Equity share with co-founder for an app I've already built | Hacker News Reader

Equity share with co-founder for an app I've already built

16 pointsmkrblue32 comments

I've been building a SaaS app over the last couple years in my spare time. In classic dev fashion I didn't do any marketing at all and have no paying users.

The app is well past the MVP stage and is an advanced project coding wise at ~70-80k lines of well written code (hence the no marketing, I just like to code).

I'm talking to a couple of potential non-tech co-founders that have proven industry experience and success in marketing that are very interested. I would only be partnering up with 1 of them, making it just me and one co-founder.

My question is what is a reasonable equity share for this setup?

On one hand I'm bringing a lot, a full working app in a large market, but on the other it's pre-revenue so will require a lot of marketing work from them, and of course more development code wise.

View on HN

You don't need an equity partner. You need a sales employee.

It's your product. They're just selling it for you. While this is a valuable service, it's not a co-founder level of service, unless you want them to also handle the other day-to-day-operations of the company, in which case you're their employee and you should be discussing a licensing arrangement for your IP.

Employee means salary, it doesnt sound like OP has any money.

Commission only salespeople exist, I used to run a marketplace for them. However, they sold much easier to sell goods, like courses. It is harder with enterprise sales with long lead times.

You currently have no company. You have a product. Customers don't care about kLOC, they care about features, stability, and ease of use.

You need to have a 50-50 equity stake with the person you bring on. The product you build, if they think it is saleable, should be part of a payback setup or equity share, or should be licensed to a new entity you create.

My suggestion would be a 1/3rd 2/3rd rev split until you make 1.5mm lifetime rev, and then after that 50/50. You will be paid back for the time you have put in, and you will have a partner who is on equal footing to you. If you need to be 51/49, so be it. If you need to maintain the license to the code, figure that piece out, but you will be best served with a 50/50 split in the long run.

Talking out his ass this guy:

"You don't have a company"

We literally do not know if he is incorporated, if there has been any sales.

"You should be 50/50"

Bold claim. First of all, making any blank suggestions for equity without any info is already questionable. But also giving half equity to a late contributor is a blunder.

> have no paying users

They’re not a “late contributor” if what they bring to the table is nonexistent today.

It is a MVP of 70-80k lines of well written code. If this is true and the app is good, he is ahead of 90% of even the projects accepted by YC which by the last ones I have see the github, it is nothing impressive at all, just React/NextJS.

I assume that YC is looking for people who have validated the market and have established that a market exists before sinking time and effort on the order of years into a product with no customers.

Code is relatively easy against the task of meeting with customers and finding the right fit for your product.

I say this as a coder who much more prefers the scratching of a technical itch to the thought of finding a customer who will pay.

He is not applying to YC, he is looking for a co-founder with a working product. The co-founder needs to come with more than "I can sell".

Read the comment I replied to.

Completely disagree. Six months of sales work could get the company onto a track where the sales guy isnt as needed. So you give away 50% just to get started on sales. He should hire a consultant to teach him how to go to market.

The amount of equity isn't as important as the vesting schedule. Don't vest anything to your cofounder right away. You should vest on a four year schedule with a one year cliff. There are good reasons this is the standard.

As far as the amount, make sure the other person thinks it's fair. If they don't find the split fair, then it'll just create issues later. Better to give away 49% of your company and have it succeed than to continue to own 90% and have it fail.

This is a common problem for developer founders. You have the skills needed to build something cool and you recognize that others might be willing to pay you money to use the thing you built; but you don't have the sales and marketing skills necessary to make it a widespread success.

You are also not flush with capital from a VC or angel investor, so you can't just hire what you are missing. All you can really offer is an equity stake in a 'potentially valuable' business.

It is very challenging to decide just how much equity you must part with in order to attract the talent you need. Everyone can throw in their two cents without knowing much of the specifics for your particular case. Take any such advice with a grain of salt. The 'right' amount could be anywhere from 10% to half of the company. There are no magic formulas to determine what is best.

Why equity share at all?

Simply look for a separate, independent business partner with marketing and support skills.

Their equity becomes the customer base that they will grow and develop in the same way you developed your equity in the software.

You simply provide service to this marketing partner at some agreed upon fixed rate. They will be responsible for finding and handling their customers.

A very simple business arrangement/relationship and clear division of labor. I'd recommend avoiding making this any sort of *exclusive* arrangement in case the partner does not perform.

Let's say pre revenue, founder is also looking for co-founders, to market the app along with building a brand wouldn't that be a good idea.

Otherwise, for solo founder to manage everything would become big and complex. Right? Or is there another way?

You "found" an LLC which develops software in order to provide service to one (or more) marketing partners.

Marketing partner may already have his own company but if not, he founds a totally separate LLC to market and support the service that you provide. This separate LLC is wholly his to own and operate as he sees fit.

The customer base that marketing partner builds belongs to him --- this is his equity. The software that you build belongs to you and is your equity. You provide service to marketing partner at an agreed upon rate.

This clear separation of ownership, responsibility and equity makes it about as simple as it gets. You don't really even need a legal document to formalize this simple relationship.

Complexity starts when you try to combine these two separate functions into one shared entity --- which leads to internal conflicts regarding ownership and control.

I hear where you are coming from, but as a marketeer I wouldn't take this model.

The problem is that marketing is "transferable". Say I build a company marketing and selling your product. I spend capital building "your" brand. You decide to terminate the arrangement. I have -nothing-.

Worse, you decide to create your own marketing department. You rename the product slightly but basically leverage all the work I've done.

>> The customer base that marketing partner builds belongs to him

You cant 'own' a customer base. I might have the customer list, but do do you. Customers are free to (and will happily) switch to the original maker.

If I try and sell my marketing company a buyer takes one look at it and realizes it has a single supplier, and owns no IP. There's literally nothing to sell.

So yeah, if uou can find a marketeer willing to partner like this, good luck to you both.

Incidentally the reverse is also true - having just one customer (the marketeer) puts the supplier at risk as well. If there's any falling out both companies will suffer.

I spend capital building "your" brand. You decide to terminate the arrangement. I have -nothing-.

No, you spend capital building *your own* brand. I "white label" the product/service being provided to you --- you name it, price it and market it as you see fit.

The risks and benefits here are mutual.

We are doing business because you don't want to develop software and I don't want to do marketing. We are legally independent but the reality is, we are co-dependent. We both have incentives to work together. Neither of us can just "walk away" without significant loss.

BTW, I have been doing this successfully for over 25 years.

Whole it's possible for this arrangement to work (we did it successfully from 1996 to 2016) I still don't recommend it.

Firstly it takes enormous good-faith by both parties. It worked for us because our partner was very ethical (as are we) and both sides managed to work well together.

There were however several inefficiencies. They decided to sell the business and found no buyers (because nobody sane buys a business with one supplier. ) we couldn't preemptively lock in a long term contract until we knew who the buyer would be. We met a couple of the prospects but it takes time to build a new relationship.

In the end we acquired them at the agreed value. Since then we've uncovered all the places where being 2 companies created massive inefficiency, and incompatible goals. The sum has been worth more than the parts.

All that said, yes the model worked for us. Yes we didn't have the capital to do "their side" of the work back in the 90s. So having it in-house would have been difficult. Since we had very different management styles (also apparent after the merger either company culture) we wouldn't have been good co-founders.

BUT all that aside, the model also held us both back quite a bit, which we've Since come to realise. It also succeeded mostly because (like a marriage) we both were willing to make allowances and operated in good faith. And both sides were "good character".

So I'm not saying it can't work. I'm saying it's risky, and not a model I'd recommend.

I'm saying it's risky, and not a model I'd recommend.

To me, the epitome of risky is just gifting a good chunk of equity to a marketing entity who has done nothing to earn it and whose character is unknown.

My proposal avoids this risk. The legal independence allows a non-working relationship to be easily unwound early on if need be --- by either party.

This sort of partnership is really built around mutual benefit while minimizing the possible effects of "faith" or "character". "Bad faith" can only lead to self harm and loss --- making it an irrational option.

In fact the autobiography of one of WordPerfect's founders tracked like this in the 80s. The marketers/distributors of WordPerfect were external entities. A lot of the company's drama involved these legacy salesman who built up massive markets and were living large.

Alternatively those drama people would own a part of the company, not sure that would be better.

I like to work with shares/membership units.

I calculate how long I have been working on the product and at what speed. Suppose a year at half time (4 hs a day), then if I make a deal to work 4 hs a day for another year and a partner does the same, I would get 2/3 and they 1/3. Reevaluating at the end of the period.

Several options:

1) find a fractional sales/marketing firm. They may need a retainer and monthly fees but you can also negotiate outcome based commission and early termination in case they don’t deliver

2) if you have to give equity, I’ll say 15-20% is good, with 1 year Cliff and 4 year vesting .

> On one hand I'm bringing a lot, a full working app in a large market

On the other hand you have no idea how to or skills to make money from it. So the person who does is bringing an awful lot as well.

I would suggest looking at this differently. Do you need a sales CEO taking half of your company?

Or do you need 2 or 3 sales people?

I would offer commission on each sale and a vesting program to sales staff where they get 5% if they hit certain targets, 10% if they hit others..

Determining the equity distribution between co-founders is a critical step that requires careful consideration. Here's how you can justify holding 51% equity based on your contributions and goals:

Technical Foundation and Completed Product: You have invested a significant amount of time and effort in developing the application, which has already passed the MVP stage and is ready for use. This substantial contribution provides the groundwork for further development and marketing efforts.

Maintaining Control: Holding 51% equity allows you to retain control over strategic decisions within the company. This is crucial to ensure that your vision and goals continue to drive the direction of the business.

Division of Responsibilities: Considering that your potential co-founders will primarily focus on marketing and business development, their contributions will be highly valuable. However, this does not diminish the importance of your technical input and development expertise.

Management Flexibility: Retaining a controlling interest (51%) also gives you the final say in case of disagreements. This is important for effective management and conflict resolution.

Motivation and Balance: Co-founders should be adequately motivated to work on the project, so they should receive a significant equity share. This can be around 20-25% each, which collectively totals 49%, leaving you with 51%.

An example of equity distribution could be:

You (Founder and Developer) - 51% Co-founder 1 (Marketing and Business Development) - 24.5% Co-founder 2 (Marketing and Business Development) - 24.5% This distribution ensures that you retain control over the company while providing significant motivation and involvement for your co-founders. It is also essential to formalize all agreements in a legally binding contract that outlines each participant's contributions and mechanisms for conflict resolution.

Why not go down the partner route? Keep your equity until they have proven themselves.

Your goal is to have sales, not marketing. Give a cut of ARR. Rate varies depending on how much partnership involvement is expected for the sale.

Before getting into no paying users,

Do you have users for your app? Who is the target audience and what problem does your tool solve

Get closer to the deer. Talk numbers.

Whats your current revenue? How fast is it growing? What is your partner’s goal in 1,10 years? What’s his strategy of achieving it? From this it is easy to set up timeframes and equity share steps.

Your product worth nothing until it is a profitable business, it is a liability.

Sorry to disappoint but business side of things worth much more than coding (if it is done well), and the only way to know how well it is done — measure revenue and other business metrics. Not lines of code (the more of them the worse, actually).

I would give them 30% tops and that's like the final negotiation step "take it or leave it" kind of thing.

Also for the love of God give him a 1 year cliff, 4 year vesting schedule. DO NOT just cut him equity.

Other comments here also properly note, you may not even need a cofounder. Just hire a commission based sales dude. That sounds much better.

Reply on news.ycombinator.com