The length of time of vesting is not as important as protecting the rest of the team if one of the founders walks away two weeks later with a significant portion of the company. If a one year or six month vesting period makes sense, why not? But having no vesting can be very risky.
Here are some rules of thumb, with SWAG percentages attached.
1) Fulltime hours worked (with no salary) count more than part time hours worked (done in your free time from a day job).
2) Having the initial idea counts for 5%.
3) A difficult to replicate beachhead (patent, nontrivial code, brilliant design) counts for 10-20%.
4) Being the person who actually incorporates and recruits others counts for 10%.
5) Money invested is ignored. It should either be even contributions for everyone (and thus nulled out), or invested in a convertible note with very modest terms (and thus counted separately).
6) Holding the CEO role counts for 10%.
7) Having a reputation that will meaningfully impact the company's probability of being funded counts for 2x-4x.
8) If, at the end, you and your cofounders have equal shares, you did it wrong.
9) Once the company has had the validation and de-risking of a financing round, everyone from thenceforth is an employee, not a founder.
Generally it means you have an entrepreneurial track record, but it could also mean you have amazing investor connections, an executive track record of tremendous success in a relevant business, an EIR arrangement where the VC wants to fund you, etc.
Going from nonfundable to fundable or from a premoney valuation of x to 2x (which is what someone should do to merit this sort of disproportional value) gets rewarded by a corresponding increase in ownership.
I hate to sound too negative, but 99% of that "Rate My Startup"'s I see on here are worth nothing now, and will be worth nothing in 5 years. Don't spend too much time debating whether you deserve 90% or nothing or 20% of nothing, because they both equal the same thing.
Unless there was a overriding reason for one partner to have more equity I would only ever do 50/50 or 1/3rd each etc. Equal shares means everyone has the same amount riding on it. Everyone suffers the same stresses. Everyone gets the same wins. Reasons that would make me do it differently, if one partner has a proven track record (has had a major success in the past, that they were truly part of), if it was an extremely technical project (getting better search results than Google for example) I think the technical co-founder is probably worth more - if they can deliver, similarly if it is a very hard sell the marketing/business person might deserve more (although if it is that hard a sell I'd stay away). Lastly if the business needed money and someone had a contact that could bring in that money it would be worth considering giving them more equity (if it was me, I'd be demanding more).
I'm pretty sure in general YC gives the company equal money based on number of founders. I would imagine as a general rule that means they see all founders as equals. Seems like a pretty good guideline.
(Would be interesting to hear what PG and co do when they meet a team and think 2 out of 3 are awesome - do they fund, not fund, tell them to lose the other guy etc?)
My last startup was founded by 4 people with equal shares and rights. We failed early partly because we couldn't go into a clear direction, too many votes, too many opinions. We didn't turn out to be a well matching team either, though.
For my next startup I wouldn't do equal shares again, someone needs to be able to have the last word.
edit: Initially we started with 2 people with equal shares, and got two others in shortly after launch. We did an even split then, although in retrospect 30/30/20/20 would have been better. That is if you don't depend entirely on your newcomers.
The 30/30 would still be a problem though (from experience). There needs to be one visionary who has the final say. Help prevent fights and wasted time.
I agree, I think it might have worked for our case though because my initial cofounder was more business focussed and I was the technical one. He stood behind my technical/product decisions.
We had 40/40/20 - which wasn't too bad (indeed, I made the call as to who the CEO would be - the "business" guy with the 20%). Unfortunately this turned to be absolutely the right thing to do in the short/medium term but a disaster in the long term.
You could deal with "someone needs to be able to have the last word" without changing the shares of equity. The split of voting rights doesn't have to be the same as the split of financial ownership.
This is what we did for our startup. Started with 2 people, added a third later. 1/3 profit sharing, but only the original 2 founders have voting rights.
What's the skill set? Bringing on a co-founder for a specific skill set at an early stage is generally a bad idea because everyone will (and should) be doing everything for the first few months. If you're pre-product and pre-revenue you should be looking for partners...that is, people who have complementary skill sets and are willing to do everything possible to ensure that the company succeeds. At this stage companies should be split equally among the founders. If you're at a later stage then the percentage should be decided in a brief (emphasis on brief) negotiation process that accounts for existing product value created. In this case, a good rule of thumb is probably 1/n^2 where n=employee number.
Here's a tip I heard from a friend (assume 2 co-founders, can be extended to n without loss of generality):
Have both founder sit down and write a list of things they think the other founder brings to the table. Assign an equity value beside each point (with the remaining equity belonging to you). Spend some time doing this, encourage them to take it seriously.
After both of you have completed this, sit down and run through the entire list. Have an open and honest debate about each point.
Once adequate consensus is reached, add up the total % of equity assigned. Hopefully, this number will exceed 100%, if it does not (ie: both co-founders believe they make an outsized contribution), it's probably a good sign you need to go back and restart this process again. Multiply your personal equity stake by the total % equity to get your share.
It seems like a good idea because it avoids making the argument self-serving and talking about your own contributions. Instead, it's about getting the partnership off on a foot of mutual respect & understanding.
Disclaimer: I've never tried this myself, results may vary.
So, as an example, with a business guy & technical co-founder, the business guy believes the technical co-founder should deserve 80% of the company, the technical guy believes the business guy should deserve 40% of the company.
80% + 40% = 120%. Thus, the business guy ends up with 40%/120% = 33.3% and the technical guy ends up with 80%/120% = 66.6% of the company.
Both walk away happy that they got more than they felt like they deserved.
At the start, I think equal shares is really the way to go, as long as each founder is going to put in the same level of effort and dedication. Squabbling over percentages is bound to create tension before things have even got off the ground.
Scott Farquhar one of the co-founders of Atlassian said this best in his talk at Business of Software this week. Which I'm paraphrasing from memory...
If you're co-founding a startup equal shares is the way to go you should be doing this with someone you trust and can work with and squabbling over pieces of a worthless asset at the start is a sidetrack from doing what matters.
I'd add that vesting is never a bad thing but if you are so worried about people not contributing you shouldn't be starting a company with the person.
I've been considering this... now, I've been pouring all my personal resources into my company for five years now, so this is something of a special case.
The thing is, other people want to get involved, people who have skills worth more than I can pay in cash. I know that I have more dedication than they do. If we are where we are now a year from now, I'll still be plugging away at it. No other rational person would feel the same way.
So, my thought is that every year or so, we simulate another round of funding. We dilute all current stock by the amount of money we'd need to pay everyone market rate, and distribute the new shares based on the difference between a person's market value and the cash they actually got paid.
This would be pretty similar to the effect we'd get if we did everything in cash, and got a new round of funding every year to pay salaries.
What I like about it is that if you worked for me three years ago but then lost interest, your equity stake would slowly shrink as I kept pouring in another $80K/year worth of unpaid labour into the thing.
Of course my case is a special case. most of the time the idea is that if one founder loses interest, the company goes under and that's that.
It sounds like you just need to setup an option pool (with 4 year vesting) and hand out equity to some senior level employees. Why do anything more complicated than that?
so, if you don't stick around for four years, you get squat?
or you get 25% of that a year?
the former sounds a bit too draconian. I mean, I don't expect anyone (save for myself) to stick around that long.
the latter would stick me with the same problem I have now... the thing is, every year that goes on, I'm investing what amounts to a pretty large chunk of cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon, my ongoing contributions should mean something, too.
My point is that without dilution, as time goes on and I accumulate more (no longer working) people with percentage ownership in the company, my motivation to continue to invest decreases. If the company increases in value fast enough (and if my free-market value doesn't increase dramatically) that the percentage of the company I still own is worth the investment, we don't have a problem. But if I become more valuable or if the value of the company stagnates, my motivation for continuing to invest will decrease with my percentage ownership. I'll be thinking more about how to buy out those who are no longer with me rather than using those resources to move the company forward.
I could issue a new options pool (that dilutes existing shares) every year, but I don't really see the difference between that and what I proposed, other than it's options rather than equity.
Normally the vesting would be quarterly over 4 years with a 1 year "cliff". So 0% until 1 year (then 25%) then every quarter they'd get the next chunk.
The equity they get should be a reward for work they've done, not work they're going to do. So if they work their ass off for years they should get their equity and you shouldn't feel negatively about it.
Their piece should be quite small relative to yours. If you gave out 15% in an option pool only 7% of it might have been vested and exercised. That's not very much if it meant you got to have really great people work their ass off for you over years.
If you do it right you will not regret them owning a small piece of your company because they should have contributed to moving it forward in a big way.
You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it."
>You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it."
Now, admittedly, I'm somewhat irrational about my company. For the first four years, I think only an irrational person would have stuck around.
But it still seems like it would be very easy to get into a situation where I've spent away the company.
For example, say the company is worth $200K. (It's worth a little more than that, but in this industry, you are talking around a year revenue plus the value of your equipment, so valuations are really low compared to, say, social networks.) so I hire someone worth $130K and I pay them $30K, because I can afford that and they need to make rent. To make things fair, I need to give them half the company for a years work, right?
Yeah, after that first year, I'd feel fine about it. they put in a bunch of good work and improved the company. But, say they quit because I am an idiot and I overestimated the value of the product we built, so the company is now only worth, say $300K and still can't pay anyone reasonable salaries.
So, would I work another year? this time needing to grow the company twice as fast to feel the same effects? maybe. but the year after that? yeah I'm pretty sure I'd decide it's time to close up shop and start a new company or to get a real job.
Give them tiny percentages that are only worth a lot if the company is a big success. That means maybe 2.5% (with vesting) for an amazing person. If someone takes over most of your job (and does it better) maybe you'd give them 5%-10% but that's a very extreme case. Most people should be getting 0.15% - 1.5% depending on their contribution. You don't necessarily have to decide up front. You can start people low and award options for performance.
Plan to distribute at most 20% of the company to employees over the next 5-7 years.
>Give them tiny percentages that are only worth a lot if the company is a big success.
Is it possible to get good people who have other options for 1/4th what they could regularly get plus what amounts to a few grand worth of equity?
It doesn't seem like a very good deal for the employee, really. (seems like a fine deal for me if I could pull it off... but I'd laugh at you if you made me that offer. Sure, pay me market rate plus some tiny bit of equity, that's fine... but if you expect me to work for peanuts, I expect serious equity.)
edit: thanks for engaging with me on this; It's good to hear another perspective, I mean, mine is likely wrong. But I think that I might be trying to apply equity rules that make sense for "get big or die" businesses to a lifestyle business that only needs to double a few more times.
You just described how most startups end up. Even yc funded startups that flop have to close up shop and the founders go back to work at Facebook or whatever. There aren't any easy answers to your questions.
well, "easy" answer #1 is what I've been doing, which is to say, keeping all the equity to myself.
I was just thinking that I know of funded companies that pay market salaries that have been going for years (and many rounds of funding) without turning a profit. Each new round of funding dilutes the previous investors. I was thinking it might be possible to simulate the same thing when the "investors" (and that's what you are when you work for equity) are investing labour rather than cash.
Allow the existing founders to discuss and decide what the new potential co-founder is worth and what they are willing to pay (in percentage/equity) to get him/her onboard.
