Equity · Advisor Equity

Slicing the pie and vesting schedule for Full time founder and part-time advisor/co-founder

Murali Sangubhatla Co-founder at 500 Miles

October 27th, 2014

I've read through several discussions on FD and other resources online. But, I still have lingering questions and want to get perspectives from experienced entrepreneurs here, on this important step.

- A has the idea, built prototypes and sought initial validation
- A spent 3 months full-time on executing the idea and built an alpha version.
- A has built the roadmap and strategy for going to the market, by discussing with friends and entrepreneurs.
- A worked on a partnership deal that is bound to get user traction
- B met with A ~ once a week for 10 times, brainstormed ideas and discussing strategy
- B helps formalize the pitching deck with SoM, roadmap and presents to prestigious law firm. This leads to a deferred payment for incorporation.
- B has the right contacts who could lead angel rounds, series A etc.,
- A has 2nd degree connections to investors.

A continues to fully believe in the idea and continues FT to realize its full potential. B sees this as an opportunity but is risk-averse at the moment, may quit FT job on funding and has a plan B venture on mind.

So far, A has been considering B to be an advisor (and not a co-founder). It is now time to incorporate and setup business agreements with potential partners, advisors etc.,

I want to hear thoughts on how to formalize the relationship that is fair to A, B and also sets up the company for success.

Florian Pestoni

October 27th, 2014

Just some thoughts that I hope will help you look at various angles of this issue, which is never as simple as it would seem.

Keep in mind that most of the work is still in front of you. It's great that you showed dedication and entrepreneurial zest for 3 months (I'm assuming you're "A"), but if your goal is to build a company, you're looking at 5-7 years. If "B"  is willing to put in the effort required to make the company a success and is a good complement to your skills, then that's great. In other words if value(A+B) >> value(A) then B is a potential cofounder.

As to the split, it'll depend on the contributions that you see each of A and B making over the next several years. The "idea" may merit a small bump, depending on how technically deep/protectable it is, but keep in mind that it is likely to morph with input from both of you and more importantly the market/your customers. 

You can smoke out the lack of commitment by using a vesting schedule with a one-year cliff. Make it clear upfront what the expected commitment would be (eg 30 hours/wk for 3 months, then FT). If "B" is only half-in and doesn't perform according to plan, you have up to one year to get rid of them; it'll work as incentive for him or her to make sure they are adding value and "earning" their equity.

The biggest red flag to me is that you don't seem to be too sure about the value that "B" would bring to the table. Figure that out, discuss it together to make sure that you both see it the same way, and the rest will likely be easier to address.

Hope this helps.

Mike Moyer

October 28th, 2014

This is a classic equity-split case that is easily solved using a dynamic equity split. In your question you list a number of contributions made by various participants. Each one of those contributions moves the company forward (theoretically). Each person making those contributions, therefore, deserves a piece of the action in the event that the company ever creates income.

A dynamic equity model assigns a theoretical value to the various contributions made. A person's share of the company is equal to the theoretical value they contributed divided by the total theoretical value everyone contributed. It will give you a perfect equity split. It is dynamic because it changes over time so everyone always has exactly what they deserve to have.

I've written a book that describes exactly how to value all the inputs. It's called Slicing Pie and if you contact me through SlicingPie.com I'll give you a copy.

Grant Sernick Co-Founder at LoyolyPRO

October 27th, 2014

Hi Murali,

I, too, don't have an answer for you, but do have some things to think about.  I really agree with Florian's perspective that a) there is a tonne of work ahead of you, and b) having the both of you participating will increase the value of the total pie.  Although it seems that A has done much more work than B, it is possible (likely?) that without the help of B, that reaching a funding milestone might not be possible.  My sense is that the closer you get to the valley the easier it is to raise funds.  The corollary to that is that the further you are from the valley, the more difficult it is...he/she might be more valuable to your endeavour than you might think three months in.

That said, I think it is very important for the both of you to understand commitment levels.  There is a big difference between being fully committed (like A is) and one foot out the door (like B has been described).  One line of questioning that might help elucidate the commitment to the venture is to ask B what would it take to come on board full time.  If he/she says something similar to their current salary, then it would suggest that they are not willing to take on much risk, and therefore I would seriously consider whether or not they are the appropriate partner for your venture.  

Along the same lines, you should consider control of the future company.  If the two of you are in it together, and you were 50-50 partners (which might not be unreasonable), that might be a good arrangement if you are both working full time, with exactly the same view.  If you aren't fully aligned, then it's important that one of you has a sufficient share of the company that you can take on a couple rounds of funding while still maintaining control of the company.  

Sorry that I haven't provided an answer...but hopefully these are some parameters that you might want to consider.  In the end, this is a decision you (and your partner) both need to be comfortable with.

Murali Sangubhatla Co-founder at 500 Miles

October 27th, 2014

Thanks for your valuable insights, Florian & Grant. It helps me enlarge the picture and have a quality conversation.

- B definitely adds value from a fund-raising perspective and from being the potential CEO with business expansion capabilities. My main focus was on commitment and belief vs doing it as a job.

- I like Florian's suggestion of 30hrs/week for 3 months and then FT, with a vesting schedule with 1 yr cliff to weed out lack of commitment. And this brings to the 3rd point that Grant is alluding to: Control. We currently have mutual trust, but should we have a 3rd member on the board to avoid deadlocks (and potential issues enforcing vesting)?

Grant Sernick Co-Founder at LoyolyPRO

October 28th, 2014

I am of two minds on this.  On the pragmatic side, having 3 people on a board, or as part of a decision making process is a good thing.  Majority rules, right?  Well...kind of.  Here's the problem.  If it isn't possible to gain consensus between the two of you, there is a real problem.  A third person doesn't necessarily solve it, and can make it worse.  

Let's imagine that there is a decision that is to be taken that could take the company in diametrical directions.  You think you should go with option A, your partner option B, and the 3rd board member is the deciding vote.  Yes, there will be a direction, come the end of the meeting...as the 3rd board member will cast his/her vote.  But, let's be honest.  Either you or your partner is going to be disenfranchised.  They aren't going to feel engaged, and will not be operating at an optimal level.  

A better approach would have been for the two of you to sit down and hash out the argument for which way to go.  Someone will need to make a compromise (or perhaps both), and that would keep you both happy and working together.  At this point, if the two of you can't make this work without a mediator (i.e., that third board member) I think you are in trouble.  


Nathan Schattke

August 25th, 2017

It seems like this is a good place for dynamic equity. It's really handy to have B around but you don't think she should have a defined share, and you don't know how long she will stay around. Why not pay B in slices for funding when it happens (with an agreement now on the rate). Start off with a commission on that lawyer work. As for the other work and meetings, pay a fair wage and work it into slices.

If B has a good chunk of the company that she feels is fair, she will push her contacts to come through in the clinch.

In my current fixed equity company there are two 1% owners out there who helped a lot in the early stages, they deserve something. I would have rather had it dynamic, with the 1% they did their chunk of work and saw no more profit and went off to something else. Had it been dynamic they may have looked for more ways to help.