Ask HN: How to bring on co-founder almost two years later?

Ok, having started down this path a couple of years back and trying to bring in a co-founder here is my 2 cents. btw, I ended up not doing it but learned some really valuable lessons. Also, I am identical to you in that we are a consultancy that has 2 SaaS products.

This will rarely work if you are using "co-founder" as a way to get a higher dollar (caliber) employee for a cost which you can afford today. Co-founders are either all in and you have to forget what you have already done or you have to admit they are not a co-founder and instead are a critical employee hire.

There is nothing wrong with offering a lower than market salary and giving the employee a 5-10% ownership with vesting. That is completely legit.

I think the main problem is don't call someone a co-founder and mislead yourself or them if they will not be splitting decisions and the hard times with you. A true co-founder may be taking a salary when times are good, but has to be willing to forego it when times are tight (bootstraped especially). If not, they are not a co-founder they are an employee.

As far as an equity split, I do not feel every co-founder deserves an equal share, but I would always start there and then see what other facts might affect it. For example, 15 years ago in a startup I was an early contractor for, a group of people started the company but one of the co-founders had family to support. So he kept his day job quite a bit longer until the company was more solid and could afford his monthly minimum without struggling. They all agreed that meant he wasn't going to get the equal split, and I remember even he felt that was fair and they were great people to work for/with. And no one was trying to be an asshole to him, just he didn't have the same risk and skin in the game.

Thank you for the advice.

You've hit my major concern, which is trying to figure out if he is the kind of person that can do the co-founding thing, or if he just wants equity without the risk.

You are welcome, good luck!

Let's keep this simple, and say you split this SaaS off in a new company (i.e. no consulting revenues).

He could be a co-founder. You have created some value. That is your achievement. But, do you want him to be to a co-founder? Does he have complimentary skills? Will co-owning the business mean you can achieve more, with the same resources?

Some partnerships end up adding up to 3 when you add 1+1 together. If that would be one of them, it's worth considering it.

What kind of business is it, and what is the exit plan? If you're running this as a profitable business without the intent of raising VC, you could get him to buy part of the equity at market rate (part of the payment could be deferred). Or you could 'sell' him half the equity, with vesting in place, but defer the payment by reducing it from future dividend payments.

Lots of possibilities, but in the end it depends on what he'll add to the business and if you are comfortable working with him.

As a friend of mine once put it, is he a creator of wealth or a taker of wealth? Most people are takers.

"As a friend of mine once put it, is he a creator of wealth or a taker of wealth? Most people are takers."

Great point. My worry is he is looking at this at a take opportunity.

Congrats on the progress you've made so far. Personally, it doesn't sound like a co-founder. It's not clear whether you think he wants that title specifically or just a lot of equity. The former would be a red flag to me without some context.

As far as the amount of equity to give, 50/50 after a couple years, when you've gotten the company profitable, seems high. But that depends on why you started the company in the first place, and more importantly, where you want to take it from here and how he can help with that. If he's uniquely capable to accomplish things that you really want for the company, but can't or don't want to do yourself, you'll compensate him highly. If you can't afford the salary, you'll give him more equity. And that's certainly a valid decision, even if it's not typical. That said, the fact that you don't think it makes sense leads me to believe that it doesn't. I personally would have to have no doubt before giving up that much of the company that I"d made profitable.

Whatever you do, I would vest any equity too.

50/50 doesn't even remotely make sense here. You've taken on a huge amount of the risk in starting and pushing your company to profitability.

Calculating the equity distribution should be easy:

4 * (His current salary - what you would be paying him) = His risk (I use 4 here because that's the usual vesting period)

Your profit * [5-10] = Your valuation (You'll have to work out the coefficient on your own, as it depends heavily on your market and growth potential)

His risk / your valuation = His equity

This should give you a really rough number. This is the absolute upper limit of what you should be giving him in equity (otherwise there is little to no risk). Keep in mind that if you are growing 20%+ year over year then your valuation doesn't conform to the formula above and should be adjusted much higher (or just think about what you would be comfortable selling the company for today).

Equity is all about risk/reward. Because you are profitable, much of the risk is already out of the equation. Consider also how much greater the responsibility in having 30%+ equity to the company - do you think this person will be loyal to that?

Disclaimer: I provide co-founder advice for a living [1], so take this with a grain of salt

I can see a couple of scenarios playing out here, here is the one that I think applies to you, but let us know if something else is going on:

That new person is mostly a sales person and you expect them to grow a fairly new product which is independent from your existing business. Fine. It's ok for them to have a huge incentive plan, where they earn most (half) of the profits of that new product. Compensation: decent base in cash, huge cut of sales, a small piece of equity (always vesting of course)

[1] http://foundrs.com

Wow your site has some great resources, thanks!

He's not really a sales guy, most of our sales are high touch, and very technical. So I am the guy that handles all of that.

I would put him more on the marketing/strategy side of things.

Why doesn't 50/50 [with a vesting schedule] make sense?

The sunk costs are sunk. Presumably the cofounder will more than double the rate of growth and value of the business.

To put it another way, if you're going to treat your business as a startup, then assume it will fail and that 80% is as valuable as 50%. And if it gains startup style growth, your life will be roughly equivalent with 50% or 80% of the exit.

On the other hand, if this is hard negotiating then there's a poor fit because the relationship is already adversarial. If the potential cofounder is not someone you want to become rich, don't marry them. 5~10% equity is not "co" anything.

Good luck.

Thanks for the reply!

You're right, sunk costs are sunk costs. I guess I am try to also figure out if I want a "co-founder" or just another early hire.

Something closer to 50/50 is what Paul Graham always advise for later co-founders. Forget the past, imagine how both of you will work equally hard from now on. But remember that he is talking about startups that aim high. Maybe a billion dollar company, at least worth tens of millions. If this is also your ambition, to get your company from bootstrapped regular income to a $100 million dollar company, then go for a 60/40 deal (I am not convinced 50/50 is really desirable). But remember to have a good lawyer and take all precautions about vesting and if this person it really the right one.

But if you aim at a good, healthy, profitable small company; I would just hire someone. Even if it is another more junior person.

Cofounder implies is that there is a new company founded and that the person involved is someone you trust enough to build a business with. Anything else is just a "what goes on the business card" distraction from real work.

If you're negotiating terms, then it's a finite pie model and you're in the hiring business. That's a distraction from the core business mission - it's a means to an end -- [but an often necessary one]. Founding a company is about grabbing a slice of an infinite pie, it's outward focused. That means bouncing ideas off each other.

I'd be wary of anyone who is looking for the title. That's resume building, not business building. I'd be wary of anyone who is negotiating for a founder role. Founding is about doing not getting.

On the other hand, I'd be wary of anyone who wanted to be a founder without equal equity. Anything else creates friction on the relationship between founders. 50/50 equity is simply a way of testing whether it's a cofounder relationship or not.

I'm not saying you should give away half your company. But I'm not saying it isn't the right business decision either. It's a hard problem because the decision is about whether or not to take a leap of faith.

As a final thought, 10% or 50% if the person you are considering is not the right person, the business is going to suffer. Be equally selective in either case. Pick people you want to be in business with.

A very naive idea could be just to get some money from the bank and hire somebody.

Why you need a co-founder anyway ? It sound that you just need a great technical leader.

I wish I could, but we don't have enough cash on hand to commit to that level of employee.

Well, still you can pay some one part time, doesn't need to be a full time hire.