Ask HN: What is a reasonable equity to give to a late co-founder? | Hacker News Reader

Ask HN: What is a reasonable equity to give to a late co-founder?

6 pointsbrownieman14 comments

I am a single founder of a company that is generating a million dollars in revenue. What would be a reasonable equity to give to a co founder I bring in at this stage?

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Firstly, assuming that your revenue exceeds your costs and that your business is in fact healthy, why would you want to bring in a co-founder and not an employee, if you have managed fine so far? I would say it's likely to be a mistake. Especially if you have employees, since you would be bypassing them for promotion and bringing in someone from outside, sending a signal that you're not committed to employees working their way up through the business (see Jim Collin's books for more on this). Rather hire a great employee and train them up and promote them.

Secondly, your question takes it for granted that you should "give" the equity away. Why? Surely, your prospective co-founder should buy his share if you both value your equity? If it's not bought it's not worth anything. You can't give it away, and certainly not for something promised which may never materialize. A bird in the hand is worth two in the bush.

First of all, congratulations on the revenue and from your statement that it is not even close to failing I infer that you must have at least 15% to 20% profit margins and have replaced salary and benefits you personally would be earning working elsewhere.

Working from that scenario it seems that you have taken out a significant portion of the risk. That is you have built/created "X" it is not just a great dream. You have proven that "X" is a business by convincing people/businesses to pay for "X" at a price that produces a profit.

Your risk in bringing on a co-founder is that in trying to grow the company he will screw up the current secret sauce or distract you from what has worked to get to this point.

My own experience has led me to believe that many people who say they can deliver high growth to early stage enterprises cannot. In some cases it is because most of the growth they take credit for in another firm had little to do with their personal performance and much to do with firm brand/reputation, well established sales processes and other intangible factors. They get into this new environment and cannot reproduce former results. Other times, people in sales and marketing are much better at selling themselves than they are at selling the product. And, then there are those that really deliver results! How can you be certain this potential co-founder will really deliver growth?

Other comments point you in the right direction. If you decide to go ahead, then vest over 4 years - that is very common. Also I would make some milestones around sales growth. If certain growth targets are hit, this person can choose to take a cash bonus or to accelerate vesting. Finally 25% seems high to me since you have taken out so many of the early stage risks - something more on the order of 15% seems reasonable.

Of course, be wary of accepting advice from strangers on the Internet.

[A corollary of Spolsky's analysis] [1]

Adding a cofounder should essentially, though not perhaps legally, mean there's a new company. And the new company should be more valuable to the point that the existing founder's equity goes up despite the dilution. Thus:

  100 / (number_of_current_founders + 1)

The value of adding a cofounder is solely based on the future value of the company. Looking backward at sunk costs doesn't add value in the best case, is a waste of time in the average case, and generates toxicities in the worst.

If you don't want to make the person rich, don't make them a cofounder...they're the wrong candidate for you. If you want to negotiate with potential cofounders then the relationship is founded at arm's length and down the road when there's real money on the table is entirely within the explicit nature of the relationship.

Good luck.

[1]: https://gist.github.com/isaacsanders/1653078

25% to hire someone at a company making 1 million in revenue sounds insane. Assuming you're running some kind of SaaS business you probably have a valuation north of 10 million. So you'd basically be giving this guy $2.5 million. Is he really better than selling 20% of your company and hiring the best people $2 million can buy?

Assuming you're not totally insane, the only reason you can be considering this guy at 25% is you believe he has magical industry connections that are going to add many millions to your bottom line. He's basically a sales guy. So I'd give him a standard sales guy deal - some percentage of new business brought in for first X years ... if he's really good give him a small piece of equity too, like 2.5%. That way he's properly incentivized to bring his industry connection through.

Also, you should probably seek out some reputable advisors and not ask questions like this on the internets.

Whatever amount you decide, make sure it vests over four years.

Yes this, My ownership vests at a rate of 1% per year/ then i become fully vested after the 5th year.

What makes him a "co-founder" vs "just" a manager/employee?

The startup is still at an early stage (less than 2 years) and he would be contributing significantly to its growth. In this case, co-founder is interchangeable with being a first employee.

There are probably too many variables here for us to ever answer this question satisfactorily. Do you have investors? How much do the other founders have each? Will the business fail without this person? What's he asking for? How much risk is he taking by joining you? Etc.

No investors. Single founder owning 100%. Business is nowhere close to failing but may not grow as fast without him. Asking for 25%. Risk being taken is him quitting his stable job at an established company.

25% seems pretty reasonable if he's taking a substantial cut in income and you believe he's the right person.

weigh this against his salary too, if he is making a competitive salary, then 0% ownership. I would say 25% is high, go for 10-15% if he will take it. You wont have much of the company to work with should you seek investors.

Why isn't 25% acceptable to you?

If you get it down to 18% and the company exits at $50 million is the extra $3.5 million going to change your life?

Steve Ballmer had x < 8% initially, if this helps :) (from wiki).

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