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Please go through this excellent post by Y Combinator -

https://www.ycombinator.com/library/5x-how-to-split-equity-a...

It should be equal split.

An idea's worth is zero, it is the execution that matters.

Other way to look at it is if they are offering you 15% and keep 85% for them, without an mvp or revenue how are they justifying having 5.6 times more equity than you.

The only possible justification is the few thousand dollars that they have put in, you can either match that or maybe take slightly less equity to offset that amount based on the expected valuation.

But please do not settle for less than equal split, because you will be putting the same amount of effort in the execution of the idea.

Yeah I even shared that video with them to help explain my thoughts.

They claim that they plan on investing up to $50k in the first year, which was additional justification for a lower equity split. But again, this feels strange to me - they're basing current equity split off of projected funding? Is that weird? If it was just based off the current few thousand dollars that have been invested that would make sense to me. (But the few thousand dollar difference still wouldn't justify an equity difference so high)

This does bring up a good point though. The founder claims that they would probably be contributing a lot more cash than me, and thus taking on more risk. And on top of that, they don't want me to get entangled with voting rights on how to spend cash if I would not be the one contributing the most cash, thus, less equity. How do founders reconcile differences in co-founder funding early on? And especially after equity has already been distributed?

Idk.. this all seems so ridiculous to me. No? The company is currently worthless - difference in a few thousand dollars seem to pale in comparison to the execution abilities of creating a solid product. Of course, maybe my execution abilities suck, but thats what the 1 year cliff is for.

/rant

Anyways. I told them I'm out.

Good call. A lot of red flags in here, including one I haven't seen in the other comments: the relationship with the brother. If you're both technical, you have more seniority than him but he has more shares and co-founder status? You're in for recurring headaches about who owns the tech, and you'd always be in the minority.

25%+ is the bare minimum at this stage, but really it should be close to 33% because they don't have anything built yet.

It's also not ideal that the "technical" co-founder who's family is not advanced technically. You guys will need to sort out who's taking the lead technically, from an implementation and eventually hiring perspective.

5-10% is more in line with startups that have secured pre-seed funding and are coming in as employee, examples here: https://topstartups.io/startup-salary-equity-database/?team=...

Run away ...

I got pulled into situations like this twice and even with an MVP the idea guy couldn't sell what he claimed customers wanted.

I have seen this a couple of times. The only reason you wouldn't do an equal split is:

(a) if they have substantially more experience or have a more valuable skillset. For example, prior to this role they could command a salary that was twice what you could make in the market.

(b) they have substantial traction already. Revenue, customers, funding, team momentum, etc.

Neither of these seem to be true. "I came up with the idea" is not enough to warrant a difference in equity.

Honestly, the fact that they didn't offer you co-founder and equal equity is the first flag. Working with his brother is the second flag.

It seems the company is not "derisked" in any way for you or potential investors. So, there would be little justification for the lower equity stake. If the rationale is they've been working on it for many months prior, then they should have more to show than ideas. (And hopefully it isn't an indication of future pace ...)

Alternatively, consider how much you're risking earnings-wise. Assume some initial valuation ($1M?), then try to compare the estimated value of your stake to a market salary. For example, 25% of $1M = $250K, and four-year reverse vesting brings that to $62.5K/year. (If you plan to give investors preferred stock, it could be worth only 1/3 to 1/4 of that.) Hence 25% equity with no salary gives you at present moment less than a market salary. So you would need more than 25%, and it quickly becomes clear the fairest approach would be an ~equal split.

If you do join as a co-founder, make sure you are given equal access to the company documents. I would also insist on being part of the discussions with lawyers (at a minimum to verify everything is as promised). And ensure you all sign the official cap table, decide on board seats, etc.

Regarding "cash is king," as a co-founder they should be very transparent with you about their financial contributions. There are many ways to handle founder capital that don't involve depriving you of equity, e.g. loans or convertible notes. And finally if you don't trust your co-founders to be honest with you, you may not want to go into business with them.

I've formed multiple teams of technical Cofounders, starting on the business side. His initial offer seems extraordinarily low and naïve, unless your technical skills are not considered essential by them(at which point you may want to run on this alone). If you have faith in the opportunity and not your fit with it, invest your money, not your time and reputation.

An idea is worth $20, and you should never work with family members.

> you should never work with family members.

I hear this often but don't know what wisdom is behind this. Why shouldn't?

If they're your family members, any stress from work comes home. There's no decompressing or escape, which can lead to conflict at work and home. If things go wrong, you run the risk of blowing up both your professional career and home life.

If they're other family members, same deal as you'll be caught in the crossfire. Meanwhile if things are going well, you'll still never have the same level of access to your cofounders as they have with each other.

I disagree about never. There are many challenges associated with it, and the relationship has to be very strong, but lots of world beating companies have been built by family members. Two that come to mind are Stripe with the Collison brothers, and Walmart was founded by two brothers as well.

Equal split or walk away. Anything else but an equal split will create incentive problems later on, look weird when you're fundraising, and make you feel under-appreciated and unhappy in case the company succeeds.

Personally I think you should walk away anyway. The fact that they're trying to scam you with 5%-10% at this stage is a huge red flag in terms of culture and strategic knowledge. They either have no idea what they're doing, or they're actively trying to screw you, both of which are bad.

Hmm an offer of 5%-10% when they have nothing with no salary is exceedingly low. Especially since they only an idea…. If you join, you’ll be working together for the next 3-5 years to get this off the ground and you might end up resenting such a small amount of equity. Either take a small equity stake (5-10%) and a below market salary. It sounds like you are happy with no salary (I guess they are too), in that case I think 25%-33% would be more reasonable. If you and the brother go with 30% each, the idea guy would get 40% so 33% more than you. If you both go 25%, then he would get 50% so double what you guys have…

With regards to him putting in cash, agree a pre-funding equity split and valuation then adjust it for the cash investment shares amongst the co-founders.

I like what another poster said. If you earn $100k pa then that is roughly your market value and you ought to get equity equivalent in lieu of that. It’s a good way of making your case for 33%!! Ultimately only accept what you would feel happy with in 1-2 years time when the going gets tough and it’s hard and you feel down.

It sounds like they are looking for their first employee, not a cofounder, but they don't want to pay you a salary.

It also sounds like they haven't done any validation on the idea. An idea that sounds nice is worthless if there's no market for it.

From the short summary it sounds like two dudes are trying to find someone to build their idea because it will make them rich, there will be lots of conflicts with the founders, no sales, and a protracted fight at the end over who gets to keep the worthless IP, and you'll pay more in lawyer fees than the company ever made in revenue.

A model I like is that founders need to earn their equity, i.e. everyone gets restricted shares.

So you determine what work needs to be done and the value of doing it. If you do that, you get your shares. If people don't deliver, they lose their shares, and you can compensate new people with those shares or other founders can get compensated for doing that work too.

Monetary funding is separate from that. Putting in cash gets an instant percentage of the company. That's usually e.g. 20% of the company for putting up the cash, even though based on risk it should be more.

It’s a negotiation! Don’t run away, use it to build negotiation muscle even if you don’t progress with it.

If they were just willing to give you 1/3 without negotiating I’d bet they would act the same the negotiating with VCs or customers and the biz would be a disaster!

Use the opportunity to level up and not think like an employee expecting everything to be handed to you on a plate.

I agree with the advice to agree all the parameters of how things will work including who leads and how things get done in all areas. Equity % is just one parameter in a multi variate equation.

Sure always negotiate,

but “If they were just willing to give you 1/3 without negotiating I’d bet they would act the same the negotiating with VCs or customers and the biz would be a disaster!” just isn’t true consistently enough to be useful.

Context is important, but if what OP is saying is correct, them not opening closer to an equal split suggests they have a lack of capabilities assessing their founding team here or it’s their first time around the block.

Maybe you could screw integral founding team members into taking a fraction of the equity they deserve, but you’re setting up shitty team dynamics, dysfunction, and problems to come. For cofounders and employees: I’ve found you’re better off paying the ballpark of what they’re worth and would be excited about vs trying to get them at their bottom dollar

> Their first offer was 5%-10% equity without the title of a co-founder. ...I would not be taking a paycheck.

They made known what they want. They want an employee, not a co-founder. Employee is fine, but they get paid $$$.

They want to have it both ways in their favor, at your expense.

Recently I came across "slicing pie" concept for equity splitting. Look into it and propose it to him. I think it's a great first step towards fair split.

I haven't used it for anything with an exit, but have used it in some hackerspace projects in that may-or-may-not go anywhere stage. I like the approach. Mike Moyer is the author of the book, btw.

If cash is king, and they are putting real money in, then ask how much. They're saying their cash is worth 55% of the equity (assuming the 15% sweat equity is for each cofounder). Is it a couple of thousand or have they put hundreds of thousands in company accounts? Are you being offered a chance to match the contribution at the same valuation? Are they committing to funds going forward without expecting more equity, or are those "planned financial contributions" a way of diluting you right off the bat?

just my 2c... they're already not valuing what your bring to the table. what happens after you've worked without pay for 6 months and they start getting traction? I would offer to build the mvp for cash. They can keep their equity if it's so valuable.

If it were me I would insist on an equal split since they don't even have anything.

Run away

I wouldn’t do it…

Ask HN: Co-Founder Equity Split