How to split equity with a person you don't know well


4

I have a hobby/side project which I am quite serious about. I have been working on it for about ½ year, but have figured out I needed more people on board for it to become a success. I have found a good designer, but I don't know him that well, and I want to give him equity. I don't mind giving him a bit of equity, but is there a good way to give it during a period of time? I am concerned if he might quit the project after a few months, but would still have quite a bit of equity in the project. At the same time, he would like some assurence that he has part of the project.

Is there a good way to create a contract, which would make sure that he won't keep all the equity if he doesn't want to be on board anymore, or are there other ways to do this kind of contract?

Equity

asked Jun 28 '13 at 19:37
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Dofs
73 points
  • You want to use vesting in order to make sure your partners receive equity only if they are involved in your startup. See [this answer by Joel Spolsky](http://answers.onstartups.com/a/23326/12315) on a related question. – Matthew Perron Alexander 7 years ago

2 Answers


1

Standard way to address this is to incorporate a company and issue your partner shares that are subject to vesting (and issue yourself shares, of course).

Unvested shares are subject to unilateral repurchase by the company upon termination of the service provider relationship. You set up a vesting schedule that determines when shares vest (i.e. no longer subject to the company's right to repurchase).

A very typical schedule is 4-year monthly vesting with a 1-year cliff. This means that no shares will vest for the first year. After a year passes, 1/4 of the shares will vest. Thereafter, 1/48th of the shares will vest each month - so after 4 years, all the shares will be fully vested.

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answered Jul 2 '13 at 11:02
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Darby Wong
21 points

1

Consider looking at a dynamic equity split - where a relative value is assigned to the various contributions (past and future) for each participant. Time is one contribution. How it is valued is based on whatever metric you agree to (example: a senior developer will have more value than an intern).

Unlike a fixed percentage equity allocation+vesting, the dynamic model changes over time as additional contributions are made making it easy to add or subtract team members as needed. Because all values are relative, the model ensures fairness for all participants regardless of their contributions. Those who contribute the most will get the highest rewards.

This Techcrunch article goes into more details.

While this approach doesn't work in every case, it does address allocation issues early stage companies face... and can be used as a blueprint upon which one develops a fixed equity split once the company proves itself.

answered Jul 3 '13 at 04:44
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Jim Galley
9,952 points
  • Excellent, this might be a solution! Thanks. – Dofs 7 years ago

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