8 ms·

Ask HN: How to decide what percentage each founder gets?

58 points by 10smom 16y ago

What do u do when bringing in a founder for the purpose of having a certain skill set on the team? What is fair for all?

techiferous 16y ago
Whatever you do, make sure you vest each person's share in the company (including your own)! See http://www.vcreadylaw.com/blog/2009/09/14/founders-agreements/ http://www.vcreadylaw.com/blog/2009/09/14/founders-agreement...
- borism 16y ago
  How often does that actually happen? I can't think of any examples. Most start-ups hardly live full 4 year vesting period either failing or being acquired.
  - techiferous 16y ago
    The length of time of vesting is not as important as protecting the rest of the team if one of the founders walks away two weeks later with a significant portion of the company. If a one year or six month vesting period makes sense, why not? But having no vesting can be very risky.
beh 16y ago
Chris Dixon wrote an insightful post on this last year: http://cdixon.org/2009/08/23/dividing-equity-between-founders/ http://cdixon.org/2009/08/23/dividing-equity-between-founder...
danielayele 16y ago
What's the skill set? Bringing on a co-founder for a specific skill set at an early stage is generally a bad idea because everyone will (and should) be doing everything for the first few months. If you're pre-product and pre-revenue you should be looking for partners...that is, people who have complementary skill sets and are willing to do everything possible to ensure that the company succeeds. At this stage companies should be split equally among the founders. If you're at a later stage then the percentage should be decided in a brief (emphasis on brief) negotiation process that accounts for existing product value created. In this case, a good rule of thumb is probably 1/n^2 where n=employee number.
bartman 16y ago
My last startup was founded by 4 people with equal shares and rights. We failed early partly because we couldn't go into a clear direction, too many votes, too many opinions. We didn't turn out to be a well matching team either, though. For my next startup I wouldn't do equal shares again, someone needs to be able to have the last word. edit: Initially we started with 2 people with equal shares, and got two others in shortly after launch. We did an even split then, although in retrospect 30/30/20/20 would have been better. That is if you don't depend entirely on your newcomers.
- jmathai 16y ago
  The 30/30 would still be a problem though (from experience). There needs to be one visionary who has the final say. Help prevent fights and wasted time.
  - bartman 16y ago
    I agree, I think it might have worked for our case though because my initial cofounder was more business focussed and I was the technical one. He stood behind my technical/product decisions.
- arethuza 16y ago
  We had 40/40/20 - which wasn't too bad (indeed, I made the call as to who the CEO would be - the "business" guy with the 20%). Unfortunately this turned to be absolutely the right thing to do in the short/medium term but a disaster in the long term.
  - bobds 16y ago
    Would you care to elaborate on the long term disaster part?
    - brudgers 16y ago
      I was in a similar situation, it was 46/46/8. 46 and 46 were "married" due to their mutual investment. I was the 8. It's what I negotiated to come on board. No vesting. There was casual mention of a purchase. I controlled a third of the company because 46 + 8 could sell. It was a paranoia fest. I had to go in order to save the "marriage." They are still "married" today. And at the time, I would have cashed out on the sale in a New York minute.
shivam14 16y ago
See the Founder's Pie Calculator as a reference, http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Calculator.htm http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Ca...
- staunch 16y ago
  That link doesn't work (for me). HN is stripping out the single quote. Here it is with the quote encoded: http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...
shalmanese 16y ago
Here's a tip I heard from a friend (assume 2 co-founders, can be extended to n without loss of generality): Have both founder sit down and write a list of things they think the other founder brings to the table. Assign an equity value beside each point (with the remaining equity belonging to you). Spend some time doing this, encourage them to take it seriously. After both of you have completed this, sit down and run through the entire list. Have an open and honest debate about each point. Once adequate consensus is reached, add up the total % of equity assigned. Hopefully, this number will exceed 100%, if it does not (ie: both co-founders believe they make an outsized contribution), it's probably a good sign you need to go back and restart this process again. Multiply your personal equity stake by the total % equity to get your share. It seems like a good idea because it avoids making the argument self-serving and talking about your own contributions. Instead, it's about getting the partnership off on a foot of mutual respect & understanding. Disclaimer: I've never tried this myself, results may vary.
- shalmanese 16y ago
  So, as an example, with a business guy & technical co-founder, the business guy believes the technical co-founder should deserve 80% of the company, the technical guy believes the business guy should deserve 40% of the company. 80% + 40% = 120%. Thus, the business guy ends up with 40%/120% = 33.3% and the technical guy ends up with 80%/120% = 66.6% of the company. Both walk away happy that they got more than they felt like they deserved.
  - borism 16y ago
    since when tech guy gets more than business guy? (to all the downvoters: I'm genuinely interested)
    - zackattack 16y ago
      Maybe when there are real technical challenges? Developers capable of creating CRUD business applications are basically a commodity
    - 16y ago
giffo 16y ago
Allow the existing founders to discuss and decide what the new potential co-founder is worth and what they are willing to pay (in percentage/equity) to get him/her onboard.
lsc 16y ago
I've been considering this... now, I've been pouring all my personal resources into my company for five years now, so this is something of a special case. The thing is, other people want to get involved, people who have skills worth more than I can pay in cash. I know that I have more dedication than they do. If we are where we are now a year from now, I'll still be plugging away at it. No other rational person would feel the same way. So, my thought is that every year or so, we simulate another round of funding. We dilute all current stock by the amount of money we'd need to pay everyone market rate, and distribute the new shares based on the difference between a person's market value and the cash they actually got paid. This would be pretty similar to the effect we'd get if we did everything in cash, and got a new round of funding every year to pay salaries. What I like about it is that if you worked for me three years ago but then lost interest, your equity stake would slowly shrink as I kept pouring in another $80K/year worth of unpaid labour into the thing. Of course my case is a special case. most of the time the idea is that if one founder loses interest, the company goes under and that's that.
- staunch 16y ago
  It sounds like you just need to setup an option pool (with 4 year vesting) and hand out equity to some senior level employees. Why do anything more complicated than that?
  - lsc 16y ago
    so, if you don't stick around for four years, you get squat? or you get 25% of that a year? the former sounds a bit too draconian. I mean, I don't expect anyone (save for myself) to stick around that long. the latter would stick me with the same problem I have now... the thing is, every year that goes on, I'm investing what amounts to a pretty large chunk of cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon, my ongoing contributions should mean something, too. My point is that without dilution, as time goes on and I accumulate more (no longer working) people with percentage ownership in the company, my motivation to continue to invest decreases. If the company increases in value fast enough (and if my free-market value doesn't increase dramatically) that the percentage of the company I still own is worth the investment, we don't have a problem. But if I become more valuable or if the value of the company stagnates, my motivation for continuing to invest will decrease with my percentage ownership. I'll be thinking more about how to buy out those who are no longer with me rather than using those resources to move the company forward. I could issue a new options pool (that dilutes existing shares) every year, but I don't really see the difference between that and what I proposed, other than it's options rather than equity.
danshapiro 16y ago
Here are some rules of thumb, with SWAG percentages attached. 1) Fulltime hours worked (with no salary) count more than part time hours worked (done in your free time from a day job). 2) Having the initial idea counts for 5%. 3) A difficult to replicate beachhead (patent, nontrivial code, brilliant design) counts for 10-20%. 4) Being the person who actually incorporates and recruits others counts for 10%. 5) Money invested is ignored. It should either be even contributions for everyone (and thus nulled out), or invested in a convertible note with very modest terms (and thus counted separately). 6) Holding the CEO role counts for 10%. 7) Having a reputation that will meaningfully impact the company's probability of being funded counts for 2x-4x. 8) If, at the end, you and your cofounders have equal shares, you did it wrong. 9) Once the company has had the validation and de-risking of a financing round, everyone from thenceforth is an employee, not a founder.
- nick007 16y ago
  could you elaborate on #7?
  - danshapiro 16y ago
    Generally it means you have an entrepreneurial track record, but it could also mean you have amazing investor connections, an executive track record of tremendous success in a relevant business, an EIR arrangement where the VC wants to fund you, etc. Going from nonfundable to fundable or from a premoney valuation of x to 2x (which is what someone should do to merit this sort of disproportional value) gets rewarded by a corresponding increase in ownership.
    - nick007 16y ago
      thanks for the follow up
robryan 16y ago
At the start, I think equal shares is really the way to go, as long as each founder is going to put in the same level of effort and dedication. Squabbling over percentages is bound to create tension before things have even got off the ground.
pcrawfor 16y ago
Scott Farquhar one of the co-founders of Atlassian said this best in his talk at Business of Software this week. Which I'm paraphrasing from memory... If you're co-founding a startup equal shares is the way to go you should be doing this with someone you trust and can work with and squabbling over pieces of a worthless asset at the start is a sidetrack from doing what matters. I'd add that vesting is never a bad thing but if you are so worried about people not contributing you shouldn't be starting a company with the person.
DirtyAndy 16y ago
I hate to sound too negative, but 99% of that "Rate My Startup"'s I see on here are worth nothing now, and will be worth nothing in 5 years. Don't spend too much time debating whether you deserve 90% or nothing or 20% of nothing, because they both equal the same thing. Unless there was a overriding reason for one partner to have more equity I would only ever do 50/50 or 1/3rd each etc. Equal shares means everyone has the same amount riding on it. Everyone suffers the same stresses. Everyone gets the same wins. Reasons that would make me do it differently, if one partner has a proven track record (has had a major success in the past, that they were truly part of), if it was an extremely technical project (getting better search results than Google for example) I think the technical co-founder is probably worth more - if they can deliver, similarly if it is a very hard sell the marketing/business person might deserve more (although if it is that hard a sell I'd stay away). Lastly if the business needed money and someone had a contact that could bring in that money it would be worth considering giving them more equity (if it was me, I'd be demanding more). I'm pretty sure in general YC gives the company equal money based on number of founders. I would imagine as a general rule that means they see all founders as equals. Seems like a pretty good guideline. (Would be interesting to hear what PG and co do when they meet a team and think 2 out of 3 are awesome - do they fund, not fund, tell them to lose the other guy etc?)
swah 16y ago
My friends quit, so its 100% to me now.
js2 16y ago
There are a couple posts from Jeff that address this topic - http://www.mcstartup.com/past-articles/ http://www.mcstartup.com/past-articles/

58 points by 10smom 16y ago

What do u do when bringing in a founder for the purpose of having a certain skill set on the team? What is fair for all?

techiferous 16y ago

Whatever you do, make sure you vest each person's share in the company (including your own)! See http://www.vcreadylaw.com/blog/2009/09/14/founders-agreements/ http://www.vcreadylaw.com/blog/2009/09/14/founders-agreement...

borism 16y ago
How often does that actually happen? I can't think of any examples. Most start-ups hardly live full 4 year vesting period either failing or being acquired.
- techiferous 16y ago
  The length of time of vesting is not as important as protecting the rest of the team if one of the founders walks away two weeks later with a significant portion of the company. If a one year or six month vesting period makes sense, why not? But having no vesting can be very risky.

beh 16y ago

Chris Dixon wrote an insightful post on this last year: http://cdixon.org/2009/08/23/dividing-equity-between-founders/ http://cdixon.org/2009/08/23/dividing-equity-between-founder...

danielayele 16y ago

What's the skill set? Bringing on a co-founder for a specific skill set at an early stage is generally a bad idea because everyone will (and should) be doing everything for the first few months. If you're pre-product and pre-revenue you should be looking for partners...that is, people who have complementary skill sets and are willing to do everything possible to ensure that the company succeeds. At this stage companies should be split equally among the founders. If you're at a later stage then the percentage should be decided in a brief (emphasis on brief) negotiation process that accounts for existing product value created. In this case, a good rule of thumb is probably 1/n^2 where n=employee number.

bartman 16y ago

My last startup was founded by 4 people with equal shares and rights. We failed early partly because we couldn't go into a clear direction, too many votes, too many opinions. We didn't turn out to be a well matching team either, though. For my next startup I wouldn't do equal shares again, someone needs to be able to have the last word. edit: Initially we started with 2 people with equal shares, and got two others in shortly after launch. We did an even split then, although in retrospect 30/30/20/20 would have been better. That is if you don't depend entirely on your newcomers.

jmathai 16y ago
The 30/30 would still be a problem though (from experience). There needs to be one visionary who has the final say. Help prevent fights and wasted time.
- bartman 16y ago
  I agree, I think it might have worked for our case though because my initial cofounder was more business focussed and I was the technical one. He stood behind my technical/product decisions.
arethuza 16y ago
We had 40/40/20 - which wasn't too bad (indeed, I made the call as to who the CEO would be - the "business" guy with the 20%). Unfortunately this turned to be absolutely the right thing to do in the short/medium term but a disaster in the long term.
- bobds 16y ago
  Would you care to elaborate on the long term disaster part?
  - brudgers 16y ago
    I was in a similar situation, it was 46/46/8. 46 and 46 were "married" due to their mutual investment. I was the 8. It's what I negotiated to come on board. No vesting. There was casual mention of a purchase. I controlled a third of the company because 46 + 8 could sell. It was a paranoia fest. I had to go in order to save the "marriage." They are still "married" today. And at the time, I would have cashed out on the sale in a New York minute.

shivam14 16y ago

See the Founder's Pie Calculator as a reference, http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Calculator.htm http://www.andrew.cmu.edu/user/fd0n/35%20Founders%20Pie%20Ca...

staunch 16y ago
That link doesn't work (for me). HN is stripping out the single quote. Here it is with the quote encoded: http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...

shalmanese 16y ago

Here's a tip I heard from a friend (assume 2 co-founders, can be extended to n without loss of generality): Have both founder sit down and write a list of things they think the other founder brings to the table. Assign an equity value beside each point (with the remaining equity belonging to you). Spend some time doing this, encourage them to take it seriously. After both of you have completed this, sit down and run through the entire list. Have an open and honest debate about each point. Once adequate consensus is reached, add up the total % of equity assigned. Hopefully, this number will exceed 100%, if it does not (ie: both co-founders believe they make an outsized contribution), it's probably a good sign you need to go back and restart this process again. Multiply your personal equity stake by the total % equity to get your share. It seems like a good idea because it avoids making the argument self-serving and talking about your own contributions. Instead, it's about getting the partnership off on a foot of mutual respect & understanding. Disclaimer: I've never tried this myself, results may vary.

shalmanese 16y ago
So, as an example, with a business guy & technical co-founder, the business guy believes the technical co-founder should deserve 80% of the company, the technical guy believes the business guy should deserve 40% of the company. 80% + 40% = 120%. Thus, the business guy ends up with 40%/120% = 33.3% and the technical guy ends up with 80%/120% = 66.6% of the company. Both walk away happy that they got more than they felt like they deserved.
- borism 16y ago
  since when tech guy gets more than business guy? (to all the downvoters: I'm genuinely interested)
  - zackattack 16y ago
    Maybe when there are real technical challenges? Developers capable of creating CRUD business applications are basically a commodity
  - 16y ago

giffo 16y ago

Allow the existing founders to discuss and decide what the new potential co-founder is worth and what they are willing to pay (in percentage/equity) to get him/her onboard.

lsc 16y ago

I've been considering this... now, I've been pouring all my personal resources into my company for five years now, so this is something of a special case. The thing is, other people want to get involved, people who have skills worth more than I can pay in cash. I know that I have more dedication than they do. If we are where we are now a year from now, I'll still be plugging away at it. No other rational person would feel the same way. So, my thought is that every year or so, we simulate another round of funding. We dilute all current stock by the amount of money we'd need to pay everyone market rate, and distribute the new shares based on the difference between a person's market value and the cash they actually got paid. This would be pretty similar to the effect we'd get if we did everything in cash, and got a new round of funding every year to pay salaries. What I like about it is that if you worked for me three years ago but then lost interest, your equity stake would slowly shrink as I kept pouring in another $80K/year worth of unpaid labour into the thing. Of course my case is a special case. most of the time the idea is that if one founder loses interest, the company goes under and that's that.

staunch 16y ago
It sounds like you just need to setup an option pool (with 4 year vesting) and hand out equity to some senior level employees. Why do anything more complicated than that?
- lsc 16y ago
  so, if you don't stick around for four years, you get squat? or you get 25% of that a year? the former sounds a bit too draconian. I mean, I don't expect anyone (save for myself) to stick around that long. the latter would stick me with the same problem I have now... the thing is, every year that goes on, I'm investing what amounts to a pretty large chunk of cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon, my ongoing contributions should mean something, too. My point is that without dilution, as time goes on and I accumulate more (no longer working) people with percentage ownership in the company, my motivation to continue to invest decreases. If the company increases in value fast enough (and if my free-market value doesn't increase dramatically) that the percentage of the company I still own is worth the investment, we don't have a problem. But if I become more valuable or if the value of the company stagnates, my motivation for continuing to invest will decrease with my percentage ownership. I'll be thinking more about how to buy out those who are no longer with me rather than using those resources to move the company forward. I could issue a new options pool (that dilutes existing shares) every year, but I don't really see the difference between that and what I proposed, other than it's options rather than equity.

danshapiro 16y ago

Here are some rules of thumb, with SWAG percentages attached. 1) Fulltime hours worked (with no salary) count more than part time hours worked (done in your free time from a day job). 2) Having the initial idea counts for 5%. 3) A difficult to replicate beachhead (patent, nontrivial code, brilliant design) counts for 10-20%. 4) Being the person who actually incorporates and recruits others counts for 10%. 5) Money invested is ignored. It should either be even contributions for everyone (and thus nulled out), or invested in a convertible note with very modest terms (and thus counted separately). 6) Holding the CEO role counts for 10%. 7) Having a reputation that will meaningfully impact the company's probability of being funded counts for 2x-4x. 8) If, at the end, you and your cofounders have equal shares, you did it wrong. 9) Once the company has had the validation and de-risking of a financing round, everyone from thenceforth is an employee, not a founder.

nick007 16y ago
could you elaborate on #7?
- danshapiro 16y ago
  Generally it means you have an entrepreneurial track record, but it could also mean you have amazing investor connections, an executive track record of tremendous success in a relevant business, an EIR arrangement where the VC wants to fund you, etc. Going from nonfundable to fundable or from a premoney valuation of x to 2x (which is what someone should do to merit this sort of disproportional value) gets rewarded by a corresponding increase in ownership.
  - nick007 16y ago
    thanks for the follow up

robryan 16y ago

At the start, I think equal shares is really the way to go, as long as each founder is going to put in the same level of effort and dedication. Squabbling over percentages is bound to create tension before things have even got off the ground.

pcrawfor 16y ago

Scott Farquhar one of the co-founders of Atlassian said this best in his talk at Business of Software this week. Which I'm paraphrasing from memory... If you're co-founding a startup equal shares is the way to go you should be doing this with someone you trust and can work with and squabbling over pieces of a worthless asset at the start is a sidetrack from doing what matters. I'd add that vesting is never a bad thing but if you are so worried about people not contributing you shouldn't be starting a company with the person.

DirtyAndy 16y ago

I hate to sound too negative, but 99% of that "Rate My Startup"'s I see on here are worth nothing now, and will be worth nothing in 5 years. Don't spend too much time debating whether you deserve 90% or nothing or 20% of nothing, because they both equal the same thing. Unless there was a overriding reason for one partner to have more equity I would only ever do 50/50 or 1/3rd each etc. Equal shares means everyone has the same amount riding on it. Everyone suffers the same stresses. Everyone gets the same wins. Reasons that would make me do it differently, if one partner has a proven track record (has had a major success in the past, that they were truly part of), if it was an extremely technical project (getting better search results than Google for example) I think the technical co-founder is probably worth more - if they can deliver, similarly if it is a very hard sell the marketing/business person might deserve more (although if it is that hard a sell I'd stay away). Lastly if the business needed money and someone had a contact that could bring in that money it would be worth considering giving them more equity (if it was me, I'd be demanding more). I'm pretty sure in general YC gives the company equal money based on number of founders. I would imagine as a general rule that means they see all founders as equals. Seems like a pretty good guideline. (Would be interesting to hear what PG and co do when they meet a team and think 2 out of 3 are awesome - do they fund, not fund, tell them to lose the other guy etc?)

swah 16y ago

My friends quit, so its 100% to me now.

js2 16y ago

There are a couple posts from Jeff that address this topic - http://www.mcstartup.com/past-articles/ http://www.mcstartup.com/past-articles/