Think I've found a tech co-founder, now what? Equity, accountability, timeframes etc'

December 30th, 2013

Hi guys, thanks for all the great feedback to my post 'What else can you do to be as attractive as possible to a tech CoFounder?' - I may have found that person. Here's my next questions:

If I've spent 3 months full-time doing nothing but coming up with idea, validating the market, wire framing, paying a designer, getting the MVP coded and building a customer network and delivering proposals, and constantly talking to prospects…. how do we structure the equity to make both parties happy? He suggested 50/50 and I responded with 60/40. The discussions have been very healthy so far. Here's the situation:

He is showing great interest and is becoming emotionally connected by the idea, even suggesting an additional direction within my target market (its a B2B product) which I hadn't thought of and sounds great. He is qualified, great experience, Top 25 school MBA grad, certificate from Stanford etc, startup experience and big corp experience. Lately he's more a CTO / infrastructure type tech-person, big on strategy and gets the big picture, less a coder. He has an offshore dev team for his current business, but is confident he can code the thing himself.

1. Yes there is no '100% complete product' as of right now, but with paying clients I could fund development (or part of it) myself if I had to. I certainly don't feel comfortable giving up 50% to someone I just met, having put 3 months full time into it (without salary) and paying a designer. Am I justified at 60/40?

2. Should I have him commit to a 'cash injection' to match my time and cash payments made to the product so far, in order to be an equal 50/50?

3. I don't want to de-motivate either. But yet, I feel strongly about maintaining control. I can't see myself going anywhere less than bare minimum 51/49 if it came to that.

4. Am I greedy, am I over-cautious, am I stupid? Would love the thoughts. Whatever we proceed with, I need to make sure this person can 'get it done' and in 'reasonable timeframes' otherwise I could be locked in to something taking forever to build. So am considering a performance-based equity operating agreement which I can have an attorney friend put together.

Anonymous

December 30th, 2013

I'll back up Detrick 100% here. No matter what you choose to do, Slicing Pie is an absolute read. You might or might not like the Grunt Fund concept, but I'm sure you'll get your head a lot clearer after you read it. For $12.55 on Amazon, you really don't risk much and it's a great investment.

As far as I'm concerned, I would never agree to 50/50 in that situation. You've put some effort already and should be rewarded for it. Period. In any case, 50/50 can put you in a deadlock situation, and I don't think any VC or business angel will recommend such an even split if you'd ask them.

Mike Moyer

December 30th, 2013

Wow! Lots of Slicing Pie recommendations! Looks like the book is making an impression!

Please note that I always offer free books to people who post relevant questions to this forum, I'm not just trying to sell books!

Thank you to all the Slicing Pie supporters out there!

A note on Monica's experience- her re-valuing at $40K (pretend value) was the right move. Sometimes you have to adjust to attract early members, but from that point on you should be earning under the same rules.

Jake Carlson Software Development Manager at Oracle

January 6th, 2014

It's very hard to get firm understanding of where this guy is technically. What examples of his actual development work does he have to show? (Not projects he managed, but actual development work he's done.) If all he is saying is that he manages an off-shore team, we have no idea of his technical prowess. What are the specifics of what he has built that he believes can be utilized for your project?

Further, it's hard to get a handle on the quality of your MVP without seeing it or having any further details. Therefore, I can't really evaluate the IP value of it nor his claim that it doesn't exist.

Bottom line: both he and you are making very specific claims about the value of what you have so far and the value of what he can bring to the table, and I'm not sure anyone here is in a position to evaluate any of those claims without further information. The number of hours invested on either side is essentially meaningless in terms of value; what matters is what you have to show for it (i.e., the result).

Jeff Whelpley CTO at GetHuman.com

December 30th, 2013

+1 for 50/50. The legal agreement will protect you. Either it works out and you will want a 50/50 partner or it doesn't and you will cut him loose before it becomes a problem.

Monica Borrell CEO and Founder at Cardsmith

January 6th, 2014

Hi John, I'm 2 months into a newly implemented Grunt Fund, so perhaps it is too recent to be a valuable example to you. As I previously mentioned, I took the 200k of grunt fund 'value' (which included 30k of my own cash) and reduced it to 40k total value. I did this partially due to my desire to solidify the partnership,, but we also worked collaboratively and honestly to evaluate what the real value was of what I'd accomplished so far. We took learning out of the equation, and focused on what it would take to recreate what we had to start if we had to do it all over again, and then cutting that figure in half. The formula wasn't important, the collaboration in the solution is what mattered.

It sucks to think that I 'wasted' money and time, but I decided to chalk it up to learning, and decided it was a small price to pay to get to a much bigger PIE that I felt my co-founder could create with me. This valuation exercise in itself was very informative. In doing it, we both recognized that neither of us was trying to squeeze the other, and we developed a serious amount of respect and trust for each other.

I'd suggest you use the process of setting up the Grunt fund as a way to test whether you really want to work with this person. If you don't have a lot of trust, I don't think it will work. Look for red flags and be prepared to start again your search if you don't find the trust and collaboration. Feel free to message me if you want to talk more offline.

Good luck!

Detrick DeBurr

December 30th, 2013

I've never seen a deal where 50/50 is "really" fair. Take a look at setting up a grunt fund.... check out Mike Moyer and http://www.slicingpie.com/ ... Get 2 copies of the book.... One for you and one for your co-founder... I wouldn't make another move till you both understand the "Grunt Fund" concept... then the conversation should get a lot easier.... Good Luck

Chris Phenner

December 30th, 2013

50/50.

Three months of your 'head start' will be a blip of a rounding error compared to what you risk by putting that spread between yourselves.

Stas Oskin

December 30th, 2013

I double recommend reading slicingpie.com, just started reading it, but I already see how much headache and nerves it would have saved me in the past, if I've read it first.

Anonymous

December 30th, 2013

I second what Chris offered as the reason for the 50/50 split.

I used to be in the 60/40 camp, then moved to the slicing pie camp. I'm now in the, 50/50 camp.

Someone wise once asked me, how much will your 3 month ahead-start matter to the company in 4 years? Is it worth a 50% premium (in a 60/40 split, you have 50% more shares than he does)? How much is it worth to you to avoid a riff between you and your co-founder?

Tom Maiaroto Full Stack Consultant

December 30th, 2013

I don't think you're being greedy. If you have actual product/code and paying clients, he would have to bring something to the table for an equal cut in equity. It's pretty simple. He has to match assets for assets. I'm not saying that's a large amount of cash or cash at all. It can work out in a variety of ways, but it's not like you both are starting at the same time with 0.

I don't care of it's 3 days, 3 months or 3 years. Your work and risk is not a "drop in the bucket" and it will certainly never seem like a drop in the bucket or some "blip." I'm sorry but I think Chris there just minimized your hard work. That time, the product, any clients, etc. those are assets. Those have value. Period. Don't EVER let anyone convince you otherwise. Now, if you had to scrap everything you've built....Ok, that's another story.

You can't just walk up to someone who's been putting in time and expect 50/50. On what? A hope and a promise? Your good looks? Your MBA or other degree? No, I think your instincts are correct.

Second, 50/50 is a pretty bad idea anyway (conflicts/voting/etc.). I think others have said this enough and linked a great site so enough said.

Last, "offshore" developers for a "CTO" raises a giant red flag to me. There's no way you're a CTO and don't have tech buddies in the same country if not the same town you live in. What's up with that? I can understand "part" of a team being offshore but... No, that's a red flag. Over 10 years in the developer game, I can count on one hand how many times I've seen offshore developers work out. It doesn't. Period. Not that it can't...But I've seen more people go through hell and back correcting the mistakes they made by working with offshore developers.

Is he suggesting some people in another country are his "value" to 50%? Things work out in mysterious ways, but you should clearly lay out what you'll each be responsible for and be certain he is adding value to your company and working as hard as you. Not some "team" in another country who you'll likely never meet. Him.

It sounds promising though. If you hit it off, that's great. I don't think you're being greedy or paranoid or anything like that. I think you're clearly thinking it through and that's what's important. Maybe you will end up 60/40 or 49/51 or whatever. You can't know that so early on in your relationship either.

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