Is being offered 23% of a company an insult as a partner in a start up? I am responsible for building and designing the entire web app, coding the Frontend, backend, and digitizing all requirements for our proof of concept. My partner found me on LinkedIn. Its his idea, he will be running business functions, marketing, client onboarding, and he has a few real clients to do a trial run with. We’ve been working together for two months in a trial period and now we want to write up contract. How do I value myself?! ……This is my first start up !
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what is the other guy getting?
“It’s his idea” he will be running all functions to make the company successful. It sounds like you are only contributing sweat equity, while he is contributing both sweat equity and liquidity. 23% sounds fair to me.
Late-stage cofounder here that took 20%. It depends on how important the work that’s been accomplished is on the business and fundraising strategy. In my case, there was some initial indication of product/market fit and traction.
More may be needed in your case (25-35%). You could consider asking for additional option incentives aside from straight vested equity options.
This is a terrible deal! An idea is not worth 77%. Please please consider this. In the beginning you will be building the app and doing most of the work at least initially, while he will be basically just sitting there and telling you what to code. If this startup fails, he looses nothing, while you loose the time you wasted building it.
Do not take it. Technical cofounder are hard to find and are very very valuable. It should be at least 50%.
50-50, no matter who’s idea it is. If he invested some of his money upfront, I would consider putting in some money as well. You guys will both be in the trenches, and execution is by far the hardest part. Anything other than 50-50 has the potential of creating a edge between you guys down the line
What does the cap table look like? I understand you’re the only two employees, but does your cofounder own the other 77%?
FYI you have a little bit of leverage if you haven’t assigned your IP to the company. That usually goes hand in hand with equity grants and if you’re just getting to your contact now, it sounds like you might still own your inventions.
Source: venture attorney
This is why you hang out in venture capitalist hangouts. So you can get brown bag stories from venture capital attorneys, who you pay for a personal consult asap on any contract you are planning to sign and rely on to protect your interest in the sweat equity you are about to commit to.
Your equity should be vested and you can work with the primary investors on deciding what it should be.
If they are acting as the CEO and doing all the pitches, gathering funding, etc. then, yea, they should likely get close to 50%.
If you are building the entire thing, then you should also get close to 50%. However, investors will eat into those percentages, so it would likely be more around 25% for each of you.
But vested equity is setup with importance of roles over time and you can schedule a reinvestment of equities for the team over years. So, if your work is worth 50% now, but will be 25% later, you can start with 25% and it can grow to 50% over 3 years. Same with the CEO.
Also, are you getting paid for this work? That will make a difference on the equity in the company.
It honestly sounds pretty legit and you can probably negotiate, but without more information, it is hard to say.
As some have said already, 23% is pretty high for cofounder equity stake.
Some people get as low as 4% but that’s assuming the startup can do multiple raises.
Sales trumps engineering. This is gonna piss a lot of engineers, but an amazing product without sales gets you nowhere. A shitty product with great sales still gets you somewhere.
So, if you think you can line up clients, deals, have a great network, then sure, this is an insult. If not, 23% of something kicking off is so much greater than 50% of zombie mode.
Your partner obviously values his skills for this business more than your contributions. It’s up to you to understand if that’s valid.
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Whenever equity is expressed as a percentage you have a “fixed” or “static” equity split and sooner or later someone is going to get screwed. If you’re not the person getting screwed then you are the person doing the screwing. It’s unavoidable. This is because the percentage you recieve is based on the assumption that you are going to provide exactly 23% of the inputs necessary to reach breakeven or series A investment. It’s impossible to predict future events and, therefore, impossible to predict equity.
Instead, think of it this way:
Let’s say that you are responsible for building and designing the entire web app, coding the Frontend, backend, and digitizing all requirements for our proof of concept. But, you are going to get paid cash, instead of equity. You are simple being hired as an employee. What would you get paid? Would you get paid by the project? An hourly rate? An ongoing salary?
Whatever you negoitiate as cash payment is your fair market rate. If you get paid your fair market rate you don’t deserve any equity because you aren’t putting anything at risk. If, however, you aren’t paid your fair market salary the unpaid amount is, in effect, at risk.
Your share of the equity should be based on what you put at risk relative to what others put at risk.
For example. If you are worth $100,000 a year and you work a year without pay you are putting $100,000 in unpaid salary at risk. If your partner puts $200,000 at risk he deserves 66.66% and you deserve 33.34% This is a logical, obvious, unambigious conculsion that is perfectly fair. There’s not guessing or predicting. Your at-risk amounts can easily be calculated.
Any other approach is going to be unfair.
This approach, known as The Slicing Pie model, is used by thousands of startups all over the world and it never fails. You can learn all about it at www.slicingpie.com
Did either of you put real money in?
I know a SaaS startup with 80/20 split, but the guy with 80% has the industry exp, product vision, and $X0,000 invested personally to pay for the MVP that’s already built. The 20% guy is a full stack developer who came on board later to carry on the dev work.
You have to decide what’s good for your situation, but be reasonable!!
Vesting contract with performance requirement on sales
Just my opinion OP , but I think Jobs was right about that the magic lies in the execution, so I would normally want more personally (but might be fine in this situation, elaborated further down). Ideas are cheap in comparison to execution and can get stolen anytime after all. To play the devil advocate, does anything stop you from just starting your own company with his idea right now?
Still, 23% is not bad in this scenario in my opinion. Now, why is that? Because he has CLIENTS LINED UP. He does not seem to be a wannabe entrepreneur, a business plan writer but non-doer or like those people who pay to go to multiple real estate seminars and still haven’t bought their first rental (This last example honestly just makes me sad to see😢).
So, can you accept 23%? Be 100% sure that you are all right with that. If not, the resentment might eat you alive. Again, be sure about this.
If you still want an equal split I would emphasise that you want to be a partner with him on this expedition, that you really believe in it and go all the way with him. Maybe read the “Go all the way” poem by Charles Bukowski while you at it🫡😁.
Anyway, just my 2 cents! Best of luck!
No. A founder with the idea deserves more. He found you and could contract with anybody to build. It sounds like you’re more than just “coding” and so being offered equity is great. As a start up, $ are limited and so I would also make sure that cash income is proportional when the time comes. Just as you’re being held to a project plan to build the tech, he/she needs to be held to a project plan to build the business.