I can't make the target closed beta release date alone and asked if my friend would help out. I told him we should come up with an equity split (even if it feels premature) that's favorable to both of us. It'll vest over 4 years with a 1 year cliff that kicks off when we get seed funding, when we both go full-time on it. He, being unfamiliar with startup investing and equity splits, told me to come to him with a split.
I'm struggling to do that. If I were to do the whole thing on my own, I wouldn't be able to launch by my target date without cutting significant features but I do have the skillset to do it. He has no background in the business side of things.
So, we're looking at a co-founder who:
- Will be working part-time (same as me) until seed funding
- Has a similar programming skillset (but more experience in production web app dev)
- No business background
- Coming into a project where the idea and release are mapped out, and 100k lines of code are written.
- FAANG background (same as me)
I want him to be motivated in case the beta goes well, but a 50/50 or 60/40 split seems unfair. To complicate it even more, the beta should be revenue-generating from day one, but of course who knows how well it'll perform. Could be a few hundred in revenue (10+ users), could be tens of thousands (200+ users).
I'm considering an 85/15 split with a 50/50 revenue split after expenses. Am I totally wrong?
Take that as a starting point and give yourself that share of the company as if you were a vested investor who had funded this round. Then take the rest of the company and divide it up based on your joint forward-looking labor.
Doing things this way can make it more clear who is being paid for what. It establishes parity in terms of how much work your both doing now, but it also gives you credit for the early investment of time and risk that you took on initially.
I suggest doing many of the online equity calculators just to get a few different perspectives. However, assuming he is being paid entirely in equity, 85/15 might be low. (This assumes someone who will go all-in alongside you, will contribute an equally substantial amount long-term, and that there is no "revenue split" -- not sure how that works exactly.)
One perspective you can take is based on assumed valuations. For example, say the company supposes an initial preferred stock valuation of $4M. Then, common stock might be valued at 30% of this -- $1.2M. You proposed the new co-founder might vest 15%/4 = 3.75%/year -- which would only be valued at $45K/year. Plus they have to deal with the one-year cliff risk of getting nothing, making it extremely risky for them overall.
Hence, assuming all of the above, an 85/15 split may be low. (In support of this is considering what % you'd have to give up to raise money for the work you've already accomplished, as another commenter noted.) Also consider that this is at the very beginning of the company and you may want to look moreso forward -- would their presence greatly increase the company's chance of success?
Whatever you decide, the key is to be completely honest and upfront with your potential co-founder so that you both completely understand the agreement and are satisfied with it!
If you want to get the best price, you'll need to have an alternative.
I'll re-iterate the previous comment. Whatever you propose should be a starting point for a larger conversation.
After all the only “fair” answer is based on how badly you need him and what he’ll accept based on a fair market value for his work.
So you should choose the amount of stake you think will be motivating for the whole team in the long run (including you as a leader of the team).
And even more important than this you should define exit/change strategies — what if tomorrow you would loose motivation, or new guy would find a critical pivot and would build new critical feature making all your 100k lines obsolete?