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Reality check... you just gave B the job of deciding how much equity he should have while you're busy doing the actual work of starting the company. That's like paying someone to pick your pocket.

If you don't know how much these people are worth, it is probably because they aren't doing work that is of any tangible value to the company yet. Sure... they'll be invaluable to the company in the future. Everyone is. But do yourself a favor and get them to articulate exactly what it is that they will do and tie a value to THOSE milestones. Then link their vesting to hitting those clearly-defined milestones. And make sure those milestones push the business forward and don't include random stuff like "define equity split".

Don't give people equity if they don't have work to do RIGHT NOW that you ABSOLUTELY need them for. If not, wait. Every day you wait means their risk goes down and they will get less equity. Do NOT give people a part of your company because you think you'll need them "later" and because you think they'll pull their weight "later".

Amen to that reality check.

The more I read this, the more I think you're shooting yourself in the foot with this setup.

"link their vesting to hitting those clearly-defined milestones"

Great advice here. If I bring on a business guy who claims he can land the first 10 major accounts that will be critical for the business, that's all well and good. But unless he's a proven rainmaker I wouldn't give up equity unless it's vested to hitting these key milestones.

And by the way, don't put this off as a "task" to your secondary business partner. Both of you need to sit at the table and discuss.

Question: I hadn't heard of vesting based on milestones before. Is that really a commonly used option? Since milestones are so hard to predict, and depend on lots of factors, not just the work of that one person. What would an example of a clearly defined milestone be?

Thanks, this kind of rings to the first thoughts I had.

This has to be one of the most frequently asked questions on HN.

It may help to consider carefully all the reasons you give equity:

* To repay effort (like, doing all the up-front coding)

* To compensate for risk (taking a job with an uncertain future)

* To compensate for financial investment in the company

* To incentivize future effort and risk-taking

* To delineate control of the company

* To access valuable tangible/intangible assets held by other people (such as a network of contacts in your problem domain, or a valuable endorsement)

Make sure you're not just thinking about equity in simple terms. You can sabotage your team by creating even superficial imbalances. You might think, "I'm doing all the coding up front, so I should get more equity because I'm valuable on day 1". Maybe that's true. But it might also be true that your partner took the same amount of risk as you, got less equity, and now also has a reason to blame you for every setback on the business side, because you delivered crappy code that prevented him from realizing his equity stake.

This is an absolutely utterly basic problem in comp package design, something that anyone who has ever hired a salesperson will tell you right off the bat. In the context of comp plans, if a conflict can happen, it will happen. Make sure your fiddley equity plan is worth the effort.

Remember, if your business is unsuccessful, 60% of 0 is 0. If your business is successful, you'll have other levers to pull besides day 1 equity grants to portion out upside.

(I personally wouldn't allocate a single share based on someone's supposed ability to land funding, though. Assume you won't get funded.)

It seems to me that you are the most important person in this company (because you do most of the work right now, and because of your comment that "PersonB's importance will probably be greater in the future" and "I just handed this task to person B"). If you're handing tasks to people, you're the boss.

1/3 each does NOT seem fair.

To be honest, I don't understand why you are getting person B involved at all, give them equity and treat them as a co-founder if they don't have much work to do right now (as you seem to suggest). From your description, quite honestly, it seems like you might as well have hired an intern or gotten an accountant instead of giving this person a large part of your company. "Knowing a lot about funding" is NOT a reason to make someone a cofounder.

That's my 0.02c, sorry if that sounds harsh. I just don't want another post in 12 months about how to split up with my cofounders who aren't pulling their weight.

Person C is coming in later, so should get significantly less equity.

From what I'm hearing, I would not have personB involved with the expectation that at some point in the future they'll start pulling their weight. If that is the thinking, then wait until you really, really need them, and then get them involved (for a lot less equity). Person C sounds important, so make them your second cofounder.

Not knowing about the details, from all your comments it sounds like personB is not doing much. YOU found another cofounder. YOU are telling personB what to do. YOU also expect personB to start pulling their weight in the future. All this points to letting them go NOW, and asking him back later when there's a need for his expertise. One more thing: having a business co-founder who isn't doing much right now but "knows a lot about funding" may well hurt your chances to get funding instead of improving them.

Get things right at the beginning. Don't get a business co-founder just because you think you need one.

Of course, I may be wrong and there may be a lot of work for personB right now that I'm not aware of :)

Think about it like this: every day, the risk of your company is (hopefully) going down. Every line of code you write, every action you take, should help with that. So every day that passes, when someone new joins, they will get less equity because they are taking less risk. More of the work is already done.

Given that you had the initial idea AND you're doing the coding and design, I'd say you should probably get additional equity. (How many successful startups had 100% hacker founders? A lot. How many had 0% hacker founders? Very few.)

Of course, this is based on my entirely limited knowledge of the rest of the situation. There are many other relevant questions to ask. Take a look at some previous threads on this same topic: http://searchyc.com/equity

I will say, try to get equity taken care of up front, before you bring people on. It will prevent conflicts of a magnitude you would never expect.

This post is insightful: http://cdixon.org/2009/08/23/dividing-equity-between-founder....

At the early stage, people tend to overvalue past contributions, and undervalue future contributions. Equity grants should be for a person's expected value over the next four years.

Since you are in the early stages, go with 1/3 each, anything else will potentially cause a lot of headaches down the road.

Having equal equity creates a healthy environment where everyone feels that they should put in as much work as they can. If the others have less equity than you, they probably won't be as motivated as you are. And even if they were, you'll likely start to question whether they are working hard enough, whether they really want the company to succeed etc. This will cause a lot of unnecessary tension.

So I think you should bite the bullet, give up some equity in exchange for better odds of succeeding.

Also, some kind of vesting may be a good idea if you don't trust you cofounders enough yet.

(I was in a somewhat similar situation like you about a year ago, went with 1/3 each and I'm still very happy with that decision.)

To be honest to me it seems like you practically giving away a big chunk of your company for free. Person B doesn't seem important at all at this moment, and seems like the relationship is partly based on friendship. Was this a friend you let into your business just because you think you need a cofounder? Person C seems of utmost importance in comparison to Person B, but still seems like she's not required at the moment. I made the same mistake once when I was younger, but luckily everything got thrashed and I started again by myself involving other people only when it was really necessary.

tl;dr: Only add cofounders when you're sure your really need them, and only then assess the risk and their involvement as a measure for equity.

You 40%, others 30% each...

Assuming they will be co-founders with you from the get go...

Whatever % you go with, have vesting.

A mentor once asked his entrepreneurship class "How do people decide what a business is worth?" People threw out Cashflows, asset value, and other thoughts. He disagreed: to Ken a business is worth only what people are willing to pay for it.

It seems you are in the same boat: they are worth what they feel is fair.

All this to say that I have never heard of a uniform method. It's all up to negotiations for your team.

Why not:

51 : 24.5 : 24.5

One person in control. Without the design, programming etc. there is no company. Those whose work will benefit the company down the road should be rewarded with equity that can be cashed down the road.

1. Write down a list of tasks that must be performed to move the company forward.

2. Decide together how many shares each task is worth.

3. When the task is finished, split the shares betweens the founders in a joint session.

I don't think that's good advice.

Why not?

It assumes you can decide on a list of tasks now and then just menially perform those tasks for the next few months. That's not how it works.

Ok, then don't make it tasks but measurable goals.

"We should have 100 signups." "We should have a first paying customer."

And so forth.

This may help: http://www.avc.com/a_vc/2010/10/employee-equity-options.html

There's no magic formula here: the objective is to estimate the contribution each of you will have to the success of the company over the next stretch of time.

Is there any immediately compelling reason why 1/3rd each isn't fair?

Because person B hasn't done much yet, and because person C is joining later than the original founder(s).

"Done much yet" and "joined later" don't really matter much, in my book-- as I said, the question is, when we look back at some future point (say, a year or two from now) and total up all of the contributions, how much value did each person provide?

Clearly, person A has contributed the most so far. That doesn't mean that the trend will continue that way.

You don't assign equity based on work that isn't done. That's asking for trouble, unless the person has a huge track record of doing the type of work you have them doing.

Vesting is key here. I'm not the first to say it, but setting up key milestones and vesting based on their successful (and be sure to define "success") completion is the only way to go.

Question: I hadn't heard of vesting based on milestones before. Is that really a commonly used option? Since milestones are so hard to predict, and depend on lots of factors, not just the work of that one person..

No. You shouldn't give equity now based on an imaginary look-back from the future, because it is impossible to predict the future, that's my whole point.

PersonB may contribute later, but at that point there will be a lot of existing value already, hence, even if they add more value, the percentage of value they add is less, and the risk they take is a lot less (since there is already value there), hence they get a lot less equity. How early you join makes ALL the difference.

Re-read the question. It is early. The code hasn't been written. The risk is still astronomical.

So if I join Google today and I come up with another billion dollar income stream for them, I'll get as rich as the founders? No. That's not how it works, sorry.

We're talking pre-launch here. From the sounds of it, the value created thus far is negligible in the larger scheme of things.

Actually: while I think the "person B hasn't done much real work yet" logic doesn't really work, joining later definitely is relevant to your equity. Person C is taking less risk than A and B; A and B need to be compensated for that.

Ask HN: How to split equity