicken is involved.

The pig is committed.

You own this company.

When you find a co-founder willing to dedicate blood sweat and tears to this venture, no matter what amount, you must return that commitment by extending him a slice of equity.

The amount of equity you award is based on:
1) The stage of the venture
2) How essential are his contributions and what are the nature of the contributions
3) How much you need him at this time in the company's path or stage
4) What you design into your stock option model as "equitable" for a given role

In this you might look at a way to say "VPs get this much stock" "Directors get that much stock" "Senior Engineers get this much stock" and so forth.

What you need early in the company is a structure or model such as this, in order to avoid pain, chaos and hard feelings associated with uneven or perceived inequities in stock distribution.

I suggest (fair disclosure: I am on the board) a system such as Option Sanity. It is free or nearly free for small operations, and is a great way to get clarity on who gets stock and why. http://www.optionsanity.com/ You have not met the right person to co-found this company. Anyone can have good business judgement and relevant experience. Not everyone is suited, by their DNA or by temperament to be a start-up founder or co-founder. Writing a check is the role of an investor, and still limits their role to that of a chicken, to a great extent. If they need to keep their day job, this is understandable. They can still commit and do great work and make great contributions in the 20-40 "other" hours of the week that they don't give their employer. You need to meet someone who can be on-fire in their belief and commitment to the company and its goals and mission.

answered Jun 14 '11 at 04:53
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Matt Weeks
1 point

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