Ask HN: Co-founder quitting job and investing $ - should I ask for more equity?

[cofounder1234]

Hello, I'm a co-founder and am quitting my job and investing a small sum of money (≈10-20k) while we try to raise seed funding and begin proving the validity of our existing MVP product.

As part of this should the injection of cash be in exchange for equity? If we got cash from an outside source it would be - but I don't know if it typically differs since I'm one of the co-founders. Does the increased risk of leaving my job and investing some money justify additional equity?

Some additional context (not sure any of it matters).

  Startup was originally my idea
  I have more equity atm (60/40)
  I have a significantly better job (which I'll be leaving)

Feel free to ask any more questions :)

[brk]

All that matters at this point is that you should have a cap table and a stock valuation.

Your investment can be one of the following:

1) cash investment where you buy stock like any other investor

2) loan with defined payback terms.

Just because you are a cofounder or have some equity now does not mean you have to invest and put your money at risk for no ROI

[cofounder1234]

I prefer #1 since #2 somewhat hinges on the startup making enough money to pay me back. I don't think my co-founder will realistically be able to write me a check out of his pocket.

We haven't done a cap table or stock valuation...perhaps now's a good time to start.

[adrianscott]

if one founder is going full-time and the other isn't, then it would seem like someone going full-time should get better equity.

you should have a written legal agreement covering the process of equity distribution and vesting, which includes a mechanism for when there is a change in commitment levels by one co-founder versus another, including if one of the two were to leave at some point. in other words, get your pre-nup done ;). (not to mention assignment of intellectual property etc -- speak to a lawyer)

a cash investment would normally receive additional equity and with a senior position (i.e. if company is sold for $25K, the $20K investor gets their money back first before the remaining $5K is distributed), though w/ $20K you probably can't afford legal paperwork for pay for that.

-a

[cofounder1234]

Yea - sounds like we have to formalize our partnership a bit more (we've only got the LLC set up). Thanks.

[adrianscott]

llc? you may want to do a bit of research on company formation choices, depending on what direction you want to go in. if you want to raise funding and do things silicon valley style, an llc would be uncommon, imho.

[seasoup]

I don't think you leaving your job factors into how much ownership you should get, as long as this means all of the cofounders are putting in full time at the startup.

If you are infusing cash into the company, you could first ask the other cofounder(s) if they can contribute the same amount and if not, ask them how they think you should be compensated for this investment. They might very well come up with higher equity on their own, or surprise you with some compelling offer of their own.

[cofounder1234]

It's just two of us at the moment and only I am leaving my job (putting in full time). I can ask my co-founder but we've talked about who is willing to or can do what and the ability/willingness to take higher risk resides with me.

[coryl]

Questions: 1) Does your startup NEED the cash injection? Do you already have plans to spend it?

2) Are you not able to prove market validity before attempting to raising seed funding or investing?

[cofounder1234]

  1. If I quit my job then yea.  I'll essentially be injecting cash to cover my own expenses.  Plans on spending it are so I have some time to focus on raising seed funding and talking to customers.
  2. I believe we've informally proven market validity.  That's quite different than having enough users use the site to show numbers that mean something.

[isnoteasy]

If you inject cash and want to translate that into more equity, the first step is to determine the monetary value of your MVP product. To measure the effect of leaving your job you need to measure how this factor will increase the value of your MVP product. One you have put numbers on those two factors the rest is an easy computation.

[cofounder1234]

Great points. A lot of the "work" I've been subconsciously putting off. Guess I can't anymore :).