Ask HN: Need advice about co-founding a startup with a VC and equity

[torynoter2832]

In the last few months I've been working as an Entrepreneur in Resident with a VC in New York that incubates companies. The deal was that we'll co-found a startup together, they will lead our seed round ($2.8M) and help me build the company. I'll be the main person working full-time on the company and the VC partners will take the CEO role but will work part time on the startup. Both VC partners have extensive experience as successful startup co-founders and CEOs.

At the beginning it seems like a great deal. I'll get to work closely with three serial entrepreneurs and build a startup with them. They will bring a clear playbook and help with the Go To Market (I'm an engineer so that's my weakness)

But after a few months, it's very clear that I'll be doing everything in the startup. Initially I thought they'll manage the entire go to market and sales, but up until now I had to do everything. Their contribution is providing advice when needed and having a 2 hour meeting with me every week to discuss everything.

While the time with them is very helpful, I can't shake the feeling that if I'm doing 99% of the work + came up with the idea, I'm better of finding a co-founder and start my own company. Right now I get only 10% equity. What do you think?

Here are the pros:

* Salary from the first day ($150k/year while I was making $300k/year before that)

* Raise funding easily ($2.85M at day 1) and they seem to be able to raise future rounds with ease (after all they are VC)

* Get to do my dream role - found a startup - with lower risk (salary + help)

* Work with 3 incredible guys that I trust and that co-founded several successful companies (as founders not investors).

* Their advice is very helpful and I get a lot of freedom. They do not try to tell me what to do, but rather support my journey.

* I get 10% equity post the Seed dilution

* I attain very valuable experience and learn a lot

Cons:

* Only 10% while I'm doing most of the work.

* Not the CEO even though I'm doing the CEO job.

* No control over the company (they can fire me at any time).

* Their investment time-wise is not huge.

[bluelu]

Since you are posting on hacker news, most of the people here will tell you that it's a bad deal.

I think it's a good deal. It's not great, but good. You still keep half of your salary, got funding right from the start, can develop/build the company, learn a lot, and have someone to ask for advise which you shouldn't underestimate, and probably will have no trouble raising a second round with their help.

With that, you will build value much faster than a "normal" start-up founder, which doesn't have the connections to raise money, doesn't have the money to hire employees, etc... I think it's safe to assume that you win at least 1 year. This will increase your company value and thus make your 10% now worth much more than someone having 100% and is right at the start.

If all fails, you only lost half of your salary (no debts creating the company), but gained all the experience and are much more fundable for a new startup.

[zn44]

I've joined a start-up as third co-founder and agreed to only 10% equity, regretted it few years in. From now on I'd not accept any offer that's not equal split between funders (few % difference at most)

For your situation if they'd be more engaged I'd suggest equal equity split what you describe sounds like normal investment albeit with fairly hands on investor. They should be getting 20%, 30% if you feel generous.

[torynoter2832]

May I ask if the startup succeeded and why do you regret?

If the startup failed, why do you care how much you owned? 100% of 0 is 0.If the startup succeed, you probably made very good money regardless.

Second question: I started with looking at stuff similar to how you see it. Then I talked to someone who tried to found a startup and wasted 18 months without getting investment or real revenue. He's point is that we only see in the media the people who succeeded, but there are many people who fail even before doing anything.

The arrangement I have with them is giving me a true shot at my dream. Fair or not, I'm going to learn a lot, get the money and support I need to try to build my vision and if successful make a lot of money (probably >$10M even if exit is modest).

So, his suggestion was, go for it.

[altdataseller]

Because if your stake is too low, you quickly run into fairness issues. Should i work as hard as my partners who have more equity? Maybe i shouldnt work as hard. But then your startup will be less likely to succeed

[zn44]

The startup is still going 5 years in. We had great run intially up to raising series A in 2019. Then covid hit us hard we had to lay off most of the team. We are growing slowly again but not quite out of the pit

Now one of my co-foundes pushed out other one last year and now is quitting himself with most of his equity vested.

At many points in the last few years my decisions to stay in the business were much harder because of unbalanced equity. Running a business is hard, hardest thing I've ever done. Last thing you want is feeling someone is going to profit from your effort and you get nothing from it, it's especially risky with your setup because your VC friends might eventually get pref shares. And don't count on your personal relationship with them, end of the day they are running business and have obligations to their investors

Finally raising seed money is not the success, building product people want with supportive business model is, running 18 months with your seed money and failing anyway doesn't sound much better than 18 without investment. I don't have that much experience in investing but I'd also think that cap table like this would make getting more money from other investors hard

[xbar]

This. I took a too-small percentage of my first startup. It haunted me for a very long time.

My next was a 30% stake among 3. Much better.

[epc]

Do they have any other companies in their portfolio that they have already implemented this structure? Can you talk to the non-VC staff?

If you're not raising money, you're not doing the CEO job. My guess is they're willing to back you but see that you don't have the business experience to be CEO (and if you're the CEO, you're not going to be doing the engineering work you need to be doing to build the company). In this scenario is the single fund providing all of the $2.85MM? Is there a board? Who does the VC/CEO answer to? Do they see their role as interim (i.e. support you to a point where you could become CEO, or get the company going until it can bring in a salaried CEO)? Or permanent?

Do you want to be the CEO? or the CTO?

I'm not saying it's perfect, but a scenario where someone is bankrolling you and providing a CEO to handle the CEO b.s. while you build the company is also not that bad given the current funding environment. I'd look for some formal role definitions both on personnel as well as business (i.e. does the incubator provide basic business resources like HR assistance, payroll assistance, so that you're not burning precious seed $$ on that?).

Ask them to put in some protections for you in writing.

I mean, it sounds like they want to build the company around you and offload the crappy bureaucracy of running a company that you admittedly don't have experience with. Yes, they absolutely get a chunk of the upside out of it, but you get to focus on building the product. 10% equity seems low but they’re bringing the seed round in to fund the company and you’re getting a decent base salary. I'd ask for accelerated vesting and something to protect your equity from dilution through at least a Series A.

[torynoter2832]

#1 - They do have more companies. They all are in the right direction (Series A-C) but no big successes since it's all early. I'm assuming that the early companies got more attention from them though.

> "Do you want to be the CEO? or the CTO?" Yes but not a priority. I want to build a successful company and happy to give up my CEO seat if there's someone better suited.

> "In this scenario is the single fund providing all of the $2.85MM? Is there a board? Who does the VC/CEO answer to? Do they see their role as interim (i.e. support you to a point where you could become CEO, or get the company going until it can bring in a salaried CEO)? Or permanent?"

At this point they answer to themselves as they are the CEOs + Investors. Post series A, they will answer the new investors. They see their role in interim, but most likely hire an outside CEO, on which I have veto rights (this is in contract that they must get my thumbs up on CEO. But, they can also fire me so not sure if this actually matters)

> "I mean, it sounds like they want to build the company around you and offload the crappy bureaucracy of running a company that you admittedly don't have experience with." That's exactly right. As I said, it's my dream job, and still I can't get over the fact that 10% while doing 99% of the day to day is too low.

What do you mean by accelerated vesting? I do have some terms in case of acquisition, but I'd be diluted at series A

[epc]

"Normal" vesting tends to be over four years with a one year cliff (and then quarterly or monthly afterwards). Then you’ve got Amazon where the vesting is weighted towards the end of the period (I don't know the breakdown but for example instead of 25/25/25/25 you might see 10/15/25/50). Accelerated vesting is simply that for key, pre-agreed upon, points or changes in the business your vesting schedule is accelerated. e.g. instead of 10% vesting over four years, perhaps you get them to agree to 25% first year, then 50% once the Series A closes. Point being to lock in some upside for you once you AND they lose control over the company (potentially) by bringing in outside investors.

I have never worked for a successful startup to exit, either quitting or being reorganized out of a role before an exit. So take my advice with that huge caveat. But one final bit of advice is before you proceed find an attorney savvy about startup corporate structures and equity to review all of your documentation and contracts.

|Edited to add this link: https://www.investopedia.com/terms/a/acceleratedvesting.asp

[torynoter2832]

Yes thanks! There's an accelerated vesting in case of acquisition.

Unfortunately I signed the contract 2 months ago. So I might be too late. At this point I can't negotiate. I can either take it or leave it

[rkk3]

> Work with 3 incredible guys that I trust

Do you actually trust them? It sounds like they haven't lived up to what you feel was promised in terms of helping with the GTM and getting the business off the ground.

You gave up control very early for money. Who knows if it was a good decision or not, but if you aren't at peace with the deal you made that is a very shaky foundation to be starting on.

> While the time with them is very helpful, I can't shake the feeling that if I'm doing 99% of the work + came up with the idea, I'm better of finding a co-founder and start my own company.

Since you are not CEO, presumably they own your IP - so your options may be limited with striking out on your own.

[torynoter2832]

Yeah I trust them. I think that at this stage I don't need much help. They are like a safety net, if I fall, they will step in. But up until now, things are going well.

[psyklic]

I strongly advise having a lawyer review the contract even though you already signed it - there will still be many opportunities for you to negotiate in the future. It's infinitely better to know now than to be blindsided later!

In my last startup, our biggest mistake by far was delegating legal solely to my business partner, who we all trusted at the time. It is incredibly easy for saavy parties to write the contract in a way that perniciously "sounds right" to an intelligent, trusting non-lawyer.

[nickfromseattle]

> Yeah I trust them

Has the trust been stress tested yet?

[gripep]

I was in a very similar situation 2 years ago.

I am too technical, started a startup with 2 amazing co-founders and I now own 10% of the company. The key difference is that for that amount of equity, I’m only responsible for the technical side of the business. Also, because the company is more of a service than a product, having that amount of equity makes sense since my co-founders are doing all of the heavy lifting.

Taking this example into account, it appears to me that the situation in your case should be the opposite. Given the amount of work and responsibilities you have, it seems like you should own the majority of the equity. It is also beneficial for your co-founders to give you more equity because, if they see that you are running the company well now, the equity split will motivate you to stick with the company for years to create value, regardless of the amount of shenanigans.

I see making you the minority shareholder as a great risk - the further you progress, the more difficult it becomes. If the startup works, the time commitment is extremely high, and constantly asking yourself, “is this worth all this effort?" won’t help. If they are concerned about giving up equity, they can use safety mechanisms such as vesting and a cliff, the typical get out of jail free card. Giving you this much equity does not create long-term motivation to stay with your startup, especially if things aren't going well. The fact that they own more companies and are still trying to pull off such a deal makes me wonder if they are trying to capitalise on your excitement about living your dream.

Because I don't know the entire picture, the best thing I can think of is to try to have a conversation with your co-founders and build a case for why you should have more equity. It will also help if you know and can afford a business advisor, as they may be very argumentative in their favour given their experience.

This is simply my opinion as a CEO - I am not attempting to persuade you to do anything. Try to think about this for yourself, making sure that you are happy with the equity split and that it motivates you (and your co-founders) to work on your startup for a long period of time. As in my example earlier, the split can be different from equal, but this is unusual. Try not to make a short term decision, but think long term!

[JohnHaugeland]

> Right now I get only 10% equity.

Run