7 ms·

Splitting Equity Among Founders

61 points by tilt 11y ago

cperciva 11y ago
While the conclusion -- co-founders should get equal shares -- seems generally reasonable to me, in a sense it's just punting the question. In the following cases I started working n months before my co-founder I started working full time n months before my co-founder I brought on my co-founder after raising n thousands of dollars I brought on my co-founder after launching my MVP how do you decide if a company has two co-founders or one founder and one early employee?
- tptacek 11y ago
  If you start working 6 months before your cofounder, the simplest thing to do is just to give everyone equal shares and the same vesting schedule, but if you want to be tricky about it (you shouldn't), just set the earlier founder's vesting schedule forward a bit. My take is that there's no such thing as a part-time founder, but if you really want to allow someone to be a founder while they have a full-time job elsewhere, just do the opposite thing: don't start their vesting until they're full time. If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee. Launching your MVP shouldn't have much to do with whether someone is or isn't a co-founder. If your MVP is fabulously successful and de-risks the project, don't bring on a co-founder; bring on an early employee. If it isn't successful, ignore it in equity calculations.
  - exelius 11y ago
    > If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee. I disagree; not everyone who's qualified to be a founder is able to forego salary. It's a big problem right now; otherwise awesome prospective founders have to be lured away from $150-200k/yr jobs - and that's really hard if your salary offer is $0. It's a lot easier if you're offering $100k - it's not their market value, but it also allows them to more or less maintain their lifestyle.
    - tptacek 11y ago
      "Founder" isn't a qualification. It's a super-common trap to think that it is; thinking that implies that you can see into the future and map someone's resume to their impact on the company. You can do that only in the vaguest possible terms. Joel Spolsky covered all of this in his guide to equity, which is like a more detailed version of Siebel's post. If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue.
      - cperciva 11y ago
        If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue. Would you allow co-founders to invest in their own company on the same terms as angel investors? If no, why not? If yes, how is this not equivalent to giving the salary-taking co-founder less equity?
        tptacek 11y ago
        So I'm writing a lot here because I'm procrastinating finishing a fake Phrack article I'm publishing later today to announce the Starfighter CTF, and we should get opinions from other people besides me. But having said that: it's probably situational. If all the cofounders have roughly equivalent finances, maybe that's OK. But if some of them have, for instance, just sold a company, and the others are doing their first no-salary startup, it doesn't seem fair to allow the better-off ones to buy additional influence. I'm using "fair" here as a shorthand for "things that will damage the incredibly valuable cofounder relationship more than it's worth".
        cperciva 11y ago
        it doesn't seem fair to allow the better-off ones to buy additional influence This sounds like an argument for multiple share classes. Founders not taking a salary get extra shares, but they're non-voting shares, perhaps?
      - 11y ago
- nostrademons 11y ago
  Have the people you meet at parties or networking events heard of your company yet? If not, it's two co-founders. Pithy sayings aside, the point of the article is to be forward-looking with equity splits. All of the reasons you list are rearward-looking: they're about things that have happened in the past. The article assumes that you want your company to be much bigger in the future and that most of the work is ahead of you, which is generally YC's investment thesis. If you're happy where you are, you could easily substitute employees for founders, but they will never be as motivated as someone with a big equity stake.
- exelius 11y ago
  IMO the distinction between "founder" and any executive-level hire before your B round are largely meaningless. You should know pretty early on what roles your core leadership team needs to have. You should set aside equity for those roles as if they were founders -- especially for senior people, who are often giving up a lot in salary to work for a startup. You're obviously not going to give founder equity to a CS grad fresh out of college, but maybe you should for say, your head of customer relations (if customer service is a strategic driver for you, of course). You should especially give founder equity to anyone whose job is to establish a department from nothing. And does it really matter in the end anyway? If your company fails, your equity is worth $0 no matter how much you have. If your company is the next Google, then you're all going to be so rich it won't matter. But I would much rather have leadership who is heavily invested in the success of the company than someone who is just going to bolt to start his own company after 2 years because its obvious he's not going to get a million-dollar payday. That said, you still have to protect your equity (liquidation preferences, vesting schedules, etc). But the focus on one founder or another's role is usually meaningless: your leadership team works as a team. If you have weak links, it should be easy to get consensus around a buyout or contract renegotiation.
  - tptacek 11y ago
    This is contrary to my own experience. Executives hired after an A round but before a B round can have wildly different incentives than a true owner does.
    - exelius 11y ago
      If you set the vesting schedule properly, they shouldn't. But given how easy it still is to get A round money, and how most of the work of building a competitive advantage happens between A and C rounds, IMO you have to compensate them like founders if you expect them to build your company.
  - cperciva 11y ago
    If your company fails, your equity is worth $0 no matter how much you have. If your company is the next Google, then you're all going to be so rich it won't matter. You sound like a VC. While some investors might not care about any exit smaller than Google, let me assure you that there are plenty of companies which are worth more than $0 but less than $23B; if a company is acquired for $5M, there's a big difference between owning 5% and owning 50%.
- angersock 11y ago
  Did the second person get meaningful equity? If so, they're not an early employee. /snark
- brudgers 11y ago
  In the context of startups that flow through YC, all founders are employees. The startups are Delaware C Corporations. Corporations are required to pay the people who work at them at least the statutory minimum wage. There's no exemption for owners. And there's significant liability for a company that skirts the law and later becomes successful [for some definition of "successful"]. To put it another way, all those items may matter for a small business organized in another way. But a C-corp is legally a "person" separate from it's owners, officers, and employees.
- patio11 11y ago
  Employees get a reasonable fascimile of a market salary and the perks commonly afforded employees in your region/industry with probability equivalent to the sun rising in the morning, as of day one, for every payroll period until they're formally separated from the company. If this describes someone's situation, they're an employee. If not, they're probably a co-founder (or being horrifically exploited).
elliotoco 11y ago
How about being a solo founder? What argument(s) would you put forth to dissuade someone from doing that?
- tptacek 11y ago
  This has been talked to death on HN already: https://hn.algolia.com/?query=solo%20founder&sort=byPopularity&prefix&page=0&dateRange=all&type=story https://hn.algolia.com/?query=solo%20founder&sort=byPopulari...
tptacek 11y ago
This is the only way I'd ever consider doing a startup again. It's important that you get both parts right: the equal split and the vesting schedule. Run, don't walk, from startup teams that want to operate without vesting.
- brianwawok 11y ago
  You think 1 year cliff is always right? I think a cliff can be an easy path to abuse.
  - tptacek 11y ago
    Yes. If you can't trust your team not to abuse the vesting cliff, you can't trust them to be cofounders. It is hard to imagine a scenario with a normal (<=4) number of cofounders where it is reasonable to let someone who spends less than a year on the project to walk away with as much as 6% of the company. Having just wrapped up a 10 year company, it is honestly hard to imagine it being fair for that person to walk away with 1%.
    - brianwawok 11y ago
      I would say the reverse of that is also true. If you can't trust someone to not abuse not having a cliff, you can't trust them enough to be cofounders. Especially if a cofounder is putting sweat or cash equity in, he absolutely should not have a cliff of any kind.
      - tptacek 11y ago
        Speaking as a founder who is putting both sweat and cash equity into their company: run, don't walk, from cofounders that demand not to have a cliff. You might not end up regretting giving someone a pass on their vesting cliff, but if you do regret it, you will regret it a lot. If you're part of a founding team and you put cash in, get IOUs, and take cash back out later.
    - shostack 11y ago
runesoerensen 11y ago
Also submitted here: https://news.ycombinator.com/item?id=10665306 https://news.ycombinator.com/item?id=10665306 https://news.ycombinator.com/item?id=10665034 https://news.ycombinator.com/item?id=10665034 Should probably be merged, and themacro.com might benefit from redirecting to the canonical URL :-)
- dang 11y ago
  We merged them. Sorry your earlier submission lost out. We're working on an approach to duplicates that will make it less of a lottery.
  - runesoerensen 11y ago
    Ok great, and no worries :-)
humbertomn 11y ago
The text could include more info on vesting schedules and some examples. It's surprising how many professionals still never heard of vesting schedules when joining a startup (specially outside the US), and as influential as YC is, I bet a good explanation there would be very helpful. "Vesting or no company at all :)"
- tptacek 11y ago
  Your lawyer is going to set up your vesting schedule for you, so all you really need to know is "four year vesting, one year cliff, vesting monthly after the cliff".
- mosquito242 11y ago
  Two potentially helpful resources to share that might help explain Vesting Schedules to folks: https://capyx.com/cap-table-guide#vesting https://capyx.com/cap-table-guide#vesting https://capyx.com/vesting-calculator https://capyx.com/vesting-calculator Full Disclosure - I am a co-founder of Capyx.
jsprogrammer 11y ago
Dump the word founder. If it takes seven years to build a company, then after seven years any employee is also a founder and should have equal share. Please use the reply link, oh, wandering downmodders.
- rday 11y ago
  I didn't -1, but it may be due to the article being focused on co-founder splits and not employees.
  - jsprogrammer 11y ago
    Sure, maybe some can't yet take on the logical implications of such an argument.
- nostrademons 11y ago
  Also didn't -1, although I did downvote your personal snark toward rday's response. There have been a number of recent posts moving in this direction, where prominent investors have argued that the line between founder and early employee is blurrier than most people think it is, and so employees should get more equity than they currently do, with fewer restrictions. See eg: http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity http://blog.detour.com/introducing-progressive-equity/ http://blog.detour.com/introducing-progressive-equity/ The current founder/employee divide is largely a relic of the days where, to build a tech startup, first you had to convince a bunch of investors to give you $10M and then you hired a team with that. In that system, the founders were the ones who convinced the investors, and the employees were the ones who were hired with investor money. But capital requirements for startups have gone way down since then. Now, the logical divide is before vs. after product/market fit. If you join BPMF, you're a founder - sometimes (oftentimes?) the title and equity don't go along with that, but that's because there are a lot of suckers out there who don't actually know how the startup game works. If you join APMF, you're an employee. After all, a founder's entire job is to identify an unmet need in the marketplace and devise a strategy for solving it, and until you get PMF you haven't really done that. The complication is that startups BPMF shouldn't be hiring at all, but few of them realize that, and even fewer of them can check their egos enough to realize that having people do your bidding won't actually help you find a viable business model faster, it just makes pivoting more difficult. There've been tweets from Sam Altman [1], comments from Paul Buchheit [2], essays from Paul Graham [3 - "If you went out and hired 15 people before you even knew what you were building, you've created a broken company."], and video interviews with Marc Andreesen that all say that, but still, a seemingly large fraction of entrepreneurs don't listen. [1] https://twitter.com/sama/status/667852581968805888 https://twitter.com/sama/status/667852581968805888 [2] https://news.ycombinator.com/item?id=8720304 https://news.ycombinator.com/item?id=8720304 [3] http://www.paulgraham.com/pinch.html http://www.paulgraham.com/pinch.html
purplerabbit 11y ago
What if one founder supplies the idea, but has no technical or business ability? What cut would that be worth?
- zxcvvcxz 11y ago
  Then you shouldn't be working with them...
  - seansmccullough 11y ago
    Ya, they aren't adding any value. Anyone can just come up with an idea.
- danieltillett 11y ago
  Like anything it depends on how good the idea is. Some ideas are not worth much, while others are worth lots.
- logfromblammo 11y ago
  They get a participation trophy at the annual awards ceremony.
- patio11 11y ago
  Scintillating conversations are worth buying the dinner you have them over. Shares get issued for doing lots of work for a period of years. Founders with quote no business or technical ability endquote who nonetheless are capable of value-producing work exist [+]; people who do not actually do work create no meaningful value and are not founders. [+] Startups are basically all about people who are theoretically "unqualified" to do things repeatedly doing things they are unqualified to do.
gsibble 11y ago
I think part of the confusion here is what determines the difference between a founder and an employee. Are there two founders? Three? Five? Seven? When did they all start working? Are they all working full time? Are they all taking a salary? Not to mention that you can't just grant equity out of thin air once a company has been founded. There are tax implications, especially after you've raised money. I can't imagine telling an investor that they're going to get significantly diluted because I have a new founder that needs 20% of the company because "all founders get the same share". If you were all there together at the inception of the company and all agree to work fulltime on the project and can contribute equally than it makes sense to split up the equity equally. But just saying "everyone should get the same share" seems to simplify things a bit much.
- tptacek 11y ago
  As you say, the simple (and common) case is that everyone starts working in earnest on the company at roughly the same time, and equity split is a no-brainer. A very common set of cases that is only slightly more complicated than this is the one where everyone in reality has started working in earnest on the company at approximately the same time, but for whatever reason, one of the team members feels that some work they did prior to starting the company with their partners also counts as "earnest work". Most of the point of this article is that you shouldn't complicate your company by accepting that argument; you will regret it down the road. The next most common set of cases is that "cofounder" status is used as a recruiting tool. The company really wants to work with a particular person, but that person doesn't want an employee role. This can happen months or even years after the company has been founded. The simple answer here is that a cofounder is whoever the existing cofounders say is one. I personally think you're better off keeping things simple: if you call someone a cofounder, give them an equal share of the equity. If the road ahead doesn't have enough opportunity for a new cofounder to contribute so much that they'll earn the share, don't call them a cofounder. After that, you're on your own.
natmaster 11y ago
The big takeaway for me is the last sentence, "If you aren’t willing to give your partner an equal share, then perhaps you are choosing the wrong partner."
colmvp 11y ago
I've personally never worked with an engineer who thought that I as a person who would do UI/UX/front-end code deserved equal amount of equity as him as the other co-founder (backend engineer). And in all fairness, you can execute a shitty looking designed product with functionally that works and gains traction.
- exelius 11y ago
  Sucks to be them; UI/UX guys are way more in-demand than back-end developers. The skill set is also way closer to the up-front product design that makes/breaks your company than back-end work is.
  - dennisgorelik 11y ago
    Different skills are valued differently for different startups. For Google - backend skills were way more important than UI. For Instagram - UI/UX.
- tptacek 11y ago
  Don't start companies with people who think any part of equity allocation should come from which programming languages which founders work with.
lmartel 11y ago
My favorite solution to the "I started n months before my cofounders" problem is to write an IOU from the company to the person for the work they've already done at some significant but less-than-1 fraction of their typical monthly rate, say 50% or 70%. This allows the founding team to acknowledge the extra work without creating an uneven equity split.
- tptacek 11y ago
  Yuck, what a mess. My monthly rate is absurdly high, because for the last 10 years I've chosen to work primarily for companies that will get a lot of value out of working with me. The fact that I've done security work for big financial firms doesn't mean my work is that valuable to the startup relative to what all the other founders are getting, but my resume anchors my rate there. If you're finding it important to draw these kinds of lines between founding team members, that's a sign that you might not have the right founding team members. A founding team that "clicks" and works together is incredibly valuable, probably far more valuable than any year's worth of billing you've ever done. Don't mess it up with stuff like this; it's just not worth it. Man, I am even more procrastinatey than normal today.
jdoliner 11y ago
Regarding: "I started working n months before my co-founder" A really good way to handle this is with vesting, which is something every company should have. Normally stock vests as you spend more time at the company, in my opinion it's totally fair for cofounders to have equal stock allocations but if one founder was working for 6 months before the other joined they should be 6 months ahead on their vesting.
- brudgers 11y ago
  My concern is that an accelerated vesting schedule for one founder versus the other only matters in one particular case and that case is a bad one: the founder with accelerated equity decides to cease working and become a passive owner. In any other circumstance, the "earlier" founder and the "later" founder have aligned interests in regard to equity independent of vesting schedule. An "earlier" founder insistent on more aggressive vesting may be symptomatic of an underlying poor relationship. That's not to say that there couldn't be circumstances in which two founders naturally have different vesting schedules, e.g. the "earlier" founder incorporated the final entity prior to the "later" founder's involvement. But from a formal standpoint, if both founders are there the day of incorporation, then that's where the clock starts.
danieltillett 11y ago
One thing I don't understand is if a startup is a 10 year journey why vesting is a 4 year journey? Is there some tax reason for this?
- tptacek 11y ago
  It's just a norm. Companies sometimes make additional retention grants to fully vested employees.
  - danieltillett 11y ago
    Well it is a norm that does not seem that logical. If you want the founders to be in it for the long haul then it would make more sense to have a vesting period over a longer time.
maxcan 11y ago
> My co-founder took a salary for n months and I didn’t This shouldn't be ignored however. If one founder has more immediate liquidity needs than the other, the non-salary-taking founder should receive some compensatory benefit for leaving cash in the company. The way that I like to resolve this is for the non-taking founder to essentially be paid in convertible notes or some other form of equity for the salary that they are giving up. In other words, founders split the initial equity pie equally, but then have the option of receiving cash, notes, or some mixture. If I can figure out how to make interpolated equity work from a tax perspective, that would be the optimal solution. https://medium.com/this-time-is-different/interpolated-equity-12ddebcc63ef https://medium.com/this-time-is-different/interpolated-equit...
- tptacek 11y ago
  Don't use equity to pay back cash from founders. Just use IOUs. Like Joel Spolsky says: don't resolve problems between founders with shares.
  - maxcan 11y ago
    promissory notes work too. The problem that I have is that because of the credit risk in getting paid back, unless there is a very high interest rate, they massively undervalue the investment on forgone salary. If there is a high interest rate, institutional investors get pissed off.
billcao 11y ago
"After the one year point you get 25% of your stock. Every month after that you get an additional 1/36th of your total stock." Shouldn't 1/36th be 1/48th? Because 25% has already been vested at the 1 year mark, i.e. 36*(1/48) + 25% = 1 = total stock.
tshiran 11y ago
Unless there's a really good reason to not split it equal, I think it's better if both founders have the same amount of equity. Otherwise you could create unnecessary tension which is the last thing you want at that early stage.
logfromblammo 11y ago
The two infographic images attached to the article completely failed to elucidate. Two red dots, and some blue and green squares, followed by a blue and green pie chart. This is followed by the same two red dots with more blue squares. It sort of reminds me of the occasional articles you see about particularly egregious elementary school support materials. If Suzie muttonates half her mickmackles, how many glomploots will Bobby need for the spimbliz? Wakalixes make it go! The point was that you shouldn't divvy up equity based on work already completed, because that split does not represent the division of labor in the work that is still necessary to get to a viable product. Here's how I would illustrate that: Image 1: A person in a red shirt holds a red apple. A person in a green shirt holds a green apple. Image 2: A bushel basket holds 18 red apples and 2 green apples. Image 3: An apple-pie chart made from the very first bushel represents an equity split of 90% to redguy and 10% to greenguy. Image 4: A wider shot of their orchard shows two trees with red apples on it, and 8 trees with green apples, still to be harvested.
tzm 11y ago
I co-founded a company with a small team that struggled with calculating equity splits. It was a painful process that involved a Google spreadsheet, a list of individual contributions, personal experience, impact and job function. Weights were applied. The intent was to determine an objective calculation of each founder's equity position. The process exposed some serious flaws, insecurities and heated discussions around the general efficacy of such an experiment. It felt petty and rather naive. I left the team out of principle, but helped close the round and became an advisor. My general rule is start at equal positions and apply reasonable adjustments based on hard contributions (ie, financial, etc). Building a company is a process that will be redefined as you go. However, the team dynamic shouldn't. If the team cannot grasp this concept, then leave.

61 points by tilt 11y ago

While the conclusion -- co-founders should get equal shares -- seems generally reasonable to me, in a sense it's just punting the question. In the following cases I started working n months before my co-founder I started working full time n months before my co-founder I brought on my co-founder after raising n thousands of dollars I brought on my co-founder after launching my MVP how do you decide if a company has two co-founders or one founder and one early employee?

tptacek 11y ago
If you start working 6 months before your cofounder, the simplest thing to do is just to give everyone equal shares and the same vesting schedule, but if you want to be tricky about it (you shouldn't), just set the earlier founder's vesting schedule forward a bit. My take is that there's no such thing as a part-time founder, but if you really want to allow someone to be a founder while they have a full-time job elsewhere, just do the opposite thing: don't start their vesting until they're full time. If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee. Launching your MVP shouldn't have much to do with whether someone is or isn't a co-founder. If your MVP is fabulously successful and de-risks the project, don't bring on a co-founder; bring on an early employee. If it isn't successful, ignore it in equity calculations.
- exelius 11y ago
  > If you raise more than a full-time salary's worth of money, and that money is used to make a payroll that pays a prospective "co-founder", they aren't a co-founder. Treat them like an early employee. I disagree; not everyone who's qualified to be a founder is able to forego salary. It's a big problem right now; otherwise awesome prospective founders have to be lured away from $150-200k/yr jobs - and that's really hard if your salary offer is $0. It's a lot easier if you're offering $100k - it's not their market value, but it also allows them to more or less maintain their lifestyle.
  - tptacek 11y ago
    "Founder" isn't a qualification. It's a super-common trap to think that it is; thinking that implies that you can see into the future and map someone's resume to their impact on the company. You can do that only in the vaguest possible terms. Joel Spolsky covered all of this in his guide to equity, which is like a more detailed version of Siebel's post. If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue.
    - cperciva 11y ago
      If you have to give one co-founder living expenses, give the other co-founders IOUs for the same money when you get funded or start taking in revenue. Would you allow co-founders to invest in their own company on the same terms as angel investors? If no, why not? If yes, how is this not equivalent to giving the salary-taking co-founder less equity?
      - tptacek 11y ago
        So I'm writing a lot here because I'm procrastinating finishing a fake Phrack article I'm publishing later today to announce the Starfighter CTF, and we should get opinions from other people besides me. But having said that: it's probably situational. If all the cofounders have roughly equivalent finances, maybe that's OK. But if some of them have, for instance, just sold a company, and the others are doing their first no-salary startup, it doesn't seem fair to allow the better-off ones to buy additional influence. I'm using "fair" here as a shorthand for "things that will damage the incredibly valuable cofounder relationship more than it's worth".
        cperciva 11y ago
        it doesn't seem fair to allow the better-off ones to buy additional influence This sounds like an argument for multiple share classes. Founders not taking a salary get extra shares, but they're non-voting shares, perhaps?
    - 11y ago
nostrademons 11y ago
Have the people you meet at parties or networking events heard of your company yet? If not, it's two co-founders. Pithy sayings aside, the point of the article is to be forward-looking with equity splits. All of the reasons you list are rearward-looking: they're about things that have happened in the past. The article assumes that you want your company to be much bigger in the future and that most of the work is ahead of you, which is generally YC's investment thesis. If you're happy where you are, you could easily substitute employees for founders, but they will never be as motivated as someone with a big equity stake.
exelius 11y ago
IMO the distinction between "founder" and any executive-level hire before your B round are largely meaningless. You should know pretty early on what roles your core leadership team needs to have. You should set aside equity for those roles as if they were founders -- especially for senior people, who are often giving up a lot in salary to work for a startup. You're obviously not going to give founder equity to a CS grad fresh out of college, but maybe you should for say, your head of customer relations (if customer service is a strategic driver for you, of course). You should especially give founder equity to anyone whose job is to establish a department from nothing. And does it really matter in the end anyway? If your company fails, your equity is worth $0 no matter how much you have. If your company is the next Google, then you're all going to be so rich it won't matter. But I would much rather have leadership who is heavily invested in the success of the company than someone who is just going to bolt to start his own company after 2 years because its obvious he's not going to get a million-dollar payday. That said, you still have to protect your equity (liquidation preferences, vesting schedules, etc). But the focus on one founder or another's role is usually meaningless: your leadership team works as a team. If you have weak links, it should be easy to get consensus around a buyout or contract renegotiation.
- tptacek 11y ago
  This is contrary to my own experience. Executives hired after an A round but before a B round can have wildly different incentives than a true owner does.
  - exelius 11y ago
    If you set the vesting schedule properly, they shouldn't. But given how easy it still is to get A round money, and how most of the work of building a competitive advantage happens between A and C rounds, IMO you have to compensate them like founders if you expect them to build your company.
- cperciva 11y ago
  If your company fails, your equity is worth $0 no matter how much you have. If your company is the next Google, then you're all going to be so rich it won't matter. You sound like a VC. While some investors might not care about any exit smaller than Google, let me assure you that there are plenty of companies which are worth more than $0 but less than $23B; if a company is acquired for $5M, there's a big difference between owning 5% and owning 50%.
angersock 11y ago
Did the second person get meaningful equity? If so, they're not an early employee. /snark
brudgers 11y ago
In the context of startups that flow through YC, all founders are employees. The startups are Delaware C Corporations. Corporations are required to pay the people who work at them at least the statutory minimum wage. There's no exemption for owners. And there's significant liability for a company that skirts the law and later becomes successful [for some definition of "successful"]. To put it another way, all those items may matter for a small business organized in another way. But a C-corp is legally a "person" separate from it's owners, officers, and employees.
patio11 11y ago
Employees get a reasonable fascimile of a market salary and the perks commonly afforded employees in your region/industry with probability equivalent to the sun rising in the morning, as of day one, for every payroll period until they're formally separated from the company. If this describes someone's situation, they're an employee. If not, they're probably a co-founder (or being horrifically exploited).

elliotoco 11y ago

How about being a solo founder? What argument(s) would you put forth to dissuade someone from doing that?

tptacek 11y ago
This has been talked to death on HN already: https://hn.algolia.com/?query=solo%20founder&sort=byPopularity&prefix&page=0&dateRange=all&type=story https://hn.algolia.com/?query=solo%20founder&sort=byPopulari...

tptacek 11y ago

This is the only way I'd ever consider doing a startup again. It's important that you get both parts right: the equal split and the vesting schedule. Run, don't walk, from startup teams that want to operate without vesting.

brianwawok 11y ago
You think 1 year cliff is always right? I think a cliff can be an easy path to abuse.
- tptacek 11y ago
  Yes. If you can't trust your team not to abuse the vesting cliff, you can't trust them to be cofounders. It is hard to imagine a scenario with a normal (<=4) number of cofounders where it is reasonable to let someone who spends less than a year on the project to walk away with as much as 6% of the company. Having just wrapped up a 10 year company, it is honestly hard to imagine it being fair for that person to walk away with 1%.
  - brianwawok 11y ago
    I would say the reverse of that is also true. If you can't trust someone to not abuse not having a cliff, you can't trust them enough to be cofounders. Especially if a cofounder is putting sweat or cash equity in, he absolutely should not have a cliff of any kind.
    - tptacek 11y ago
      Speaking as a founder who is putting both sweat and cash equity into their company: run, don't walk, from cofounders that demand not to have a cliff. You might not end up regretting giving someone a pass on their vesting cliff, but if you do regret it, you will regret it a lot. If you're part of a founding team and you put cash in, get IOUs, and take cash back out later.
  - shostack 11y ago

runesoerensen 11y ago

Also submitted here: https://news.ycombinator.com/item?id=10665306 https://news.ycombinator.com/item?id=10665306 https://news.ycombinator.com/item?id=10665034 https://news.ycombinator.com/item?id=10665034 Should probably be merged, and themacro.com might benefit from redirecting to the canonical URL :-)

dang 11y ago
We merged them. Sorry your earlier submission lost out. We're working on an approach to duplicates that will make it less of a lottery.
- runesoerensen 11y ago
  Ok great, and no worries :-)

humbertomn 11y ago

The text could include more info on vesting schedules and some examples. It's surprising how many professionals still never heard of vesting schedules when joining a startup (specially outside the US), and as influential as YC is, I bet a good explanation there would be very helpful. "Vesting or no company at all :)"

tptacek 11y ago
Your lawyer is going to set up your vesting schedule for you, so all you really need to know is "four year vesting, one year cliff, vesting monthly after the cliff".
mosquito242 11y ago
Two potentially helpful resources to share that might help explain Vesting Schedules to folks: https://capyx.com/cap-table-guide#vesting https://capyx.com/cap-table-guide#vesting https://capyx.com/vesting-calculator https://capyx.com/vesting-calculator Full Disclosure - I am a co-founder of Capyx.

jsprogrammer 11y ago

Dump the word founder. If it takes seven years to build a company, then after seven years any employee is also a founder and should have equal share. Please use the reply link, oh, wandering downmodders.

rday 11y ago
I didn't -1, but it may be due to the article being focused on co-founder splits and not employees.
- jsprogrammer 11y ago
  Sure, maybe some can't yet take on the logical implications of such an argument.
nostrademons 11y ago
Also didn't -1, although I did downvote your personal snark toward rday's response. There have been a number of recent posts moving in this direction, where prominent investors have argued that the line between founder and early employee is blurrier than most people think it is, and so employees should get more equity than they currently do, with fewer restrictions. See eg: http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity http://blog.detour.com/introducing-progressive-equity/ http://blog.detour.com/introducing-progressive-equity/ The current founder/employee divide is largely a relic of the days where, to build a tech startup, first you had to convince a bunch of investors to give you $10M and then you hired a team with that. In that system, the founders were the ones who convinced the investors, and the employees were the ones who were hired with investor money. But capital requirements for startups have gone way down since then. Now, the logical divide is before vs. after product/market fit. If you join BPMF, you're a founder - sometimes (oftentimes?) the title and equity don't go along with that, but that's because there are a lot of suckers out there who don't actually know how the startup game works. If you join APMF, you're an employee. After all, a founder's entire job is to identify an unmet need in the marketplace and devise a strategy for solving it, and until you get PMF you haven't really done that. The complication is that startups BPMF shouldn't be hiring at all, but few of them realize that, and even fewer of them can check their egos enough to realize that having people do your bidding won't actually help you find a viable business model faster, it just makes pivoting more difficult. There've been tweets from Sam Altman [1], comments from Paul Buchheit [2], essays from Paul Graham [3 - "If you went out and hired 15 people before you even knew what you were building, you've created a broken company."], and video interviews with Marc Andreesen that all say that, but still, a seemingly large fraction of entrepreneurs don't listen. [1] https://twitter.com/sama/status/667852581968805888 https://twitter.com/sama/status/667852581968805888 [2] https://news.ycombinator.com/item?id=8720304 https://news.ycombinator.com/item?id=8720304 [3] http://www.paulgraham.com/pinch.html http://www.paulgraham.com/pinch.html

purplerabbit 11y ago

What if one founder supplies the idea, but has no technical or business ability? What cut would that be worth?

zxcvvcxz 11y ago
Then you shouldn't be working with them...
- seansmccullough 11y ago
  Ya, they aren't adding any value. Anyone can just come up with an idea.
danieltillett 11y ago
Like anything it depends on how good the idea is. Some ideas are not worth much, while others are worth lots.
logfromblammo 11y ago
They get a participation trophy at the annual awards ceremony.
patio11 11y ago
Scintillating conversations are worth buying the dinner you have them over. Shares get issued for doing lots of work for a period of years. Founders with quote no business or technical ability endquote who nonetheless are capable of value-producing work exist [+]; people who do not actually do work create no meaningful value and are not founders. [+] Startups are basically all about people who are theoretically "unqualified" to do things repeatedly doing things they are unqualified to do.

gsibble 11y ago

I think part of the confusion here is what determines the difference between a founder and an employee. Are there two founders? Three? Five? Seven? When did they all start working? Are they all working full time? Are they all taking a salary? Not to mention that you can't just grant equity out of thin air once a company has been founded. There are tax implications, especially after you've raised money. I can't imagine telling an investor that they're going to get significantly diluted because I have a new founder that needs 20% of the company because "all founders get the same share". If you were all there together at the inception of the company and all agree to work fulltime on the project and can contribute equally than it makes sense to split up the equity equally. But just saying "everyone should get the same share" seems to simplify things a bit much.

tptacek 11y ago
As you say, the simple (and common) case is that everyone starts working in earnest on the company at roughly the same time, and equity split is a no-brainer. A very common set of cases that is only slightly more complicated than this is the one where everyone in reality has started working in earnest on the company at approximately the same time, but for whatever reason, one of the team members feels that some work they did prior to starting the company with their partners also counts as "earnest work". Most of the point of this article is that you shouldn't complicate your company by accepting that argument; you will regret it down the road. The next most common set of cases is that "cofounder" status is used as a recruiting tool. The company really wants to work with a particular person, but that person doesn't want an employee role. This can happen months or even years after the company has been founded. The simple answer here is that a cofounder is whoever the existing cofounders say is one. I personally think you're better off keeping things simple: if you call someone a cofounder, give them an equal share of the equity. If the road ahead doesn't have enough opportunity for a new cofounder to contribute so much that they'll earn the share, don't call them a cofounder. After that, you're on your own.

natmaster 11y ago

The big takeaway for me is the last sentence, "If you aren’t willing to give your partner an equal share, then perhaps you are choosing the wrong partner."

colmvp 11y ago

I've personally never worked with an engineer who thought that I as a person who would do UI/UX/front-end code deserved equal amount of equity as him as the other co-founder (backend engineer). And in all fairness, you can execute a shitty looking designed product with functionally that works and gains traction.

exelius 11y ago
Sucks to be them; UI/UX guys are way more in-demand than back-end developers. The skill set is also way closer to the up-front product design that makes/breaks your company than back-end work is.
- dennisgorelik 11y ago
  Different skills are valued differently for different startups. For Google - backend skills were way more important than UI. For Instagram - UI/UX.
tptacek 11y ago
Don't start companies with people who think any part of equity allocation should come from which programming languages which founders work with.

lmartel 11y ago

My favorite solution to the "I started n months before my cofounders" problem is to write an IOU from the company to the person for the work they've already done at some significant but less-than-1 fraction of their typical monthly rate, say 50% or 70%. This allows the founding team to acknowledge the extra work without creating an uneven equity split.

tptacek 11y ago
Yuck, what a mess. My monthly rate is absurdly high, because for the last 10 years I've chosen to work primarily for companies that will get a lot of value out of working with me. The fact that I've done security work for big financial firms doesn't mean my work is that valuable to the startup relative to what all the other founders are getting, but my resume anchors my rate there. If you're finding it important to draw these kinds of lines between founding team members, that's a sign that you might not have the right founding team members. A founding team that "clicks" and works together is incredibly valuable, probably far more valuable than any year's worth of billing you've ever done. Don't mess it up with stuff like this; it's just not worth it. Man, I am even more procrastinatey than normal today.

jdoliner 11y ago

Regarding: "I started working n months before my co-founder" A really good way to handle this is with vesting, which is something every company should have. Normally stock vests as you spend more time at the company, in my opinion it's totally fair for cofounders to have equal stock allocations but if one founder was working for 6 months before the other joined they should be 6 months ahead on their vesting.

brudgers 11y ago
My concern is that an accelerated vesting schedule for one founder versus the other only matters in one particular case and that case is a bad one: the founder with accelerated equity decides to cease working and become a passive owner. In any other circumstance, the "earlier" founder and the "later" founder have aligned interests in regard to equity independent of vesting schedule. An "earlier" founder insistent on more aggressive vesting may be symptomatic of an underlying poor relationship. That's not to say that there couldn't be circumstances in which two founders naturally have different vesting schedules, e.g. the "earlier" founder incorporated the final entity prior to the "later" founder's involvement. But from a formal standpoint, if both founders are there the day of incorporation, then that's where the clock starts.

danieltillett 11y ago

One thing I don't understand is if a startup is a 10 year journey why vesting is a 4 year journey? Is there some tax reason for this?

tptacek 11y ago
It's just a norm. Companies sometimes make additional retention grants to fully vested employees.
- danieltillett 11y ago
  Well it is a norm that does not seem that logical. If you want the founders to be in it for the long haul then it would make more sense to have a vesting period over a longer time.

maxcan 11y ago

> My co-founder took a salary for n months and I didn’t This shouldn't be ignored however. If one founder has more immediate liquidity needs than the other, the non-salary-taking founder should receive some compensatory benefit for leaving cash in the company. The way that I like to resolve this is for the non-taking founder to essentially be paid in convertible notes or some other form of equity for the salary that they are giving up. In other words, founders split the initial equity pie equally, but then have the option of receiving cash, notes, or some mixture. If I can figure out how to make interpolated equity work from a tax perspective, that would be the optimal solution. https://medium.com/this-time-is-different/interpolated-equity-12ddebcc63ef https://medium.com/this-time-is-different/interpolated-equit...

tptacek 11y ago
Don't use equity to pay back cash from founders. Just use IOUs. Like Joel Spolsky says: don't resolve problems between founders with shares.
- maxcan 11y ago
  promissory notes work too. The problem that I have is that because of the credit risk in getting paid back, unless there is a very high interest rate, they massively undervalue the investment on forgone salary. If there is a high interest rate, institutional investors get pissed off.

billcao 11y ago

"After the one year point you get 25% of your stock. Every month after that you get an additional 1/36th of your total stock." Shouldn't 1/36th be 1/48th? Because 25% has already been vested at the 1 year mark, i.e. 36*(1/48) + 25% = 1 = total stock.

tshiran 11y ago

Unless there's a really good reason to not split it equal, I think it's better if both founders have the same amount of equity. Otherwise you could create unnecessary tension which is the last thing you want at that early stage.

logfromblammo 11y ago

The two infographic images attached to the article completely failed to elucidate. Two red dots, and some blue and green squares, followed by a blue and green pie chart. This is followed by the same two red dots with more blue squares. It sort of reminds me of the occasional articles you see about particularly egregious elementary school support materials. If Suzie muttonates half her mickmackles, how many glomploots will Bobby need for the spimbliz? Wakalixes make it go! The point was that you shouldn't divvy up equity based on work already completed, because that split does not represent the division of labor in the work that is still necessary to get to a viable product. Here's how I would illustrate that: Image 1: A person in a red shirt holds a red apple. A person in a green shirt holds a green apple. Image 2: A bushel basket holds 18 red apples and 2 green apples. Image 3: An apple-pie chart made from the very first bushel represents an equity split of 90% to redguy and 10% to greenguy. Image 4: A wider shot of their orchard shows two trees with red apples on it, and 8 trees with green apples, still to be harvested.

tzm 11y ago

I co-founded a company with a small team that struggled with calculating equity splits. It was a painful process that involved a Google spreadsheet, a list of individual contributions, personal experience, impact and job function. Weights were applied. The intent was to determine an objective calculation of each founder's equity position. The process exposed some serious flaws, insecurities and heated discussions around the general efficacy of such an experiment. It felt petty and rather naive. I left the team out of principle, but helped close the round and became an advisor. My general rule is start at equal positions and apply reasonable adjustments based on hard contributions (ie, financial, etc). Building a company is a process that will be redefined as you go. However, the team dynamic shouldn't. If the team cannot grasp this concept, then leave.