Ask HN: Where do you draw the line between a co-founder and early employee? | Hacker News Reader

Ask HN: Where do you draw the line between a co-founder and early employee?

55 pointsmailarchis87 comments

When you are just starting out and building your team, how do you decide who is actually a co-founder viz-a-viz an early employee with equity

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I will be that guy and say that all the discussion around who is allowed to self-designate as a ”founder” is fatuous and fetishistic. It’s an obvious attempt to amplify one’s importance beyond sense in order to provide some level of resume inflation and just dilutes the meaning of the word.

In my opinion “founder” is not a word someone should be unilaterally conferring upon themselves, but is more meaningfully applied only by others. Until you are making actual money, you are someone trying to start a business. When you actually make money, that is at least break even, perhaps you can consider yourself an “entrepreneur”. Leave the identification of “founders” to people like the Wall Street Journal if you wish for the word to retain any meaning at all.

I agree with you with the caveat that I think it is important for two things: equity, and expected work.

If I'm a co-founder I am going to work day and night on our problem space, the tech, whatever my role is. I'm going to be thinking about it during dinner. I'm going to wake up early and stay up late and work on it during lunch breaks if I'm still an employee somewhere. I'm willing and expecting to work for $0 cash comp for months or years, or until we get investment. I'm also going to expect an equal share of equity to my other co-founders, and expect them to work more-or-less a "fair" amount when you compare our different equity stakes. I also expect to know what their equity stake is. Ballpark I would look for a floor of 25% equity before pulling out a pool for early employees.

If I'm an early employee, I will probably work more than 40 but I'm certainly not working 80-90. When I'm not working, I'm not working. You're probably not getting my cell phone number. You're going to have to pay me something, and the first time a check bounces or a direct deposit is missed I'm gone. But I'm also going to be happy with a lot less equity than 25%.

I'm willing and expecting to work for $0 cash comp

That's illegal in a C-corp, the common form of startups (in the Silicon Valley sense of "startup"). Everyone is an employee and is required to be paid the minimum wage established by law. And somewhat ironically, the liabilities created by working for zero compensation are a reason for investors to forgo investing particularly since it correlates with lack of profitability.

A 20% or greater ownership position with an active role in management of the business will exempt you from that requirement:

http://www.ecfr.gov/cgi-bin/text-idx?SID=e026726958b72eec799...

https://www.shrm.org/resourcesandtools/tools-and-samples/hr-...

You're typically not going to become a C-Corp until you take investment, at which point you'd draw a minimal salary.

Without being a C-corp there’s nothing in which to have equity or rather “equity” doesn’t mean anything much.

This is just not true. You can absolutely own part of a business that isn't a C-Corp. I've purchased various percentages of LLCs and S-Corps (and LLCs taxed as S-Corps) and not once have any of my attorneys, accountants, or the IRS come to the conclusion that the equity "doesn't mean anything much."

C-corps form the context of my comment because they are discussed up thread. Sorry for assuming that you didn’t need clarification.

> Without being a C-corp there’s nothing in which to have equity or rather “equity” doesn’t mean anything much.

Completely unwarranted rudeness notwithstanding, this comment is still 100% false.

You brought up C-corps, and legal/accounting structure isn't mentioned in any of the parent comments. Which is fair, but like I said nobody first starts a business by filing paperwork to incorporate a C-corp. They work as an LLC or sole proprietorship, and if/when they reach a point where it makes sense, they restructure. I even alluded to that in my sentence you took issue with, "or until we get investment." Yes, you'll absolutely restructure as a (Delaware) C-corp if you take venture investment, and this minimum wage law would apply - but not to the co-founders, as @adventured noted.

Obviously, clarification would not have made any difference.

Where does this obssesion with starting businesses in non-healthy way come from?

Indeed. I was the first non-founder employee of a company many years ago, joining the two founders in a tiny office. There was never any confusion about this: they were the ones that had put in the work and formed the company, and I was the one hired in a normal process.

Are you a director? Were you included in the initial distribution of company equity? You're a founder.

Have an employment contract which does not specify "founder" as your job title? Not a founder.

Working for the company without clarification of role or contract? You're ... very optimistic and have great trust in humans.

I will counter that with saying that it makes a huge difference to (1) investors, (2) the press, (3) your bank (try getting a mortgage as a founder), (4) family and friends, (5) your lawyer when talking about your class of shares and (6) the rest of the world.

I'd agree with you if we are talking about C-suite titles in small businesses or early stage start-ups.

There's a vast gulf between people A and B starting a company with person C as a cofounder vs starting the company with C as their first employee.

This is about more than just names. An employee will probably be paid better, will get far less equity and will probably end up with a different class of shares.

Making someone a cofounder is a far bigger bet and being a cofounder requires a lot more risk tolerance.

Musk became Tesla co-founder retroactively.

> In my opinion “founder” is not a word someone should be unilaterally conferring upon themselves, but is more meaningfully applied only by others.

Simply not true. It is a legal definition with someone leeway at the edge cases.

> Leave the identification of “founders” to people like the Wall Street Journal if you wish for the word to retain any meaning at all.

What? Since when did Wall Street Journal decide who are the founders? The founders tell the WSJ who the founders are, not the other way around.

Pretty much founders are those who weren't hired. Early employees are those hired by the "founders".

> Simply not true. It is a legal definition with someone leeway at the edge cases.

Can you provide a citation? I've spent five minutes on Google and all results indicate the opposite, that the title "founder" holds no legal meaning or standing. It does look like you need an agreement with the board and through shareholders to hold the title (and the title would be helpful in some situations), but that the title itself is meaningless from a legal definition.

> Can you provide a citation? I've spent five minutes on Google and all results indicate the opposite, that the title "founder" holds no legal meaning or standing.

It's called registering your company? It varies from state to state and country to country.

> It does look like you need an agreement with the board and through shareholders to hold the title (and the title would be helpful in some situations), but that the title itself is meaningless from a legal definition.

Yes. I guess the founder is not a "legal definition". But when you ( and your cofounders ) legally register the company, you are the founder.

Certainly it's not simply what others say it is. If you say I'm the founder of microsoft, it doesn't make it so. We can see who legally founded ( aka registered ) the company.

Do you count taking investment as “making actual money”?

In my current company, I wish I had handed out the cofounder title more liberally to early employees. The engineer in me wanted to stay true to the definition of "founder" but in retrospect, all of the initial employees would have loved to be founders, too (and with that, behaved as cofounders). The next startup I do will have a small parking lot full of cofounders.

> all of the initial employees would have loved to be founders, too (and with that, behaved as cofounders)

Unless you actually had a conversation with them with real clarity about expectations, be very careful in holding this conclusion.

> The next startup I do will have a small parking lot full of cofounders.

Do not do this until you have lived in a communal house with at least 15 people and stayed up until at least 3am discussing kitchen-cleaning responsibilities.

If you have to stay up until 3am to discuss kitchen-cleaning responsibilities, you're living in the wrong house.

I think that is his point.

yes.

to me, cofounders are partners in the business and therefore are part of any major executive decision. Is that your view?

> The next startup I do will have a small parking lot full of cofounders

You don't think that devalues the title? It also seems like it would destroy any sort of hierarchy.

Nope. Most people who are founders have a formal business title as well. Eg. Cofounder and CEO...

What stops you from doing this retro-actively? If you feel that you were wrong, correct it. If not then you are just virtue signalling at zero cost to yourself.

Valuation of shares might be a problem. Normally you cannot just 'give'everybody like 5%, this gift is the taxable (and if your company is worth a cool billion who is foing to pay that)

I find your comment very interesting. Would you mind elaborating on why you would do your next startup this way?

People who feel invested in their company will contribute more to that company. It also can be a source of pride and accomplishment. You can be a cofounder and software developer just as someone else can be a cofounder and CEO.

Imo, handing out co-founder titles to software developer employees is way too liberal. I'd rather prefer handing out co-founder titles to people with actual responsibilities and unique titles - CXO level, lead devs, etc.

If someone joins you within the first 30 days, contributes as much as you do and is taking as much risk as you do then they are an equal co-founder.

If someone joins you later, gets paid from day #1 (and you don't), does a 40 hour work week while you work 80 then they're an employee.

In between you can vary the percentage to reflect the difference.

^ This is the simplest, easiest explanation.

I'd add "who stresses about the bank account balance every day?" - founders do, employees don't.

A lot of startup employees stress about this when the company misses its first payroll. When you play around with fire (small, unstable companies...), you eventually get burned.

Founders work for free prior to investors/revenue to pay salaries. Employees get paid a salary.

This is not always possible. Founders can be from very diverse backgrounds and some may have costs they can not escape. The way to deal with that is to take these payments as a loan from the company to the founder which will be eventually be paid back or compensated in some other way.

I would differentiate between "getting paid a salary" and "getting a loan" and argue they're still not getting paid because the company is basically just floating their mortgage for them (or whatever the bill(s) may be). Especially if the assumption is that they pay it back.

Working for free and getting a loan to cover expenses is still working for free.

That's how it worked for me. I was employee #1 at a startup and I got a salary before the founder. I never considered myself a founder and was never treated as one.

Depending on how you find an angel raise, it’s very possible to be both a cofounder and not work for free.

Yes but probably not the converse.

- Yourself: If you have to ask you're an employee.

- Someone else: If you have to ask/are confused on where the person sits, employee also.

A great way to put it indeed. This applies so well in a huge diversity of hierarchies (social constructs) where any manifestation of power is involved.

Also reminds me of the famous poker phrase: "If You Can’t See the Sucker, You’re It"

On the YC SAFE model, there's no stock, so it isn't about that. You give away equity using the SAFE document.

We faced this issue in my company and I definitely get the fear of giving away something to someone unproven. I started out with the employee just on salary. In the written agreement, we offered ownership interest over time. In practice, I wound up giving him the full equity and the co-founder title in 3 months because of his contributions.

I would not recommend using the YC SAFE note without a thorough understanding of all the implications.

I'm curious, does anyone have experience with how the YC note compares to the Techstars 6% offering? On the basis of amount of extra table value?

Easy. If you got stock when the company was formed, you're a co-founder.

Anyone who joins after day 1 (and before day .. 180?) is an early employee.

This is such a flawed way to hand out co-founder titles.

Most companies start off as tech companies, but primarily rely on a biz dev and operations team to actually generate value. You'd likely not be focusing on those areas in the beginning, yet they are integral aspects of your business. Rewarding the people in charge of those divisions with a fancier title and consequently much more responsibility is the right way to go.

I agree with everything you have said. But the implication that people should be called a "co-founder" just because they're important to the growth of the business makes no sense.

You should absolitely hand out VP of X, CxO, etc, titles (and decent slabs of equity) as deserved, but "founder" has a meaning, and if you're not actually there at the founding, calling yourself or your coworkers one is basically misleading.

Is it that easy?

If the company pivots around for some time it could very well be that some early employees are doing co-founder work.

It still wouldn't make them co-founder. I'm not sure there is such a thing as co-founder exlcusive work.

It's definitely not that easy.

There are so many messier cases in the real world, like companies that raise a seed, then burn through it too fast only to essentially start over with a new "seed" and new "co-founders" down the road...

In my experience, the founders are the folks who make the decision to turn an idea into a business, before day 1. The only cofounder-exclusive work is the preparation and work of actually defining the initial business, taking a risk on the idea, and being a part of the incorporation process (broadly defined). Anyone hired on after that point is an early employee, though they might be compensated with equity, or they may be very influential, or they might do more for the company than the founders did... but they were not the originators of the business.

If I have an idea for autonomous robotic cat toys and you are a brilliant marketer, but neither of us knows anything about cats, are we really going to get very far by just hiring some cat people?

I get that this actually happens a lot, but aren't companies more successful when their founders cover the core expertise needed to make smart business decisions?

Or is that wishful nerd-thinking on my part?

Well, the question is in drawing the line between founder/co-founder and early employee, and that's pretty clear to me: technically speaking, a founder is someone/group who "founds" the company. That's it.

That said, I've seen plenty of founders that have had minimal impact on the role and growth of the company, and are pushed out as the company grows. You don't need to know anything about the market to found a company, you could even totally misunderstand the opportunity and the company pivots down the line to something completely unrelated to the original intent. Sometimes the founders are recognized in the story, sometimes they're written out entirely in favor of the people who came in and actualized the company that we know/see today (i.e, McDonalds, Berkshire Hathaway come to mind).

But to your points, I think the "being able to hire the right people" is the important part in early company success. You don't need to know the market as long the business opportunity you've identified has _some_ merit and you've brought on the right people. In fact, serial founders often work this way.

The first employees that you hire will take on a disproportionate amount of work and will set the foundation for much of what will follow. So it's important to be able to (a) hire really well at the start, and (b) reward those employees with leadership, visibility, and equity/stake in the success of the company. At some point, it's worth being honest with that ideas are a dime a dozen and coming up with one and incorporating a company around it is meaningless unless you succeed, and success comes from being able to create a viable business. You'll need developers, you'll need operations people, you'll need marketers, you'll need sales and customer service folks, and experts in whatever industry you're playing in. No one person will be able to do that, unless you've got a founding party of 10 people with clearly delineated responsibilities (otherwise you'll have a ton of infighting over who owns what part of the company's vision/strategy and it will all collapse).

So yeah, I think it comes down to hiring the right people, because no company can succeed or grow on the strength of just one or two people. You'll _always_ need to bring on outside expertise. The question is what expertise you need to bring on, in what order, and how you reward it when the company is just getting started.

> how do you decide who is actually a co-founder viz-a-viz an early employee with equity

Co-founders share both equity and liability, and their names appear on the legal documents regarding the company foundation.

Employees (whether early or late) do not.

I work in a cooperative where everybody has an equal share, so everyone is just owner :)

What cooperative? Can you share more?

Technically, there is no difference. In a C corp, everyone is an employee. In practical terms, the founders might make decisions more jointly rather than strictly on a basis of equity.

It's worth considering that it is probably a red flag if this becomes a pressing issue because it smells of pettiness and/or ill-feeling. Who is a founder doesn't change the amount of hard work that needs to be done. It's just a distraction from it.

It's also a red flag if an early hire with equity resents not being a founder. There's no time for that. Good luck.

Directors have a different status and may or may or may not be an employee or worker.

Founder = equity on day 1 or first couple of days/weeks/months

Co-Founder = more than 1 of above

Owner = equity earned after (sweat or money), founders are automatically owners as long as you still have shares

You can be a founder but no longer own the company (sold all shares)

If you have to take money from your own pocket to keep the company going, you are an owner - capital call anybody?

Some people actually don't want to be called founders as they think that the title they give people when they have put out to pasture and no longer actively contributing :)

But titles don't really matter unless that is all you are after

I think there are some real practical implications of being a cofounder vs employee

- Right to board seats - Access to the company's bank accounts - Authorized to approve spend on behalf of the company - Access to HR data, salaries etc - Depending on role/stage, may need to sign tax statements or other legal documents as a company representative - Full insight into the company's financial conditions - Voice when talking/negotiating with investors - Part of all crucial decisions about the company's strategy

No hard and fast rules, but generally: founders have to be present before founding (incorporation) - this usually means they will be doing work for free before that time; in many cases, founders may also need to put in money. (Once you're founded, people can't work for free anymore.) This is what made me technically an early employee rather than a founder of one of my most successful startups - I was one of a handful of peopl who put time, but no cash, into the company - we were the first employees, but that didn't happen until the VC's check was in the bank. (We were somewhat unusually seed-funded by a VC firm.) Those of us who passed on being founders either didn't have the cash or had to keep other jobs until the newco could make a firm offer of employment. (I more or less told them, "Great, I'll help plan and strategize over beer at the pub after work. Other than that, call me when you have money.) Then there are all the differences in stock class, grants vs. options vs. warrants, etc. Usually, though it's pretty clear who were the actual founders - they're the ones with the original idea, who worked (maybe with the help of others) to get it to the point that a company actually could be founded to go forward. BTW, founders aren't permanent - the one I mentioned had to rid itself of nearly a half dozen of them in the startup process. This is usually done with option grants or the like and a solid time-limited no-compete. I know another who's reformed his company three times to force bad people out. It's amazing what good lawyers can do for the people who control the company.

One of the ideas I had to instill more motivation is to apply @goopthink's definition with the added idea of "reverse-title-vesting" meaning that if you stay with us for more than X years then you become a founder too, if you were one of the early employees (let's say up until the 3rd employee).

At some point, there must have been this conversation with select few people in which you together decided to start the business. These are potentially your co-founders. In the next few weeks/months, you may expand that list, but I believe the co-founders are the ones that take the highest risk to co-found the company in face of high ambiguity and risk.

A good split of responsibilities is that each co-founder has a Cxx role (not necessarily a title). You generally need to fill the roles of a CEO, CFO, COO, CPO, CTO and CMO. This doesn't mean you need this many co-founders, as some roles can be merged, but the responsibilities most likely have to be distributed.

I don't think the line should be set only in time, but also in contribution. Did the person contribute something which is now foundational? For example some thing in the culture or technology or something that made a real difference to the future of the company? Then they should be given co-founder status nevertheless.

It's been mentioned before, but making someone co-founder retroactively seems reasonable. I'd go as far as say that someone who are present from day 0, but does not manage to contribute in any lasting or meaningful way, may be unconsidered as co-founder.

I think co-founders should have at least 10% equity, but you might give up to 5-10% to a first employee (depending on a lot of factors.) I guess the line could be somewhere around 10%. I would say that equity is the most important thing to get right, but titles are also very important and can change a lot of the interpersonal dynamics in a startup.

[1] https://www.cnet.com/news/tesla-motors-founders-now-there-ar...

Yes, when you apply to YC, they said to be considered co-founder, one must have at least 10% of the company.

Where ever you like. As the founder, you get to draw that line.

There are examples of different perspectives that you can apply through this thread, but as the founder(s) it is part of your job to decide this.

It's easier to say in retrospect. If an exit is financially successful, then:

You're a founder if you got rich.

You're a late employee if you got paid.

You're an early employee if you got screwed.

If you have to keep selling your idea, startup vision, and its future potential to retain the person during initial phase of startup, that person is not co-founder. S/he is an early employee. Co-founders are the one's who have already bought into your vision and fully committed to and working toward the vision without any prodding, convincing, encouragement etc. They independently leading the effort and doing what need to be done to move the startup forward.

I don't really see "founder" as a job role in the company, it's just a thing the media say when they want to denote you as being there since for the formation of the company. Past that you'll have actual job roles such as CEO, Managing Director, CTO, CFO, Finance Director, etc.

If you want to get specific, I would say that founders will probably have their names over initial incorporation documents and the stock grants during the formation.

YC defines it as someone with at least 10% equity.

I was watching Selling Sunset and one client was introduced as the founder of Wags, but she was not one of the founders listed on their Wikipedia article. Had a look at her LinkedIn and it looks like she was an early employee. Not sure if it was spiced up by the show or if she's actually considered a founder but I started thinking about the same thing.

Basically when you can afford to build a business with giving away founder sized equity grants, you don’t NEED another founder, but you might want one anyway. The title itself is meaningless.

By how much equity stake they get / risk they take on.

To draw a clear line, I like the YC definition others have mentioned in this thread of ≥ 10% == co-founder.

Equity.

Not to be flippant, but.. on your contract?

Also, thought I should add that if it's your name on the door, this isn't much of a discussion.

Are you paying your employee since day #1 on the job? If not, he's probably also a co-founder.

imho The only correct answer should be salary.

It doesn't need to be market rate, but if you're ever not paying someone, they're a founder - and deserve to be represented on the cap table

Who cares. All that matters is how much of the company someone owns.

Why does it matter?

Elon Musk is by far the most important founder of Tesla, and he didn’t even work there for the first few years.

So not a founder?

Yes! And no!

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