pre money startup equity for founding partner who now will become a silent partner


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my business partner and i recently decided to terminate our partnership. primarily my decision, but he reluctantly has agreed.

we have one concept (a web consumer service/app) that we spent 6 months thinking through, creating product plans, market validating, etc. no code yet. no significant $ spent - other than opportunity cost of time spent on this.

the assumption had been that we would be 50/50 ... but hadn't formalized the entity legally or raised funds yet. we were going to bootstrap initial 'mvp' and launch.

he will allow me to pursue the concept independently, transfer all IP to me and sign a non-compete. but in return he would like 12% founders equity with no dilution risk until $10M is raised to fund the entity. after $10M, dilution would be on par with my founders equity stake any advice? 12% sounds reasonable but NOT the non-dilution until $10M. thats a big $ for me; i don't see this ever reaching such investment $ needs - and certainly not in the short term. my current plan is to grow organically with some angle/convertible debt 3rd party $. i fear that i will be diluting myself over time until i'm in the 20% range and find that my ex-partner's share becomes proportionally more and more powerful; even as a 'silent partner'.

all advice highly appreciated.

Equity Founders Agreement Dilution

asked Jul 3 '13 at 23:53
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User732013
1 point

1 Answer


1

This is both an incredibly easy entrepreneurship question to answer, and a very difficult one:

First – a called splash of reality: the company, the idea etc. is worth pretty much nothing – zero, nada. It's little more than an idea… With a few plans, and probably a lot of phone calls and emails "validating" the idea… but nothing more. So any talk of equity split, dilution, pre-and post-money (and all the other buzzwords that were managed to be crammed in three paragraphs) is an amusing exercise to observe.

Unfortunately it's not all that unusual. Nor is the situation of having to discuss a cofounder exit this early on.

Again yet the concept that you spent six months thinking about – no significant development (nor even any 'insignificant' development either!) – just a concept that you been thinking about. Both of you are overvaluing the idea and the company. the company has no value – pre-or post-money – and thus any discussion of valuation, or even percent ownership is a futile exercise – even comical at this point. I really don't mean to be insulting, but I've seen this many many times where cofounders tremendously overvalued both their idea, and their contribution to the company.

Please take this to heart as I tried to be practical and provide an answer to the question that you ask.

My overall advice – though I'm certain that you won't take it – is to try to be friendly and part ways. Try to get him to understand that there is nothing to own at this point. And leave the door open perhaps for him to have a role later on.

Any, and I mean even 1%, ownership from a "silent" partner, or nonexistent cofounder – is going to reflect so badly on your new company, and reflect even worse on you the founder – that you probably will have almost no chance of getting funding from a professional investor (venture capitalist or savvy angel investor). And even without the investment part of the equation, it's going to be a headache forever. And last, it's just plain wrong.

Overall – my advice is both of you to have a discussion about getting very very tangible and specific about what you have to do in order to create the product or service – only then will they be something to place a value on. I know that he is on his way out the door, but having this discussion is important because it will probably put in perspective your collective contribution to date – and even more important will give you (especially him) an idea of the enormous set of challenges and work ahead of you in order to create even one dollar of value for your new company. Hopefully, if you have this conversation it may become more apparent that there is little value right now.

And if that doesn't work – then use a surefire way that will work… Set up a meeting with venture capitalist, or angel investor/group we both pitch and discussed the venture… You will get an even call the dose of reality about the value of the venture… And, I am certain, 100% validation of what I am writing here today.

(my answer comes from the unique perspective of having been a serial entrepreneur, venture capitalist, angel investor, and mentor and advisor to many startups)

answered Jul 6 '13 at 04:13
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Cj Cornell
471 points

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Equity Founders Agreement Dilution