Quick question on equity split for a technical co-founder. I was approached by an ex-coworker whom I had great rapport with for joining his startup.
They currently have:
- An idea (It seems like a pretty solid idea. The idea originates from someone with direct working experience with the problem trying to be solved. So this gives me confidence. )
- No revenue
- No outside funding (I believe some things have been self-funded in the amount of maybe a few thousand dollars)
- No MVP
I am a sr. mobile engineer with full-stack capabilities and I have full confidence I could realize their MVP. I'd be coming on to the team with the most technical experience and perhaps the most important skillset for implementing the MVP.
Their first offer was 5%-10% equity without the title of a co-founder. After expressing my hesitancy toward that they have moved to 15% equity and co-founder title. I mentioned that I would be most comfortable with a split closer to equal, but I would pull the trigger on 25%. I would not be taking a paycheck.
Is this strange? They mentioned that their council told them that "cash is king" - in which the founder's existing and planned financial contributions outweigh my equity grant. Though I mentioned that I wouldn't be opposed to helping with financial contributions early on as well.
These seem like red-flags, but I honestly don't know. A big draw for me towards joining is just having some fun and getting the experience, but I want to look out for myself in the non-zero chance that the company becomes a financial success.
https://www.ycombinator.com/library/5x-how-to-split-equity-a...
It should be equal split.
An idea's worth is zero, it is the execution that matters.
Other way to look at it is if they are offering you 15% and keep 85% for them, without an mvp or revenue how are they justifying having 5.6 times more equity than you.
The only possible justification is the few thousand dollars that they have put in, you can either match that or maybe take slightly less equity to offset that amount based on the expected valuation.
But please do not settle for less than equal split, because you will be putting the same amount of effort in the execution of the idea.
They claim that they plan on investing up to $50k in the first year, which was additional justification for a lower equity split. But again, this feels strange to me - they're basing current equity split off of projected funding? Is that weird? If it was just based off the current few thousand dollars that have been invested that would make sense to me. (But the few thousand dollar difference still wouldn't justify an equity difference so high)
This does bring up a good point though. The founder claims that they would probably be contributing a lot more cash than me, and thus taking on more risk. And on top of that, they don't want me to get entangled with voting rights on how to spend cash if I would not be the one contributing the most cash, thus, less equity. How do founders reconcile differences in co-founder funding early on? And especially after equity has already been distributed?
Idk.. this all seems so ridiculous to me. No? The company is currently worthless - difference in a few thousand dollars seem to pale in comparison to the execution abilities of creating a solid product. Of course, maybe my execution abilities suck, but thats what the 1 year cliff is for.
/rant
Anyways. I told them I'm out.
It's also not ideal that the "technical" co-founder who's family is not advanced technically. You guys will need to sort out who's taking the lead technically, from an implementation and eventually hiring perspective.
5-10% is more in line with startups that have secured pre-seed funding and are coming in as employee, examples here: https://topstartups.io/startup-salary-equity-database/?team=...
I got pulled into situations like this twice and even with an MVP the idea guy couldn't sell what he claimed customers wanted.
(a) if they have substantially more experience or have a more valuable skillset. For example, prior to this role they could command a salary that was twice what you could make in the market.
(b) they have substantial traction already. Revenue, customers, funding, team momentum, etc.
Neither of these seem to be true. "I came up with the idea" is not enough to warrant a difference in equity.
Honestly, the fact that they didn't offer you co-founder and equal equity is the first flag. Working with his brother is the second flag.
Alternatively, consider how much you're risking earnings-wise. Assume some initial valuation ($1M?), then try to compare the estimated value of your stake to a market salary. For example, 25% of $1M = $250K, and four-year reverse vesting brings that to $62.5K/year. (If you plan to give investors preferred stock, it could be worth only 1/3 to 1/4 of that.) Hence 25% equity with no salary gives you at present moment less than a market salary. So you would need more than 25%, and it quickly becomes clear the fairest approach would be an ~equal split.
If you do join as a co-founder, make sure you are given equal access to the company documents. I would also insist on being part of the discussions with lawyers (at a minimum to verify everything is as promised). And ensure you all sign the official cap table, decide on board seats, etc.
Regarding "cash is king," as a co-founder they should be very transparent with you about their financial contributions. There are many ways to handle founder capital that don't involve depriving you of equity, e.g. loans or convertible notes. And finally if you don't trust your co-founders to be honest with you, you may not want to go into business with them.
I hear this often but don't know what wisdom is behind this. Why shouldn't?
If they're other family members, same deal as you'll be caught in the crossfire. Meanwhile if things are going well, you'll still never have the same level of access to your cofounders as they have with each other.
Personally I think you should walk away anyway. The fact that they're trying to scam you with 5%-10% at this stage is a huge red flag in terms of culture and strategic knowledge. They either have no idea what they're doing, or they're actively trying to screw you, both of which are bad.