Quick question on equity split for a technical co-founder. I was approached by an ex-coworker whom I had great rapport with for joining his startup.
They currently have:
- An idea (It seems like a pretty solid idea. The idea originates from someone with direct working experience with the problem trying to be solved. So this gives me confidence. )
- No revenue
- No outside funding (I believe some things have been self-funded in the amount of maybe a few thousand dollars)
- No MVP
I am a sr. mobile engineer with full-stack capabilities and I have full confidence I could realize their MVP. I'd be coming on to the team with the most technical experience and perhaps the most important skillset for implementing the MVP.
Their first offer was 5%-10% equity without the title of a co-founder. After expressing my hesitancy toward that they have moved to 15% equity and co-founder title. I mentioned that I would be most comfortable with a split closer to equal, but I would pull the trigger on 25%. I would not be taking a paycheck.
Is this strange? They mentioned that their council told them that "cash is king" - in which the founder's existing and planned financial contributions outweigh my equity grant. Though I mentioned that I wouldn't be opposed to helping with financial contributions early on as well.
These seem like red-flags, but I honestly don't know. A big draw for me towards joining is just having some fun and getting the experience, but I want to look out for myself in the non-zero chance that the company becomes a financial success.
https://www.ycombinator.com/library/5x-how-to-split-equity-a...
It should be equal split.
An idea's worth is zero, it is the execution that matters.
Other way to look at it is if they are offering you 15% and keep 85% for them, without an mvp or revenue how are they justifying having 5.6 times more equity than you.
The only possible justification is the few thousand dollars that they have put in, you can either match that or maybe take slightly less equity to offset that amount based on the expected valuation.
But please do not settle for less than equal split, because you will be putting the same amount of effort in the execution of the idea.
It's also not ideal that the "technical" co-founder who's family is not advanced technically. You guys will need to sort out who's taking the lead technically, from an implementation and eventually hiring perspective.
5-10% is more in line with startups that have secured pre-seed funding and are coming in as employee, examples here: https://topstartups.io/startup-salary-equity-database/?team=...
I got pulled into situations like this twice and even with an MVP the idea guy couldn't sell what he claimed customers wanted.
(a) if they have substantially more experience or have a more valuable skillset. For example, prior to this role they could command a salary that was twice what you could make in the market.
(b) they have substantial traction already. Revenue, customers, funding, team momentum, etc.
Neither of these seem to be true. "I came up with the idea" is not enough to warrant a difference in equity.
Honestly, the fact that they didn't offer you co-founder and equal equity is the first flag. Working with his brother is the second flag.
Alternatively, consider how much you're risking earnings-wise. Assume some initial valuation ($1M?), then try to compare the estimated value of your stake to a market salary. For example, 25% of $1M = $250K, and four-year reverse vesting brings that to $62.5K/year. (If you plan to give investors preferred stock, it could be worth only 1/3 to 1/4 of that.) Hence 25% equity with no salary gives you at present moment less than a market salary. So you would need more than 25%, and it quickly becomes clear the fairest approach would be an ~equal split.
If you do join as a co-founder, make sure you are given equal access to the company documents. I would also insist on being part of the discussions with lawyers (at a minimum to verify everything is as promised). And ensure you all sign the official cap table, decide on board seats, etc.
Regarding "cash is king," as a co-founder they should be very transparent with you about their financial contributions. There are many ways to handle founder capital that don't involve depriving you of equity, e.g. loans or convertible notes. And finally if you don't trust your co-founders to be honest with you, you may not want to go into business with them.
Personally I think you should walk away anyway. The fact that they're trying to scam you with 5%-10% at this stage is a huge red flag in terms of culture and strategic knowledge. They either have no idea what they're doing, or they're actively trying to screw you, both of which are bad.
With regards to him putting in cash, agree a pre-funding equity split and valuation then adjust it for the cash investment shares amongst the co-founders.
I like what another poster said. If you earn $100k pa then that is roughly your market value and you ought to get equity equivalent in lieu of that. It’s a good way of making your case for 33%!! Ultimately only accept what you would feel happy with in 1-2 years time when the going gets tough and it’s hard and you feel down.
It also sounds like they haven't done any validation on the idea. An idea that sounds nice is worthless if there's no market for it.
From the short summary it sounds like two dudes are trying to find someone to build their idea because it will make them rich, there will be lots of conflicts with the founders, no sales, and a protracted fight at the end over who gets to keep the worthless IP, and you'll pay more in lawyer fees than the company ever made in revenue.
So you determine what work needs to be done and the value of doing it. If you do that, you get your shares. If people don't deliver, they lose their shares, and you can compensate new people with those shares or other founders can get compensated for doing that work too.
Monetary funding is separate from that. Putting in cash gets an instant percentage of the company. That's usually e.g. 20% of the company for putting up the cash, even though based on risk it should be more.
If they were just willing to give you 1/3 without negotiating I’d bet they would act the same the negotiating with VCs or customers and the biz would be a disaster!
Use the opportunity to level up and not think like an employee expecting everything to be handed to you on a plate.
I agree with the advice to agree all the parameters of how things will work including who leads and how things get done in all areas. Equity % is just one parameter in a multi variate equation.
They made known what they want. They want an employee, not a co-founder. Employee is fine, but they get paid $$$.
They want to have it both ways in their favor, at your expense.