How many shares to co-founder who helped develop the idea?

by foosheen. Posted on Sep 12, 2020    2    11

I'll try to keep it as short as I can, but the situation is as follows:

Two others and I have come up with a business idea, researched it, and really solidified the entire concept. The problem is that we're dealing with something that requires a lot of capital to even deliver a minimum viable product, so we need to find investors. Nonetheless, there's a ton of work that can be done before funding is even there. As such, two of us have decided not to seek for a full-time job (we just graduated) and put 100% in making this work. The third partner, however, has been working for a few years now, and he has made clear that he won't quit his job. That is the case for both pre-funding and post-funding, as we don't see the need for three people running the business in its initial form. This has led to a discussion (initiated by the two of us committing 100% now and later) as to how much the third party is really worth. He agrees that it's only fair that he receives less shares of the company when it is founded. Our problem right now is: How many shares does this person really earn?

Some extra considerations:

  • The third person has definitely added value in the initial phase of developing the idea;
  • A lot of work has been put in the pitch, for which the third person only provided comments;
  • We have met for 2 hours a week (at best) to discuss the progress made on the pitch mostly;
  • The two of us will be working full-time on the project until we receive funding (or until our personal deadline passes, as we can't be in this phase forever).

We're a bit in a pickle here, because we're friends, and we do see it as our creation. Nonetheless, we have trouble with having a future shareholder that does nothing and isn't even willing to fund the company according to whatever shares he has (albeit with a discount, so to speak). The advantage is that nothing has been agreed on contractually, so at the end of the day the two of us can do whatever we want. However, we want to do the right thing.

You might think that we have nothing to show for yet (i.e. no product), so that this is not a conversation worth having. But we're determined and are putting in our heart and soul. The last thing we want is to have these discussions when real money is on the table. We want things sorted (on paper) before it gets to that point.

Sorry for the long post, but I felt that I had to try the best I can to explain the important details.

Thank you in advance.


deepneuralnetwork 1

Ideas are worthless. Execution is the only thing that matters. Maybe give him 0.05% as a gesture, but IMO, even that is too much.

rpcleary 1

4 year vesting, 1 year cliff should be your terms of engagement. Protects everyone from any freeloaders.

The third person sounds more like a. Advisor than a co-founder of they won't be putting in sweat equity; I would look at a FAST agreement as an early reference point if it makes sense to retain them. Otherwise, figure out if they are willing to put in real work outside 9-5, not all our co-founders went full-time initially and we made minor adjustments based on that but everyone put on significant work.

If they want be putting in any ongoing effort and don't make sense as an advisor just part ways now- 0% is not unfair since a pitch, idea, and business plan are fairly worthless. Given your description this sounds like the case.

throwaway234783222 1

5% or below! Execution is the hardest part

prsh_al 1

He should get between 1-10% depending on how generous you feel. The conception of an idea is 1% of the journey, executing is the other 99% and he won't be executing with you.

I would suggest a mechanism by which means he has a declining %age the longer he isn't full time. IE if he comes to join full time in month 2, something like 20% but then this declines quite quickly

gugelm 2

10% equity for the person that had the idea.
If all 3 people contributed equally, he should get ~3%.

  foosheen 1

This is a simple and sensible solution. It gives a reason for the numbers that are suggested in the other comments. Thank you.

Cultural_Beyond8851 2

In a situation like this, point or two is appropriate. Of course the chances of that point or two actually being worth anything when and if you reach a liquidity event is just north of zero.

bombasticbomb123 2

Honestly if he’s just giving the idea, less than 5%. Ideas are easy, execution is hard.

Jmakes3D 3

The book "the founder's dilemma" might be a good read for you in relation to both this and your company in the longer term.

One way might be too equate time or goals reached to certain equity conditions. Maybe right now he has 10 and both of you have 45. Upon completion of each phase you both gain an additional 20. In this way his contribution is still present but stays somewhat representative of what fraction of the work he put in.

Adding shares like this might go until a predefined phase such as you getting investors. Once investors are involved you might lock it in, he might come back, or you may be told/requested to buy him out if he isn't involved anymore.

  foosheen 3

Thank you for the recommendation. I immediately read two chapters that seemed relevant, and they were very insightful. It's particularly nice to read so many examples, and it gives you perspectives that you hadn't thought of. I will definitely read the rest of the book, because it will probably show me what to watch out for in the future.

PWUsername 4