Tech startup equity split question


First about my background: I have been programming and consulting for 15 years, with expertise in C#,, t-sql, Pl/sql, JavaScript, and to a lesser degree Java, Python, NodeJs etc... I would regularly write project costs, meet customers and all that jazz. Consultancy was something I enjoyed. Technically though, I can dip my finger into many languages and platforms and try to make decisions independently of technology stack.

I was approached a few weeks ago by someone with vast expertise in a particular niche. He has an idea he wants developed by technical partner and asked if I was interested. After an initial informal meeting, I was interested, as I firmly believe this could have global reach and I would enjoy the challenge. We met three times after that to have technical requirement discussions, just so I could get a grasp of what we are trying to achieve, and so I could digest the information to allow me get going on prototype development. In the space of 6 weeks, I have started development in my "spare time" (I am now wrecked actually... I work a 40 hour week, so doing an additional 10-15 hours around that has caught up with me), although much of this was proof of concept and I plan on tearing it up and starting again with a more structured approach now that I know where I'm going. I have spent around $2000 of my own money, although I will be compensated for this.

After our second meeting, the founder envisaged me getting a 25-30% equity stake. He would maintain control, somewhere around the 60% mark. The remainder would be allocated to either him, or, to another person to come on board in the beginning to assist with the business plan, projections, grant applications and possible VC application.

I have decided to commit to this. I am willing to quit my relatively ok paying job, and go full time. I realise the scale of what's required so there is no other way to get this developed.

The 3rd person was introduced into the fold last week. He is an accountant running his own practice. He has been successful before in assisting startups get grants and other funding, although I am unsure of the extent of the funding he acquired. The accountant, or provisional "CFO", and the Founder, have a normal business relationship, get on well, seem like friends, although I wouldn't describe them as close friends that go way back. They just get on well.

A meeting was held last week to discuss company vision, willingness of individuals to commit, estimated weekly hours input, full time/part time, express any worries, etc. The Founder went first... all went well. He gave his presentation, lasted about an hour. He pitched for a 55% equity stake. Lower than I expected...

I went next... gave my speel. I pitched for 30%, but willing to go to 25%.

Note that equity was not dwelled upon at this point of presentations.

By the time the possible CFO gave his presentation, I was falling asleep. We were over 3 hours into the meeting. His proposal was 52% for Founder, with 24% and 24% to me and him. Like a complete idiot, I said I was fine with that.

Nothing was signed, no hands were shook, but the implication was that this was the way things would be.

Roll on the following day. I started to have a terrible feeling about this for a few key reasons:

  • The Founder's equity is too low. If we have an invester and he forfeits equity, he loses control. In a scenario where an investor buys in for 10%, this will essentially mean dilution of either mine or the CFO's stake if the Founder is to maintain control (which I think he should).
  • I am willing to go all-in. The CFO will maintain his practice. He will however assist with writing business plan, Financial projections, apply for grants, sort out our relevant tax affairs and form filing etc. This work would be done for no salary. I am willing to risk everything. I will be taking a 35% pay cut until such time that the funds exist to pay me market rates. The Founder will invest the initial funds to cover my salary.
  • Let's say in year 3, things go to plan, and we hit decent numbers, and there is profit sharing. Is it equitable to say that the part-time CFO gets the same profit share as the CTO (i.e. Me. Product developer.)? I know I'll be on a salary, but I think the risk I am taking on is incomparable to someone who is taking no risk during the riskiest phase of any start-up.

Also, the Founder could be leaving himself open to serious dilemmas down the road when he sees the real input required from him and Me. The plan is I go fulltime 4 months ahead of him. He will quit when his existing day job contract is finished.

Put simply, I think he has been way too generous with the CFO.

I have seen It threw back an estimated split of 64%, 31% (me), and 5% (CFO). This was much closer to the kind of thing I had in mind.

I think I'll be an angry chap in 3 years if this makes the money I think it will. I also think the Founder will regret his early generosity with the CFO, and I think could be a very expensive mistake.

Really appreciate it if you read this far. Opinions would be hugely welcome. I would really like to know what I should do to raise this without burning bridges. I'm all for fairness. But Logic has to prevail here.

Thank you.

Getting Started Incorporation Risk Equity

asked Oct 31 '13 at 22:25
Beer Drinker
13 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • I wrote the co-founder equity calculator you used, and based on your description I agree with its results. Don't take a bad deal, you will regret it later and will have wasted a lot of your time. – Alain Raynaud 9 years ago
  • Great work Alain, and thank you for the reply. The update is that the "part-time CFO" is out, and I settled for 32, and the main founder will take 68. 65/35 would have been perfect, but I can settle for this. Thanks again – Beer Drinker 9 years ago

1 Answer


There are no hard and fast rules for this, so it's difficult to answer except with general advice. As you've already found, the perception of fairness is paramount. The percentage of equity one way or another will not kill the company, but bitterness and conflict could do so easily. It sounds like you may not have read Joel Spolsky's excellent post on the topic. Apologies if you have, but here it is anyway: Forming a new software startup, how do I allocate ownership fairly? Addressing some of your concerns:

  • Control does not need to be entirely with the original founder. As long as the founding team is still in control rather than the investors, then you should not have much of a problem. What are you envisaging could go wrong? Having non-diluting stock for the founder may put investors off. It may also put you off and worsen the sense of unfairness.
  • Vesting over time can mitigate the issues that will arise if one person does not pull their weight e.g. by not quitting their full time job. You can then have a discussion about whether they should still be involved, without them having the option of leaving with a huge chunk of the company already in their possession.
  • Have an agreement in writing that allows equity to be bought back at a fair value if one person later leaves. This is pretty standard, it seems and can allow forced buy-back under certain circumstances.
  • Bear in mind that value, risk and time are not always the same thing. How replaceable is everyone? Could they just get another developer and replace you? How about replacing the CFO? What's the worst that could happen to each person if the company folds?

One way to solve this is to say that everyone should have an equal share regardless (with vesting of course) and to review things regularly. This is recommended in the beermat entrepreneur as well as by a few other people I've read, such as Joel. Bear in mind that this might change how committed each person is as the CFO may feel that a larger share (to be lost if he doesn't fully commit) is worth putting in more time for. It may also dampen any egotism by the original founder.

Hope at least some of that helps. Good luck with your venture!

answered Nov 1 '13 at 00:42
Matt Gibson
318 points
  • Great answer. It looks like the CFO would be taking zero risk so I'd pay attention to the comment regarding **What if one of the founders doesn't work full time on the company?** in Joel's answer. – Gdoming 9 years ago
  • Matt: thanks a lot. I can suggest vesting. I read Joel's post, and it addresses almost all of my concerns. It's just a pity I didn't read it before **that** meeting. gdoming: you nailed it. I take great issue with the idea of a "part-time co-founder" in a different day job. This is gut wrenching for me, and it will become apparent within the first month that it is a highly inequitable situation... bordering on nonsense if I am being honest. – Beer Drinker 9 years ago

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