Ask HN: How should we split up equity?

It sounds like you are putting well more than the 150K in with your year worth of effort on the prototype. In my experience, bringing someone on who does not currently have skills that are immediately useful (besides "enthusiasm") will end with you doing all the work. You're basically giving away half of what you have spent so much time on as well as half your money, and will likely continue doing the bulk of the work moving forward. Unless this person is VERY charming and connected with maybe some business skills, I would recommend finding someone who is equally as capable as you and has produced something of similar complexity in the past. Ideally with a very complementary skill set.

I'd maybe give them 10-20%, but vested somehow and tied to deliverables.

Your 150k should buy you x% shares and your idea and execution to date should be worth x% more. The remaining equity should be earned by everyone’s future efforts. You both need to be full time and exclusively committed. You agree x% each and this follows traditional vesting schedules. I’d expect those % to be higher than if you were also paying salaries. The rest of the equity should be in some sort of pool for future distribution. If one or more of you aren’t fully committed IMO that creates the most problems later. I’ve been on both sides - founder and vesting employee and my contribution here is not following anything other than what I’ve learned through my experiences.

What should be the process for allocating future distributions of equity?

That depends on so many different factors it’s an impossible question to answer. Can you be more specific?

Why are you bringing them onboard as a co-founder and not employee? I don’t know what’s your arrangement with them for salary, if possible - get them started as an employee, once they have proved their mettle, then you can promote them to co-founder. If you are able to see traction then depending upon how much funds your company has at that time - either you can take out your investment or get equivalent in equity. Hope it helps.

> I've found a potential co-founder who brings motivation and quick learning skills to the table.

Why are you onboarding this co-founder?

Motivation and quick learning skills can be an illusion for the lack of skills, network and experience that will bring the company forward: „This person has none but this person is really motivated and eager to learn!“.

If the previous quote resembles your line of thought, you should question the co-founder position. The person could start as regular employee (you have money), prove themselves and „earn“ the co-founder position.

I have experience with this situation and can share more details privately. Feel free to write me a mail proxy+hn32@stroschein.me

It may seem cheesy and somewhat simplistic at first, but after you get over the cutesy anecdotes and jokes, the book/method "Slicing Pie" by Mike Moyer has been a very helpful resource for me during several very early-stage bootstrappings.

It really helped contextualize the different types of contributions co-founders and early employees will bring to the table, and is a helpful transition into the world of stocks and equity for those who are less familiar.

I bought copies for all involved and we worked through the calculations together, resulting in equity splits that have so far been low-drama.

From what you've been writing, he is not bringing half the value into the business today. Hard to quantify from here but 50/50 seems like a stretch.

Mike Moyer wrote a book called "Slicing Pie" that gives a much better model than a 50/50 split for this situation.

You could try:

- You get back 10x on your initial investment ($1.5m) before anyone else gets paid when you sell the company. In the form of preferred shares.

- After that equity split 60/40 (i.e. you have 50% more equity)

My totally wild guess is they helped drum up some of that initial customer interest and opened your eyes to it. Is that right?

Anyways, here's my free advice. You get a refund if it's bad:

- One, define whether this is a small business or a startup.

- Two, separate sweat equity from financial equity.

In a classic SV-type startup, the company is illiquid for a 4 - 7 year time period. You want ownership at the end of that time period to reflect the fraction of work adjusted for risk.

With respect to the work, "having the idea" and doing some validation on it is typically worth a small premium but not a large one, because 99.9% of the work at time of starting the company is in the future. The main question is whether the potential co-founder will contribute roughly equally for the next 4 - 7 years. If not, don't try to change the equity split -- find a different co-founder or hire them as an employee (and their added value should be far more than "motivation and quick learning skills" because you should have that too).

With respect to risk, there's a few stages in the early days:

- Pre-product v0.1

- Pre-customer interest

- Pre-PMF (this is the big one to get past)

It sounds like you already built v0.1 and have proven customer interest. Thus you've de-risked the startup for this potential co-founder significantly. That's worth another chunk of equity. But you have to make a judgment call as to how far away you are from PMF: ideally there's an equity split where, if the product blows up tomorrow you won't be frustrated about him/her having a ton of equity; but if it takes another 2 years to translate customer interest into real PMF, (s)he won't be frustrated about working for a dramatically smaller share (or, if we're being realistic, both of you will be a little bit frustrated but not super frustrated).

Lastly, with respect to financial equity, I would ask if you really, really need that 150K to get to the next stage. I'm assuming 150K is meaningful to you because you are a Masters student. Can you get to the next stage with 10K? 20K? 30K (and then raise outside capital)? Can your potential co-founder afford to put in 5K? 10K? 15K? My general advice is when the sums are in the 5 - 10K range, each person just puts in what their financial situation allows for and it's small potatoes at the end of the day. But 150K is a lot and you should structure it as a separate investment [1].

The tough part here is to come up with what you think the business is worth today. Without knowing anything about your idea, it sounds like it's at best something where investors in the U.S. would put in ~$500K for roughly 10 - 20% of the company.

[1] Note though that a truly independent investor will typically get Preferred shares for their money -- but they will probably disagree with one of the founders having Preferred shares, so the shares you negotiate as part of this investment will likely be converted to Common shares upon raising real capital.

Have him borrow 75k from you, then split equity 50/50.

Most likely you'll lose your shirts, at which point, your buddy better translate his motivation and quick learning skills into 75k plus interest.