Ask HN: Offered partnership in a startup, what do I need to look out for? | Hacker News Reader

Ask HN: Offered partnership in a startup, what do I need to look out for?

16 points1_player11 comments

I'm a freelance software engineer that's been working for basically a single client for the past 2 years, with a very flexible contract and great working conditions.

We recently started working on a new, very interesting project, and today I've been offered to start a partnership with him in a new company based on this product. His reasoning was to give me a greater incentive to work 110% and not to leave him tomorrow towards other pastures.

We haven't decided anything yet, but the offer was 25% in the company, plus a minimum salary since I can't (and won't) work for free while we're building the MVP.

The client is great, has always paid on time and been very professional since I've started working for them, and has always respected and given me the freedom of picking the best tech for the problem. My role would be lead engineer/CTO. Their role would business guy/CEO.

Seems to good to be true, but I'm definitely leaning towards doing it. Is this arrangement common, and what do I need to look out for?

Thanks.

A few points:

1. At 25% of a two-person venture, the potential to get screwed is large. Basically the majority owner can make rules that lock you out of some or all of the upside.

2. Because of 1, you want to be able to see the books.

3. Get everything in writing.

4. Figure out a way to get it to 50/50 equity. This may mean no salary or IOUs to the other person for a delayed salary/payout at a premium (since they have to wait). This can get tricky very quickly. That said, unequal equity can get tricker.

5. Note that all of the trust issues mentioned above may not have to do with your partner -- someone providing additional funding can dictate onerous terms for you.

Note that it is possible that you found a dream partner and nothing will go wrong. Also note that getting massively screwed in the stated arrangement is also possible. Adjust your expectations accordingly.

Congrats. You worked with the person before and that's a lot better than cofounders who just met. Ideally you know how the other person reacts under stress for example.

First of all make sure as much as possible of the arrangement is in writing. Not being willing to write items down is a red flag. Jokingly point to 'The social network' movie (early days of Facebook) where a paper trail was missing.

Will you have equal access to the company bank account (to see expenses and gauge how good the company is doing)? Will you be a director (able to sign or co-sign contracts)? Do you have the same class of shares as the other founders and proportional share of votes? Things like this matter once another shareholder gets added (and angel investors and VC are shareholders usually). Who will own the created intellectual property (ideally the company) and who transfers what to the company now (e.g. existing domain name).

Are you allowed to work on other projects? If not then the tax office might question your sole trader/freelancer status.

There's no perfect answers, just write down those arrangements.

Go through this scenario: At some point in the future one person might be sick, on a long holiday or simply demotivated (not to say depressed) and maybe can't put in the same hours. How would you handle that? What can you do now (write down) to prepare for that scenario?

Thank you, these are really good points I'll have a think about.

> Will you have equal access to the company bank account (to see expenses and gauge how good the company is doing)? Will you be a director (able to sign or co-sign contracts)? Do you have the same class of shares as the other founders and proportional share of votes?

Is it wrong/stupid not to want to care about that? I enjoy the technical side, I enjoy the idea of managing people, but I want to delegate as much business problems as possible and concentrate on the tech.

Basically, I would be interested in this arrangement because I enjoy working with this person, and for my value/wealth to be directly proportional to the effort I'm putting in. And because the problem space is interesting, obviously.

The less visible you are, the easier it is to throw you under the bus. For example, suppose you don't give any interviews, never sign anything for the company, never pitch to investors, etc. Then, it is easier for them to pretend you never existed later - even if you make the entire product. So, I suggest you be at least somewhat visible and offer to help your business partner with some of these things in addition to coding.

Also make sure you agree in writing to a percentage of the company rather than a total number of shares, and make sure you're privy to the final cap table.

Seems like you have a good relationship, and likely a good starting offer.

A couple thoughts about the equity: 1. You say you'll be taking a salary. That means, I assume, the other guy is capitalizing the company? 2. Figure out how much he's investing into the company. If he's paying monthly expenses out of pocket, figure out how deep into the hole he's willing to go. Ask him what happens when you guys hit that number. 3. It would be much better for him to commit to investing $x amount into the company up front. He should then invest that money at Y agreed upon valuation. You should split the equity 50/50 first, and then he would get whatever equity he invests for.

Lastly, be very clear about the vision of the company, how it will make money, if other investors will be brought in, etc. It's all very new to you now, but in 18 months when you've invested everything in it, you'll want a solid foundation of communicated expectations.

Get everything in writing. And good luck.

I suggest insisting on 50/50 or client can continue to hire you as a hired gun. Don't be taken advantage of by a business guy with a lot of MBA vocabulary, flashy decks and hocus pocus. As the CTO you ARE just as essential to making the product as your partner. Do you want to be in business with someone who undervalues you in such a way?

At times, choosing not to do something can be just as beneficial to your success as doing something. If you're a badass, just remember this is not the only opportunity that will come your way.

I envisioned an alt-marketplace like Witchsy about 4 years ago; tried to work with someone who had a common interest in doing the same, with someone who had the domain knowledge and access to artists. Very similar to your situation, he had paid me handsomely for custom work and deployments. When it came to the idea of collaborating, he greatly overvalued his contribution and refused an equitable split of ownership. Fast forward to last year, his shop is closed, business bankrupt. All of his so-called "business acumen" didn't amount to shit. I totally dodged a bullet.

And, hire an attorney. Stock issuance, convertible notes, funding, SEC compliance, etc. can burn though a lot of cash.

Some good points in the thread already, but I'm surprised no one has mentioned this one: founder equity should vest over time.

If you don't think they need to vest, then imagine a future in which the business begins to work out. It's doing so well that you want to work your ass off to make your 25% worth even more. Imagine furthermore than your partner, despite owning 75%, can no longer spend any effort on the business. What do you want to happen at that point? Keeping putting in 100% of the effort, for 25% of the rewards?

I'm not sure what you mean by 'minimum salary', but it sounds like it would be better for you and for the company (but not for your partner) for that to be structured as an uncapped convertible note. The partner's could be given another convertible note in lieu of salary.

Word of advice: Make sure your “business guy” already has a written marketing plan in place showing how money is to be made, and an exit strategy. Then make sure you actually really agree that it is accomplishable, and that you are willing to go for it.

Are you shooting for a unicorn or just trying to make a sustainable, long term business? I think your answer might affect your considerations. For example, if you’re trying for a unicorn, the chances are pretty slim. Perhaps you would want to optimize on salary with some options. If you’re aiming for growing a long term business you might want to optimize on stock since (imho) that goal has a higher chance of success.

Do you trust the person? Do you believe in the product? Do you think the offer is fair? Do you believe the other person can deliver the product to market? That's really all that matters.

If there are doubts about any of those, consider passing.

Make sure there is already a written marketing plan in place.

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