Question: How to split equity between founders?

[jesusfolloweranthony]

Three of us have been thinking about a startup for a few years and I think we are finally going to get started.

• Founder A
  • Business background
  • No Tech Expertise and no knowledge of the space
  • Will assist heavily on financials (CFO) and the founding stages (e.g. pitch deck)
  • Will not be his full time job. Will take care of accounting/financials, but as needed. Will give financial advice to other two founders.
• Founder B
  • Tech Background with extensive network in this space
  • Co-CTO / Co-CEO
  • Will work full-time and will take out a salary once company is founded
• Founder C
  • Also Tech Background with extensive network in this space
  • Co-CTO / Co-CEO
  • Will work full-time and will take out a salary once company is founded

My initial thought is that all three founders would split evenly to have 1/3 of the companies shares. (Please give me your thoughts if this is not a good idea for whatever reason)

Clarification edit: For various reasons, this company will not start for at least a year. Maybe using a tech example was bad for this. But Founder A will be doing more of the leg work (say 40%/30%/30%) until the company opens in 2021/2022, at which point Founder B and C will have a salary and Founder A will not.

Here is where it gets more complicated. What if Founder C also wants to come in with $1MM of his own money to invest into the business? Founder B wants to come in with $100k and Founder A has nothing to contribute in terms of capital. Then how do we split equity?

Furthermore, does it make any sense to have the $1MM and $100k to come in as debt instead of equity, to avoid this problem?

Edit: I don't think it's relevant, but we will need to raise additional capital; thus, there will likely be other shareholders eventually. More concerned with the initial split between founders.

 

[iamsavedbygracethrufaith]

@jesusfolloweranthony First, no one is given shares. They are earned. 1 Year cliff, 4 year vesting

Second, leave room for the future shareholders

Third, 2 ceo's and 2 cto's and 1 part time cfo... why?

 

[jesusfolloweranthony]

@iamsavedbygracethrufaith

Founder A is worth the least. No domain expertise, no technical background: you can hire what he brings to the table with less headaches. 5% with a 1 year cliff and a 4 year vest, re-negotiated after hitting certain goals.

1) Understood about vesting. Regardless, for sake of simplicity, let's ignore it for this scenario. If you really care, then yes, let's assume 1 year cliff, 4 year vesting.

2) For this scenario, again, irrelevant. We can say each founder has 100 shares, and we can always issue more.

3) Because this is a simplified example. The actual startup is not tech, but figured everyone here could relate to it better. I'm surprised you haven't asked why we need more than $1MM in capital.

 

[telljoshstuff]

@jesusfolloweranthony You're already off to a poor start. Would you say this directly to his face? Do you think he would agree with you?

The likelihood is that your company is going to fail (not because of you, just because of statistics), and the equity will be worthless. Spend more time figuring out how to get all boats rowing in the same direction and less worrying about ownership %s.

Personally, I think tech founders tend to over value their skillset vs. non-technical skill sets. If you believe what you have written, you should not consider person A a founder and just pay him for the work he does (either in cash or equity...whatever he negotiates)

 

[iamsavedbygracethrufaith]

@jesusfolloweranthony You asked how to split the equity not how much should we raise in funding.

 

[charlesagrit]

@jesusfolloweranthony Slicing Pie is an amazing model for starting out a company. It is the most fair way in the beginning stages, I believe.

Slicing pie covers all of these scenarios. Splitting it equally is an awful idea in my experience. (Hypothetical) Founder A will only give 40 hours a month while Founder B and C give160 hours a month doing a higher value job. Founder B and C will say "Hey, we are doing all the work, but are getting screwed cause this guy has as much equity as us." This will cause resentment and create a motivation issue.

Check out Slicing Pie. They even have a use case for investment.

https://slicingpie.com/

 

[jesusfolloweranthony]

@charlesagrit Once the company is properly founded, founders B and C get a salary. Founder A does not (or at least, will get a small contractor's worth of salary).

Slicingpie looks interesting - any free versions of this?

 

[charlesagrit]

@jesusfolloweranthony I created a spreadsheet that follows the model. If you want, I can email it to you. Won't do everything that the software can do but can get you started.

 

[jesusfolloweranthony]

@charlesagrit If you're willing, that would be amazing. myusername at gmail.

 

[charlesagrit]

@jesusfolloweranthony Just emailed it to you. Let me know if you get it or have questions

 

[iamsavedbygracethrufaith]

@charlesagrit This is an excellent approach. I'm pm you cause I'd love to see your starter spreadsheet

 

[jesusfolloweranthony]

@charlesagrit Received, thanks. Question: The "Hours" on the spreadsheet - does this refer to hours put into 'founding' the business or hours put into afterward?

I guess to make things a bit more confusing, this business cannot start for at least a year, due to various regulatory, compliance, and funding reasons. Maybe using a tech example was bad for this. But Founder A will be doing more of the leg work (say 40%/30%/30%) until the company opens in 2021/2022. Once the company opens, Founder B and C will have a salary (their full time job) and Founder A will not.

 

[charlesagrit]

@jesusfolloweranthony Hours have to do with anything that involves starting the company. If Founder A is forming the Corporate Filing Status, setting up a bank account, creating a slide deck and pitching, that counts. Just because the company is not operating and does not have revenue coming in, does not mean that work is not being done.

From there, if Founders B & C are getting a salary, you can deduct what their fair market value is from what they are getting paid. Let's say at another company they would make $50 an hour, but they are getting paid $40 an hour. Well they should only claim $10 an hour in the pie.

The way slicing pie works is that it will eventually even out. If Founder A is doing the majority of the leg work, he will be compensated. When B & C kick into overdrive, they will be compensated.

 

[dtom]

@jesusfolloweranthony Some good advice in here already, so I'll just add:

- cliff and vesting 100%!!!

- try to get as clear as day on expectations and commitments up front, in writing if possible (not even as a formal agreement, just so everyone is on the same page)

Had a bad cofounder experience a while back in a similar-ish scenario where it went south, good luck!

 

[613jono]

@jesusfolloweranthony I don’t know about the investment scenario, but Y Combinator suggests an even split.

 

[existia]

@jesusfolloweranthony Founder A is worth the least. No domain expertise, no technical background: you can hire what he brings to the table with less headaches. 5% with a 1 year cliff and a 4 year vest, re-negotiated after hitting certain goals.

Founder B and C should come in even. Split whatever you don't give Founder A.

Regarding investment, founders can get convertible notes if they want to invest which converts to equity once you close your A round.

 

[jesusfolloweranthony]

@existia Thanks, so what is your thought on what % Founder A should get?

Founders B and C have absolutely no interest in 'business' and don't know the basics of finance. I completely agree they can definitely hire a consultant for all of this, but Founders B and C also believe that having a partner for financial guidance is needed.

Thanks for the note on convertible notes as well. Is it unusual for founders to invest via debt (vs equity)?

 

[lizzyo]

@jesusfolloweranthony

Founders B and C have absolutely no interest in 'business'

Big oof here. If that's the case, neither should be CEO or CTO. Both those roles are heavy in the business side of things. CEO sets the roadmap for the business (including sales, marketing, outreach, partnerships, etc) and CTO sets the tech execution of the business (and so has to understand the business/domain and know how to convert that into a product). Both should be VERY interested in the business.

 

[jesusfolloweranthony]

@lizzyo Sorry, you're right, that sounded bad. Founders B and C would most definitely be responsible for marketing, outreach, partnership, etc. They know the space and have the network. When I say 'business' I guess I mean more of the 'numbers' side of things such as finances, accounting, law, and tax. Maybe this wasn't a good response either.

 

[existia]

@jesusfolloweranthony Get a good start up bookkeeper, hire an accountant as you need, and get a lawyer. You don't need another founder. If your accountant sucks, you can fire them.