How Much Equity a Technical Cofounder Should Get | Hacker News Reader

How Much Equity a Technical Cofounder Should Get

blog.nahurst.com

29 pointsnathanh32 comments

No, no, no, no. This is exactly the kind of thing a business guy would use to make what should be an exercise in research and negotiation into seeming like it's "scientific". Bullshit. Research and negotiate for what you're worth. This is the biggest mistake I see technical people make with businesspeople - ask for more, don't be meek and buy the business-guy "this is how it is" BS with unnecessary totally subjective fancy charts. And I say this all as a business guy, by the way.

Edit: Here's how I'd reply: "That's a great chart, it makes total sense to me, I can see how you'd come up with the 20% number... just from the research I've done on how much exits are usually worth, I'd be looking for something around 30% to come onboard, and I'd expect to work my ass off to be worth that. I'm making pretty good salary right now, but I am really excited about this project - how can we make this work? What would you expect out of me for me to be worth 30% vesting over XYZ timeline?"

In other words, don't argue, indicate you've done some research, don't trip the other guy's ego defense mechanism, state what you want simply without grandstanding, focus on delivering value, and then ask what you'd have to do to be worth that. It'll work. Really, unless they were offering something overly fair to begin with to be cool, a businessperson will respect you more if you negotiate with them a bit. Makes you seem like you've got a spine.

"This is exactly the kind of thing a business guy would use..."

Thanks for your comment. I didn't mean for this to come across that way. I wrote this is because I keep seeing technical cofounders getting the shortchanged on equity, and I want them to know should get more. And I want non-technical cofounders to know that they should expect to give the technical cofounder a larger % equity than they often expect (unless they've really got a lot to offer).

Here's a scenario I see a lot: a non-technical cofounder has just received their MBA, they have no startup or industry experience, they have no prototype, they want a "code monkey" like YuriNiyazov says in another comment to build their product for them, they offer them 5% equity with no salary. For some reason, I keep seeing developers take them up on their offer! Under this scenario, I'm saying a developer should get 50% of the company because the non-technical founder is probably ok (maybe not great) and hasn't contributed a lot to the business yet.

I'd argue that the prototype is worthless, unless it's validated by an active user set and/or profitability, and has been through at least one iteration where features were added or changed.

I've seen a good number of technical prototypes built by non-technical people, nominally via outsourcing, and in every case the only path forward was a full rewrite. Crazy interdependency and tight coupling make it easy to build a 'demo' version of a codebase, but they also make it very expensive to bolt on new features.

Similarly, I think the percentages are high, and don't account for any business skills that the technical founder brings to the table -- what about a tech guy who's gone through the VC dance, and built successful products in the past?

I see what you're saying about the value of the prototype. How would you account for whatever risk the non-technical cofounder took on to build it? Risk has to coordinate with value added though, so if a prototype didn't really generate any new value, it's worthless. Perhaps there is some value in "lessons learned" from messing up the initial prototype, but maybe future investors/partners shouldn't be penalized for them.

You're right about not accounting for business skills the technical cofounder brings to the table. I need to state that somewhere. Great point.

Wow, you're on the ball. :)

We have a very convenient way of expressing value here. If the prototype has proven solid enough to support an active and growing user population, then it has value, because it's cleared the first hurdle of software design -- making something people want and can use.

A few iterations on said prototype before bringing in a technical cofounder is also a big plus-point. Those iterations are where you find out whether or not your prototype will be flexible enough to turn into a real product.

If it's a good prototype that proves the concept and acts as a target, then it mightn't matter if there's any reusable code there.

I know a few people who have a startup that's based on the biggest mess in the world, that took off like a rocket when it was launched, and pulled in a big pile of funding.

Problem is, now they need to change direction slightly, and they can't, because their codebase and underlaying data model were built without anybody asking the question, 'So, can we fix this later?'

I'm all for throwing a rough prototype together that's buggy as all hell and lacks features, but don't build bits of it that you can't easily change later. This isn't really as hard as it sounds, but it takes foresight from somebody who's built a lot of crap over their career and seen how their bad decisions made things fall apart. :)

This is exactly the reason why NYC is an awful place for technical founders, and part of the reason why I left. Zed Shaw has blogged about this incessantly - even when someone tries to recruit you as a technical cofounder, the usual treatment you get is "Look, you like making technical decisions? Great! All the technical decisions will be yours. You will be my pet technical-decision-making code monkey, here's 10%". Yuck.

The situation with an MBA trying to get a tech guy for 10% (usually much less, actually) happens just as much in the Bay Area. In fact the culture of the first dot com boom was almost entirely comprised of startups structured like this.

There are more opportunities for nerd/nerd startups in the Bay Area, though.

Also, this article is a good example of a dude you want to avoid working with.

Is this something that's prevalent in the NYC startup landscape, more so than anywhere else? If so, that's unfortunate.

What if the technical cofound has contributed significantly to the business idea & is doing more than his share of product development? This chart seems to be unfairly biased towards the non-technical cofounder because it assumes a clear dichotomy between technical & non-technical skills.

You're absolutely right. The chart is biased toward the non-technical cofounder. I'm assuming they've done significant work on the business before recruiting a technical cofounder. I say it in the assumptions section, but I should probably make it more prominent.

The point is that the "assumption that they've done significant work on the business" is simply not valid. Before you have a product, all the "significant work done on the business" (usually listed as 'doing market research, incorporating, and having an email from an investor that says 'I am interested in talking more when you have a product' which is investor-speak for 'please go away') is just as much of a risk and a liability as software that will inevitably be rewritten.

When you launch and all those business assumptions change later on and you need to pivot, rendering null all the business work you did previously, it's not like you would go back to your technical cofounder and say "I was wrong about that market, all the work I previously did is now worthless except for the 'lessons learned' part, so here's the extra 20% I subtracted from your equity originally".

If you've already done "significant work" on the business idea without discussing the split, you've got problems.

How exactly does a non-technical co-founder start earning revenue or have over 10K users? Someone must be doing their development? While this situation is possible, it seems unlikely.

Also, why do you get extra equity if you have raised VC funds. To me the point of a business is not to raise VC funds but to make money.

I also dislike the 'has significant experience or connections'. If you polled every single non-technical co-founder, I'm sure they would insist they have both those things. That is not really quantifiable.

I don't think this really makes sense and this will apply to only a very small set of start-ups.

I hope no one uses this...

A technical cofounder should get as much equity as he or she is able to negotiate.

Technical cofounders end up feeling burnt - or walking away from opportunities feeling like non-technical cofounders are completely delusional jerks - because they don't have as much experience negotiating. When that non-technical cofounder puts an offer of 10% or 20% on the table, he might just be an idiot, but he might be expecting you to press back hard with a counterproposal because that's what he would do in this situation.

Instead of working out formulas which will allow you to justify why your equity is what it is, learn to negotiate. The best book I've read is Roger Dawson's 'Secrets of Power Negotiation'. Then, practice.

This is the biggest piece of BS that I have ever seen. If you want to work with a reward system then hire someone as an employee and give them a bonus (money, options, whatever) when they reach those goals.

Having this sort of stuff between co-founders only builds up pressure, tension and will ultimately lead to people leaving.

This article reminds me of an actual life situation I’m currently living. A friend of mine is an entrepreneur; MBA guy he has under his belt, couple of well funded, failed, heavily tech startup.

The guy is very smart and has tons of ideas, most of them requiring a lot of tech implementation. His downfall according to my own analysis: his lack of respect for tech guys, he is stuck with the ninety outsourcing mentality, he basically sees a tech guy as some dude that work can be outsourced anytime to India or any other place in the world.

I think a non tech guy, an MBA guy who wants to succeed in Tech startup need to get in trustful and respectful partnership with tech guy(s). Tech guy should have an equity base on how important his contribution really is to the business. With my friend startup I have seen poorly executed tech companies failing miserably despite being well funded.

Also, I've been in numerous situations where the technical team (and techie co-founder) deliver time and time again while the non-technical co-founder does not manage to sell or monetize the product. If you want to play the blame game then this should work both ways.

Pfffft. I already have a working prototype, with 10k users and I'm only getting 35%? You can take a walk pal.

No, the -x% is subtracted off the techie's part. The non-technical founder gets 50% or more.

If you're a technical founder and have a prototype & users, the article isn't for you.

You must be very non-technical indeed :) Admittedly not the clearest flowchart, though...

What does the non-technical founder do that the technical founder can't?

I have see alot of cases where the biz guy says he has the connect or he will sell the product but when its built, he expects the techie to come along with him and sell it. Or he simply says the connect fell thru.

Alot of times I sit and think what would I have a business guy do? Write a business case? Write a marketing plan? Raise capital?

Then I say to myself all these can be done by me and more than likely the the biz guy has just as much experience as me in accomplishing these goals.

But the point is i'm confused about a biz guy's value.

The guy who builds - he gets half, minimum.

I stopped reading this once I saw the huge flow chart. Not only does this over-complicate things, but it is the completely wrong way to allocate equity among founders.

I'm a strong believer in founders splitting equity evenly. If you want this technical person to act like a founder, he should get an equal share. If you want an early employee, treat him as an early employee, but don't expect him to work like a founder.

Add 100k for every engineer on the team, subtract 150k for every MBA on the team.

this is nonsense. the numbers and starting points are completely arbitary. Every business is different, every founder will have different skills and contribute in varying ways and to differing degrees.

Here's how to value past work.

Imagine that you are sitting in a coffee shop with your biz person. Someone walks up, shows you a prototype and offers to sell it and the idea. For the sake of argument, said someone is selling exactly what the biz person claims is so valuable.

How much will you pay for it? How much will your biz person pay for it?

That's when you find out that the biz person feels that their contribution going forward is significantly more than yours.

Unless the non-technical founder has a lot of involvement in the business (e.g. the founder is a designer, the idea is very business development intensive / sales, etc...), I think the chart should be updated to start the tech founder at 95% ownership or more if all that's there is just an idea.

Ideas are cheap.

Great, now how about an article that is based on going in the other direction... technical founder has an idea and has it X% implemented ( where X can be 0-whatever) and is seeking a non-technical co-founder to focus on sales/marketing/bizdev/etc?

Supply and demand applies to equity distribution, whether you're technical or not. If you have skills that are rare for a particular startup, then you should be able to demand a larger share of equity.

Every cofounder should get equity based on the question "What is this idea worth without this person?". If you could hire any skilled programmer to replace the technical cofounder, then they shouldn't get a large amount of equity. If they are bringing domain knowledge, specific experience or an uncommon level of expertise, then they should get a lot of equity.

> Every cofounder should get equity based on the question "What is this idea worth without this person?". If you could hire any skilled programmer to replace the technical cofounder, then they shouldn't get a large amount of equity. If they are bringing domain knowledge, specific experience or an uncommon level of expertise, then they should get a lot of equity.

And the same applies to non-technical co-founders.

Combine this with the "how much would you pay to buy" answer wrt valuing the "idea", prototype/power-point, or other past work, and the equity division is "done".

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