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Ask HN: How to split equity?

• polvi 12y ago
  Sounds like a good time to use the equity equation: http://paulgraham.com/equity.html
  • munrocape 12y ago
    Neat article. I think OP is trying to discern _how_ to map the friend's contributions to outcome of the company.
• andreash 12y ago
  Google "Startup Lawyer If I launched a startup 2014", which sums up most legal questions including equity splits. Founders Dilemma by Wasserman covers the topic from a scientific research point of view. tl;dr as far as I remember from that book: Make sure it is fair, and enough equity for both to be motivated. You have to discuss with each other to find out. It can be everything between 95/5 to 50/50. If you value the friendship more than you value the company, you should go for 50/50. Otherwise 50/50 is not a good option according to Wasserman's research.
  • sillysaurus3 12y ago
    5% would be absurdly predatory for essentially a cofounder. (If they're building the company from the ground up rather than merely shaping it, then they're a cofounder.)
    • andreash 12y ago
      I agree. With 95/5 you're more like a first employee. My guess is that more popular splits are 50/50, 40/60, 70/30, 80/20. In that order.
• patio11 12y ago
  People who are doing this for the first time care a lot about the numerical split but people who do this professionally care a heck of a lot more about vesting. Whatever you choose, your outcome will be a lot better with a defined vesting schedule. The standard one in the Valley is (for both of you!) "four year vesting with a one year cliff", which means that 25% of the eventual grant is durably yours on the 366th day and then 75% gets parceled out in equal increments every month for the next 36 months after that. I'd be inclined to have the company write you an IOU for your cash contributions so far, and split it 50/50, perhaps with one of you getting a tie-breaking share. The company can dispose of your IOU like any other short-term debt of the company at some point in the future when it has the financial wherewithal to do so. [See below about IOUs.] Your vesting clock starts 3 months ago, your partner's starts as of the day when he becomes full-time. I cannot emphasize enough that your equity split is not nearly as important as "Does bringing this guy on uniquely make this business successful and do I have confidence that we will both be happy with this arrangement 5 years from now?" Edit to add: As I get older and wiser, I am coming to appreciate the discipline of separating one's personal and business finances and explicitly receiving written acknowledgment for transfers of money into one's company. These feel like moving money from one pocket to another in the early days, but they are not, and explicit written confirmation of that fact will make your life easier in a lot of futures. For example, I know one entrepreneur who, like many, tightened his belt, ran up substantial personal debt, and put blood sweat and tears into building a company. Professional money came into the company. Without documentation that he had loaned the company money, the best resolution would have been asking the other stakeholders to approve increasing his salary so that he could cover his "personal" debts. Had that documentation existed, he would have had ample authority to extinguish that debt in the ordinary course of business, and it would have likely had favorable personal tax consequences.
  • gwillen 12y ago
    Are you sure that 1-year cliff is a good idea for founders? A lot can happen in a year, and founder disputes are A Thing; and it sucks for the person with 49.9% to be in a position where any unresolvable disagreement in the first year means he walks away with nothing.
• onion2k 12y ago
  If I was in your potential business partner's position, I'd ask for 50/50 vested with a schedule of (say) 12 quarters, so every 3 months I'd get 4.1% of the company, with a cliff of 6 months to test whether the relationship will actually work (e.g., no equity transfer if the relationship breaks down in that time) That would recognise the work you've done already, but also appreciate that if the business lasts a long time the initial work will become less important. There's no good reason why you should have more equity than your business partner after a few years - by that point the risk each of you have taken is effectively the same.
• mattei 12y ago
  Here's a link to an in depth talk & infographic that'll help you see a more detailed view of what might impact how you approach equity splitting someone. http://blog.saasu.com/2014/03/28/ceo-insights-webinar-recording-how-to-register-for-upcoming-events/ http://blog.saasu.com/2014/03/28/ceo-insights-webinar-record... Disclosure: I work at Saasu but think this is relevant.
• staunch 12y ago
  What you've done to date is simply what was required. All of the really hard work is in front of you. If your partner isn't worth an equal share they're not worth being partners with.
• Axsuul 12y ago
  My experience is it should always be evenly distributed at such an early stage (3 months is still considered early). I've started two companies and it has never failed me. This eliminates any drama and holds each founder accountable for the work that is required. If you don't trust this approach, then there are deep underlying issues that need to be addressed first. This could be not trusting the incoming founder to make up for the time that has passed while you were running the company initially.
• shin_lao 12y ago
  My first advice would be that this friend has to put money into the company. You need him to show commitment. It doesn't have to be a lot, maybe just $ 10,000. If he refuses to put any money into the company, you have an employee, not a partner. Trust me on this one, you want to test risk tolerance as soon as possible. Second question, will he work full time? If he doesn't work full time, you should give him very little equity, or just relative to the amount he invested in the company with maybe a little extra relative to the value he brings. If he doesn't want to work full time and doesn't want to put money, just pay him by the hour. Pay him by the hour can also be a way to start the business relationship and build trust. Third question, how much can you pay him if he works full time? For example, if he works full time but you can only pay him $ 50,000 instead of $ 100,000 the first year (assuming $ 100,000 is what he could get), he's putting $ 50,000 into the company. Now, the last part: value your company. The best indicator is profit, when you reach it and how long you hope to sustain it (for ever, possibly). There are many tools and formulas, your accountant can probably help you. Because you have an accountant right? And a business plan, right? ;) Another approach is that if he puts a decent amount of money (enough to give several months of runway) into the company and works full time for a well below market salary you can give him 49% (or 50%, up to you).
• woogle 12y ago
  > can contribute a lot in many areas that need to be covered in order to build a succesful app company You told us what you've done until now, but are those "many areas" ?
• _pius 12y ago
  Joel Spolsky has weighed in on this: https://gist.github.com/isaacsanders/1653078 https://gist.github.com/isaacsanders/1653078
  • rahimnathwani 12y ago
    "if someone goes without salary, give them an IOU. Later, .. you'll pay them back in cash ... when the money comes rolling in ... pay back each founder so that each founder has taken exactly the same amount of salary from the company." This doesn't seem fair. The founder who takes an IOU rather than cash bears the very real risk that he never gets paid back. There should be an interest rate attached to the IOU: something like 15-25% to account for the risk.
    • walshemj 12y ago
      how does the tax work on that I can see the IRS wanting to get their cut of the gain
      • rahimnathwani 12y ago
        More importantly in the short term: are payroll taxes due on the face value of the IOUs? You've gotta pay taxes in cash...
    • csbrooks 12y ago
      That's something I believe, too, but I never see it mentioned. If it's "just like cash", then you've made a significant early investment in the company. How is getting paid back what you put in fair?
    • jonnathanson 12y ago
      There should be an interest rate, because the value of money changes over time. There is a difference between the value of $50,000 in hand today, and the expectation of being paid today's $50,000 a year from today. That difference is reflected in the interest rate. Risk is also accounted for in the interest rate, although fundamentally, not all risk can be accounted for. There is always going to be the risk that the startup goes bust before it can pay back its IOUs, and it would be silly to expect an interest rate exorbitant enough to account for all of that risk. A rate of 15-25% is probably fair to the individual in a nominal sense (more than fair, actually), but it is unfair to the company. This is a case where the individual will need to bear some of the risk in the financial interests of having a successful company. He is not a loan shark, after all.
• lukasm 12y ago
  Ask her what, in her mind, is fair. If she says "we should do 50% 50%" and she won't give you the credit for starting the venture, you should think twice if you want to establish the partnership with this person. If she says "you did most of the work. 20% is fair" you should do 50/50 with IOUs and vesting.* *Partners are working full time on this. Here is a good summary of how to pick a cofounder http://venturehacks.com/articles/pick-cofounder http://venturehacks.com/articles/pick-cofounder
• ABS 12y ago
  I like, a lot, the Grunt Fund idea of Slicing Pie (no affiliation): http://www.slicingpie.com/ http://www.slicingpie.com/ The point is: why split the pie before it gets done or after? why not dynamically split based on the actual resources (money, time, equipment, whatever) people put in in the early days?
  • gojomo 12y ago
    While I suspect that Professor-of-Entrepreneurship has a lot of the details worked out in his book, I would be concerned about tax implications (higher-basis/more-recordkeeping) and the distractions/morale-risks of constant rolling renegotiation about "latest contributions". For example, when the company hits a rough spot, it may be best for a team of N to be thinking, "We all need to work extra hard this month so that our 1/Nth shares wind up worth something, rather than nothing." Rather than, "I need some recharge time, I'll let others earn a little more this month, and re-engage for my increments if and when it gets less crazy."
• tzury 12y ago
  Joel's Canonical Guide http://www.businessinsider.com/how-to-allocate-ownership-fairly-when-forming-a-new-software-startup-2011-4 http://www.businessinsider.com/how-to-allocate-ownership-fai...
• rajacombinator 12y ago
  What is the other person bringing to the table? Just treat them as a first hire and offer the minimum equity needed to get such a person.
• sauronlord 12y ago
  I wouldn't give any equity away in this case. Why? He has not done anything yet. This sounds like you are afraid of sales/marketing/biz dev/something and you think he will solve your problems. I warn you: he will not solve your problems, you will have more on your hands.
• danielweber 12y ago
  Here is some advice from 1996: don't have equal partners. Make sure someone can call the shots or else no one will call the shots: http://yesatyale.org/wp-content/uploads/2014/06/lecture_06-1.pdf http://yesatyale.org/wp-content/uploads/2014/06/lecture_06-1... EDIT This moves around so much I uploaded to Scribd: http://www.scribd.com/doc/234962516/Entrepeneurial-Death-Traps http://www.scribd.com/doc/234962516/Entrepeneurial-Death-Tra...
• nav 12y ago
  Look into dynamic equity models. eg. Grunt Funds (http://www.businessweek.com/articles/2012-12-18/grunt-funds-are-trending-in-startup-circles http://www.businessweek.com/articles/2012-12-18/grunt-funds-... )
• Alex-Galapagos 12y ago
  it all depends what is he contributing.. You said that you believe "he can contribute a lot in many areas that need to be covered in order to build a succesful app company", but what is it exactly? Who's coding the app? You've already done first app, if he's contributing to marketing of the first app then he can get less than 30% of profits from that app. If you've already built second one, the same thing. If he's building the second app with you and brings more skill you might consider splitting evenly just for the second app, you don't have to give away equity within the company, you can make an agreement to split profits just for the second app, since he can decide to leave.
• kurttheviking 12y ago
  Find someone who you believe to be your equal (strength of skills he/she brings, intelligence, future potential) and treat them as your equal (50/50, same vesting schedule) -- you remain CEO. If you don't believe they are your equal, then find a way to hire them (as an employee, contractor, whatever) instead. Most other strategies are recipes for resentment in the long-term. As others have said, weathering the first 4 months will be nothing like what it takes to deliver a success story in 4 years.
• adultSwim 12y ago
  Equitably
• JSeymourATL 12y ago
  > I'd like to bring in a good friend of mine who I believe can contribute... Work to keep him as a friend. Channeling Steven Covey, it would be helpful to first understand what he would like to get out of the business arrangement and what he's committed to invest on his end. Beyond a mutual agreement, find a win-win scenario.
• kephra 12y ago
  Do you plan on an LLC, an S-Corp or a C-Corp? An LLC would require to define terms of ownership, decission and cashout in its charter beforehand. A Corp is much more flexible, especially if you do not know how much your "partner" will contribute in the future. So you might want to copy the unusual way Wizards of the Coast did: 1 share = 1 hour = $50 So you own already 600 shares, and your partner owns zero. If he invests money or time he earns share and dilutes you, if you invest money or time you earn shares and dilute him. WotC shares later sold to $1400, iirc - so it was a good deal for the artists who painted those tiny pictures for magic the gathering. PS: Peter Adkison later wrote that he had no clue how a normal Corp works, and did not consult a lawyer because he had no money for it, and just handwaved a way, that sounded fair to him, to pay the artists without having any money. It worked out, thats all that counts.
  • tptacek 12y ago
    I don't think it's true that an LLC requires you to allocate equity statically at the time of formation. LLCs routinely issue equity to employees long after formation, and, to the best of my knowledge (I cofounded, co-managed, and eventually sold an LLC with several tens of employees), without modifying their charter. No matter what your corp structure is, this is an issue you need to spend a few hundred dollars on an attorney on.
• alain94040 12y ago
  I'd like to bring in a good friend of mine who I believe can contribute This is the key sentence. Work together for a month, with no equity. See how much this potential co-founder actually accomplishes. You'd be amazed by the gap between what you dream may happen and what actually happens. Success is hard. If after a month, you are still super-excited about this co-founder, start discussing an equity split. Always with vesting. No cliff (or very short, that was what the 1-month trial period was for). If a co-founder doesn't receive a salary, then the minimum equity split would be 90/10, all the way to 50/50. FYI, at 90/10 I would behave like a super-adviser, but not a fully committed co-founder. 75/25 is the first "true co-founder" deal I can think of.
  • tptacek 12y ago
    "No cliff" is wishful thinking. Everyone has had the experience of hiring someone who ended up not working out. It almost always takes more than a month to come to that conclusion, and a little longer still to act on it. And finding a viable cofounder is harder than hiring. Having someone who worked for you for a couple months walk away with tens of basis points of ownership is a pathological situation, not something you should deliberately optimize for.
• samtalks 12y ago
  Funny you ask this here. In 2012, 1 in 4 Y combinator starts up broke apart due to founder disagreement. You can bet a large part of that was due to equity distribution issues. Equity issues can get really messy - and easily damage friendships. Read the reviews for Slicing Pie. It's about maintaining a dynamic model that eventually vest into shares (if the company works out). I read it. It's great quick read. Ideal for your situation, I think. And it may preserve your friendship. http://www.amazon.com/Slicing-Pie-Company-Without-Funds-ebook/dp/B0096EFHBI http://www.amazon.com/Slicing-Pie-Company-Without-Funds-eboo...