5 ms·

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 ca

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).

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).