Equity distribution · Founder equity

Equity split when co-founder joins 1.5 years in

Mikus Sleiners Software Developer in heart and by profession. 13+yrs exp.

Last updated on February 10th, 2018


Vibhor Verma Blockchain tech Entrepreneur

February 2nd, 2018

I have some similar questions on equity contracts.

Paul Garcia marketing exec & business coach

February 4th, 2018

The frustrating part is that your company isn't worth the amount invested to make it run, it's worth the amount of revenue it can generate. So, you're not dividing the slices based on how much time, cash, and effort have gone into the company in the last year and a half. You're only able to divide the value by what it's worth today in terms of revenue.

The tech co-founder sounds like a blessing because you are getting a work commitment without cash. That doesn't automatically convert to equity though. It might convert to options or deferred salary or some combination.

You need to ask why the co-founder doesn't want cash, and what their objective is for reward in the long-term. Maybe they asked for equity, maybe they didn't, we don't know. How will you be able to calculate the change in revenue attributable to the additional technical staff person? Do you need this person regardless of ownership? Have you struggled with some skill that only this specialist can provide? Are you assuming that equity is the only thing you can use to "pay" this person? What is there left to distribute after what's already taken by the initial investors? Are they willing to be diluted, and under what conditions?

So many questions.

David M

February 28th, 2018

Paul makes some good points with the exception of the statement that the company only has a value of the revenue it can generate. That may be accurate in some businesses but by no means is a general rule and in many situations is absolutely incorrect. The business can have capital assets that have value...a building that cost money, Intellectual property such as a patent that could have great value, current inventory. And time can be valued absolutely with regard to software development progress. Revenue capability certainly goes into valuation, but is not the only factor. Where he is correct is there are a lot of questions. Without knowing where your company is, there is no way to answer that.

The issue of "fairness" comes into play. You can look into various equity splitting suggestions. I have yet to find one that is flawless. If your company is doing well then you have the benefit to have a better grasp on where your value and potential value is. From that you have to decide first what your current partners believe is fair, and then you have to convince the new founder it is fair. A year and a half in....personally if you have a lot of work and progress done, unless this is an all star CFO, or CEO, or CMO, CTO..I wouldn't be granting him co founder status. And I wouldn't be talking "split." Maybe you mean equity compensation in place or addition to salary? What do your founding documents state about this situation? If they don't specify, and this is more than a hobby, consider putting together a proper founding document which would address such a situation. If you don't have the funds to do it, at the very least get something in writing.