Now I wanted to bring my friend as a co-founder for a couple of reasons: 1. They have complimentary skills: hardware / PCB design. 2. I need a co-founder overall to improve productivity and need different inputs on many things.
The problems: 1. Currently my friend can only commit 1 full day per week. Future commit depends on how things go. 2. I started the project long before my friend started helping design the PCB. (about 2 years before). 3. The software work is far more than the hardware work in this project. 4. If I split the equity, say 10%, for my friend as co-founder given their commit level. What happens when they increase their commit level in the future, say to 50% or even full-time commitment after one year.
Note, my friend can also write software. I.e. he is not hardware-only guy but so far only did the hardware work in this project.
My question is: what are the recommended methods of equity split for my friend as a co-founder in this case?
Here are some points I collected so far:
1. Some say 50/50 split is good in general because it provides the sense of equality. 2. Some day 50/50 split is almost never good because it can cause deadlocks. 3. Almost everyone says vesting over years (4 years?) is good, and 1-year cliff is good. 4. I've read a book called "Slicing Pie handbook", but it seems to me it requires a lot overhead to get it right.
I was also wondering: is there some well-known method that is more dynamic than the fixed percent split, and also less dynamic / simpler than the "slicing pie" method?
Thanks!
The reason for this policy is that I've seen far too many companies go under because partners start fighting about things like who contributed more and so deserves the larger share. That's utter poison to a partnership (particularly if a partner is a friend, which is a whole danger zone all by itself) and business.
Better just to say "we split everything equally" to avoid fights in the future when circumstances change.
I am not suggesting this is the best way to handle it. It's just the way that I've arrived at, and it's worked very well for me for decades.
Being equal partners with someone but contributing five times as much work into the company as them is a recipe for disaster. You may not care all that much right now, but what about when you need to bring on an outside investor and dilute your own stake?
- The equity split is about incentivizing/rewarding you both for the work ahead, which is going to be much harder than anything thus far
- I would treat the 2 years as a sunk cost
- If you are true cofounders, 50/50 or 51/49 is the fair way to go
- Vesting diffuses the edge cases (either of you leave early, either of you turn out to be flakes), and is a necessity if you want to ever raise VC money
- It sounds like there is a question of him working only part time. In this case he should not get founder equity. Read the clerky docs as there can be severe drawbacks of granting significant amounts of equity post-founding
If your friend can’t work fulltime on your startup it might be worth hiring them as an employee or contractor with some equity comp to match their commitment to the startup.
If you do go with vesting you may need to set up vesting for yourself to show good faith. But since you’ve already made some progress and are working fulltime on it, it might make sense to agree with your friend on different initial amounts of equity and/or different vesting rates. You may need to ask a professional to figure out how to structure it. I feel like an optimally fair way would be to have your half be structured as vesting over 4y but with you starting with some equity proportionate to the current work you’ve put in, then have your friend’s half vest at a rate conditioned on how much time they can give at any given time such that at fulltime commitment it would vest in 4y (but the so the vesting rate would change if they quit their day job to work on the startup fulltime).
Honestly if I were in your position though I would start with having your friend contract and then bring them in as a founder later if they’re ready to do it fulltime. A lot of people like the idea of working on something like this but lose interest when faced with the reality of grunge work, no immediate success, etc.
You can pair it with something like https://mardukmethod.com to do all the tracking and set up the business.
I’ve had a 50/50 split that worked beautifully because we complemented each other in our roles, we were committed and there was trust (so even if the workload wasn’t always equal it didn’t create any resentment.)
But I look on that as the rare ideal exception, I think giving a 50 split to someone not willing to commit is a formula for possible future problems.
1. Like why can he only commit 1 full day per week, is it money, a bad time, he wants to see how the startup turns out before committing?
2. Do you have money to pay him?
3. Do you need him?
Situations you do want to be in.
1. Make him an insulting offer that sours your friendship
2. Company dies due to founder deadlock
3. Having a silent partner who didn't commit like you did
4. Be unable to raise money because he has 50% equity and isn't committed. Investors don't want to invest in a company a founder doesn't believe in enough to quit their job, and they don't want to invest in a company where 50% of equity is tied up.
Some general advice
1. Make sure he vests
2. If you give him 50/50 make sure there is a shotgun clause
3. Set a timelimit on when he has to join full time. (something like he needs to come work on the project full time with 365 days, and his vesting starts then. If he never makes the jump he doesn't get the equity. Basically he's working for the option to come on board if things work out)
4. I'd offer him the 50/50 split to quit his job and come work with you full time so he knows you value him as a partner.
5. I definitely would not give someone 50% of my company to work on it part time unless I absolute had to.
As to whether or not go all the way to 50% in total... kind of a different question... Obviously better for you to keep as much as you can in the pool and not give away, not even out of greed but to keep the options in the pool to afford more star hires in the future, for example. But it might create bad blood if the person really comes through and starts contributing.
> I've read a book called "Slicing Pie handbook", but it seems to me it requires a lot overhead to get it right.
Part of business IS bookkeeping. But I've found Slicing Pie to be fair in that it takes into account hours worked, hourly rates (and experience), and risk (already) put in, and it implicitly adjusts over time. If you can't be arsed to keep records, you might not be suited to run a business with people in it.
To begin minimally with slicing pie, start keeping track of hours/pay in a spreadsheet - it really doesn't take much. Then refer to the book for scenarios like people leaving, 'baking the pie'.
- it doesn't matter how much time you spent on it, look forward
- incorporate first, very cheap
- you will have to set up a vesting schedule for yourself
- you can use a calculator like this to inform you of the roles you'll have in the future https://foundrs.com/ (number doesn't matter, but look at the questions)
- you will have to set up a vesting schedule for him
- if you can acquire the hardware IP for the company, just do that (you will have to raise to do this - don't spend own money - but it will be hard without the IP in the first place, so maybe precommit to price)
- I have no faith in part-time founders. Among my network of people running venture-funded startups, 100% worked full-time on it from incorporation. People worked part-time, but you were either in at incorporation or not.
- in practice, what you have to give away in equity is replacement-cost
- in practice, you currently have a company worth 0 and every person you bring on should change the EV up.
- you can hire this person as an employee and then provide equity commensurate and then issue more for when they come on full time
Sorry, not entirely useful but hope what's there helps.
For point 1, it doesn't matter what they match skill wise if they are not putting in time.
You are better off as a strategic partnerships in separate startups.
https://www.ycombinator.com/library/5x-how-to-split-equity-a...
Now if your friend can’t commit right away, another option is to just buy their work and find another cofounder who is ready to go. Maybe something like 5% or 5k in 5 years, whichever is bigger. That’s just me spitballing though.
If you give 5% for example, there’s no reason you can’t give more in time based on increased input, but don’t give something you’ll regret in the future.
70/30 seems reasonable based on what you described.