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.

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.

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.

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).

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!

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.

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.

Robert Clegg

December 31st, 2013

Having been through 4 rounds/$12M in venture financing as a co-founder myself...

Do you understand cap tables? Do you have a 4 year projection of what your company will look like after 2 to 3 rounds of financing? What percent of the company is reserved for employee options, etc? Look at the end game to put percentage ownership, value and control into perspective.

Second, rest assured that any REAL mistakes will be taken care of and trued up as you go through successive rounds of financing. Sophisticated investors will see the real value in team members and make sure they are compensated fairly. Additional options are issued, vesting rights adjusted, etc. Your board will know who is contributing, who is invaluable, and what adjustments need to be made to keep key employees.

From a negotiation standpoint, you can deflect much of the pressure you are feeling directly by establishing the relationship with the corporate legal team. There are standards, best practices, and shareholder rules and obligations the Company must abide by that will make this less personal. The Corporation can "explain" things to both of you but not be your individual advisors.

Happy to talk if you'd like to ping me directly.

-Robert

Erin-Michael Johnson

December 31st, 2013

... well you've had a lot of advice. Too bad you can't predict the future and are left with imperfect human tips and tricks to glue your legal docs together and start the merry journey.

Remember: BE FAIR. Don't waste your time trying to control equity distributions, decision control is baked into the operating agreement and board members (whom you may have 2/3 of if you choose).

With vesting, it should be bi-directional. Your partner is taking a risk in your personal constitution... if you walk about, he also needs to know that he gets your resources (I.P. et al.) to allow him to operate the business, with some help, if you've walked away. In partnerships, what's good for the goose is good for the gander.

It boils down to this. Find a great partner. Both get Lawyers that represent your personal interests. Fight it out (amicably). You'll find huge agreements on some issues and unbending agreements on others. You'll go through 5 - 8 rounds of law battle, little will be resolved, Cumulatively $60K will have already been spent without a clear end to negotiations You'll be exhausted and realize why so many deals break down when lawyers get involved. But, if both of you are cut from the same cloth and believe you can "kill it" together, You'll work things out in heated arguments offline and take it to they lawyers the next day. The end result will be that you two know you can walk the walk together and have air-tight legal documentation to get you started. #notmyfirstrodeo

John Duffield

January 2nd, 2014

Such amazing replies so quickly - thanks very much everybody. Due to the many references to Mike Moyer's book 'Slicing Pie' I've started reading it. I've been in touch with Mike directly - thanks Mike. Buy it on Amazon for only $12.55 or only $9.99 on Kindle.

In short, here's a quick summary of the feedback based on 25 replies (Mike three comments not included):

- Those in favor of 50/50 equity: 8/25. 32%

- Those NOT in favor of 50/50 equity: 8/25. 32%

- Those not leaning either way. Or having no opinion: 9/25. 36%

Clearly even opinions based on this small sample size, very interesting. Seems instincts and experiences of the group clearly vary.

- Those in favor of my 3 month time and cash investment being recognized: 4/25. 16%

- Those recommending 'Grunt Fund' and reading Mike's book 'Slicing Pie': 8/25. 32%

Some people have commented on both the strategic abilities and coding abilities of my potential tech co-founder. He advised he can architect everything and code a lot of it, but would need help in terms of manpower to get it done sooner. So it seems I could have a great partner on my hands - as I said he's also bringing some exciting ideas and big thinking to compliment my original direction.

Happy new year everyone. Would love any final thoughts.

John Duffield

johnjduffield@gmail.com

(310) 866-7856

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