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I love companies that say they are "pre-revenue" as well as pre "product/market fit". In the infamous words of Kevin O'Leary you are pre-business, or what some

I love companies that say they are "pre-revenue" as well as pre "product/market fit". In the infamous words of Kevin O'Leary you are pre-business, or what some might call a hobby. Nevertheless, I don't say this just to rain on your parade. Businesses all start somewhere. But what you are saying is you have no cash on hand or ability to take on debt to pay for a software engineer to build your main product. Let's make it relatively clear, you cannot pay a person in equity in lieu of monetary payment. Why not? Because your equity isn't worth anything right now. If you have no revenue, no product, and no investment, you have no value. So if you were to "hire" an engineer who, at market value, might make $100,000 per year, how much would you pay them in equity? You cannot make the equation work. So you are stuck with some other sort of agreement. You can make them a co-founder. But you don't want to dilute your equity. That's a major issue. The question then becomes how much benefit are you bringing to the organization in comparison to them? I've been asked this, personally, a number of times in my career. "Will you take 5%? If we take off with this production we will become a $1,000,000,000 company and you'll be worth $50 MILLION!" My answer, when the company is at your stage is no, I will not take .5%, 1%, or 5%. I will take 50%. Of course, co-founders choke on this. But I have a lot of issues to weigh as a potential co-founder. First, often times the other co-founders aren't working on the product or the company full time. The aren't making any revenue and so how will they live without a second job? On the other hand, as an engineer, I must get that product out the door quick, so I am heads down full time. Second, this is a huge risk for me and I do not want my co-founders making poor decisions while I stand there with my tiny, non-voting amount of equity. Some might say "But what happens when we need investors!" and this is a reasonable question which does come up. I give up a percentage of my equity to gain investors at the same rate as my partners. If we need to do a raise as 20%, I now have 40% and my co-founders have 40%. The math follows down to just about any level. We make those decisions together. Anyway, I just wanted to give you the other side of this sort of discussion. Most entrepreneurs want to value their idea very high, while reducing the value of product execution. By sticking to my principles, I have been quite successful, starting 2 businesses and partnering in 2 others, all sold successfully. I hope you find the right fit for you!

brudgers 11y ago
Sivers' advice on valuing ideas: https://sivers.org/multiply https://sivers.org/multiply
tixocloud 11y ago
Thanks, I really appreciate your frank thoughts and sharing the perspective of a potential co-founder before I actually insult anyone. My initial thoughts were to have an equal split amongst 3 people. I was warned that 3 co-founders would be too many and would not leave much on the table but I don't fully agree with that notion. I was willing to bet that anyone would want an equal share in return for what they bring to the table. Just for clarification, when we raise at 20%, then all 3 of us would share the 80%? And how much do companies usually leave aside for employees?
- trcollinson 11y ago
  If you were to come to me and say "Hey, we have this idea, we have a prototype, and we'd like to make it a product. We'd like to get it in front of investors and make you a partner. We know you are going to put in a lot of time and effort to build it. We can offer you 33%, as we're both going to take 1/3 ourselves..." I would not be offended by that. That is actually a very fair assessment and a good starting point for a fair negotiation. As for splitting equity that is a bit more of a complicated conversation. Not all equity is the same. In a fair world you might say: 10% reserved for employees, 20% for investors, and 70% for us. That seems fair on the outside right? You would each get 23.3% and you could each outvote any investor you bring on board. However, often times you don't have straight equity deals when raising funds. You might take a convertible note. You might have an investor who will only accept preferred shares of equity with special arrangements. Even relatively simple and underfunded start ups can sometimes have very complex cap tables with multiple levels of shares of stock being given different rules and right. If you're not careful, the cap table can easily run away from you. I have known quite a few successful entrepreneurs who have gotten screwed in the end, not because of co-founders, but because the cap table went sideways. For example, one small start up was offered north of $80MM 4.5 years after starting up. The co-founders each, after taxes, walked away with a few hundred thousand. So, to answer your actual question, it really depends. Getting a partner who has been through those whole ordeal before can be priceless.

brudgers 11y ago

Sivers' advice on valuing ideas: https://sivers.org/multiply https://sivers.org/multiply

tixocloud 11y ago

Thanks, I really appreciate your frank thoughts and sharing the perspective of a potential co-founder before I actually insult anyone. My initial thoughts were to have an equal split amongst 3 people. I was warned that 3 co-founders would be too many and would not leave much on the table but I don't fully agree with that notion. I was willing to bet that anyone would want an equal share in return for what they bring to the table. Just for clarification, when we raise at 20%, then all 3 of us would share the 80%? And how much do companies usually leave aside for employees?

trcollinson 11y ago
If you were to come to me and say "Hey, we have this idea, we have a prototype, and we'd like to make it a product. We'd like to get it in front of investors and make you a partner. We know you are going to put in a lot of time and effort to build it. We can offer you 33%, as we're both going to take 1/3 ourselves..." I would not be offended by that. That is actually a very fair assessment and a good starting point for a fair negotiation. As for splitting equity that is a bit more of a complicated conversation. Not all equity is the same. In a fair world you might say: 10% reserved for employees, 20% for investors, and 70% for us. That seems fair on the outside right? You would each get 23.3% and you could each outvote any investor you bring on board. However, often times you don't have straight equity deals when raising funds. You might take a convertible note. You might have an investor who will only accept preferred shares of equity with special arrangements. Even relatively simple and underfunded start ups can sometimes have very complex cap tables with multiple levels of shares of stock being given different rules and right. If you're not careful, the cap table can easily run away from you. I have known quite a few successful entrepreneurs who have gotten screwed in the end, not because of co-founders, but because the cap table went sideways. For example, one small start up was offered north of $80MM 4.5 years after starting up. The co-founders each, after taxes, walked away with a few hundred thousand. So, to answer your actual question, it really depends. Getting a partner who has been through those whole ordeal before can be priceless.