Ask HN: Co-founder equity split methods?

[askhn2023]

I am a solo founder that created a MVP with help from a friend. The product has both software and hardware. I wrote all the software and worked on the hardware with my friend. My friend designed the main PCB of the product.

Now I wanted to bring my friend as a co-founder for a couple of reasons: 1. They have complimentary skills: hardware / PCB design. 2. I need a co-founder overall to improve productivity and need different inputs on many things.

The problems: 1. Currently my friend can only commit 1 full day per week. Future commit depends on how things go. 2. I started the project long before my friend started helping design the PCB. (about 2 years before). 3. The software work is far more than the hardware work in this project. 4. If I split the equity, say 10%, for my friend as co-founder given their commit level. What happens when they increase their commit level in the future, say to 50% or even full-time commitment after one year.

Note, my friend can also write software. I.e. he is not hardware-only guy but so far only did the hardware work in this project.

My question is: what are the recommended methods of equity split for my friend as a co-founder in this case?

Here are some points I collected so far:

1. Some say 50/50 split is good in general because it provides the sense of equality. 2. Some day 50/50 split is almost never good because it can cause deadlocks. 3. Almost everyone says vesting over years (4 years?) is good, and 1-year cliff is good. 4. I've read a book called "Slicing Pie handbook", but it seems to me it requires a lot overhead to get it right.

I was also wondering: is there some well-known method that is more dynamic than the fixed percent split, and also less dynamic / simpler than the "slicing pie" method?

Thanks!

[JohnFen]

This is just me, but my personal policy is that all splits like this have to be equal. With two people, 50-50. If one person isn't contributing (or expected to contribute) enough to make that acceptable, that person shouldn't be a partner.

The reason for this policy is that I've seen far too many companies go under because partners start fighting about things like who contributed more and so deserves the larger share. That's utter poison to a partnership (particularly if a partner is a friend, which is a whole danger zone all by itself) and business.

Better just to say "we split everything equally" to avoid fights in the future when circumstances change.

I am not suggesting this is the best way to handle it. It's just the way that I've arrived at, and it's worked very well for me for decades.

[ericmay]

Yep, that's what I came here to say. Also at this early stage it's a 50-50 split of a whole lot of $0 and it's way more important for the two founders to not have any extra emotional load over "other co-founder has more equity than me" getting in the way of building.

It has personally been easier for me when looking for a co-founder and thinking about equity split to realize whatever is being built is worthless today and is likely worthless tomorrow, and spending time caring about equity for a worthless product gets in the way of creating any sort of value.

[BizarroLand]

This is one of those things where the flower will wither on the vine over fear someone else will get an unfair share of the fruit.

You can't make it without them, so make it with them and then deal with the fallout. If it makes you both millionaires then who cares?

Stop being greedy and selfish before you even have something that is worth anything to anyone else.

[paxys]

IMO someone who isn't willing or able to work on the effort full time cannot be a co-founder and equal partner. If your friend wants to start off as a part time employee or consultant then they should be given equity accordingly. Later if/when they want to increase their role in the company you can always give them additional grants.

Being equal partners with someone but contributing five times as much work into the company as them is a recipe for disaster. You may not care all that much right now, but what about when you need to bring on an outside investor and dilute your own stake?

[iancmceachern]

I 100% disagree.

Not everyone has family money to lean on and just quit their jobs.

These people still have value to bring, and in fact most successful startups I know of personally were started by folks as their side job whole working in that particular industry.

A person's value is not how many hours they sit in an office chair a week. A persons value is their output, what soceity is willing to pay for it.

If you find the right value proposition and connect it with the right engineering talent you can get value out of a single hour of that experts time, your don't need 40.

[ericd]

Down that path lies a lot of resentment from the person who is committing their full time and effort. Not a good idea for a partnership.

Surely this hypothetical super-valuable expert earns enough such that they could have saved up some living expenses? That family money thing is, frankly, an excuse that people tell themselves. Lots of people do it without family money.

[iancmceachern]

It's not an excuse that people (me) tell ourselves it's a documented fact:

"There is a strong connection between your parent’s income and your chances of becoming a startup entrepreneur, with those from a strong financial background having a higher chance of becoming entrepreneurs,” said Shira Greenberg, the chief economist Israel’s ministry of finance, in a recent report conducted by his agency and reported by the Jerusalem Post...The study – which used demographic, academic and financial data from Israeli entrepreneurs between the ages of 25 and 35 and their families – found that the income of an entrepreneur’s parents was the most important factor towards the likelihood of starting up a business."

Source: https://www.google.com/amp/s/amp.theguardian.com/business/20...

Since you poked at me, I'm not telling myself anything. I've had a very deliberate, successful, and thankful career in med tech startups and large companies and as a result have gained some wisdom and had the opportunity to observe how the world works around me, and am now sharing that wisdom and observations made.

[ericd]

That doesn’t seem to say that entrepreneurs rely on family money other than a couple of tired anecdotes about Musk/Gates. It’s mostly saying that successful entrepreneurs tend to come from more successful parents, but I’m pretty sure that’s true of success in most things. Having successful parents tends to help the kids a lot, and the money itself is among the least important ways, imo.

And it wasn’t meant to be directed at you (I’m glad you’ve found success), just that it’s a self-defeating attitude that’s distressingly common. Family money itself is not important when starting something. Though it is helpful to have a couch to fall back on if you need it.

[iancmceachern]

Did you see the study? There is a whole study they did, it's not just the first paragraph or two with the anecdotes, there is meat later in the article that addresses your "plot holes"

Also see this data: "University of California, Berkeley economists Ross Levine and Rona Rubenstein analyzed the shared traits of entrepreneurs in a 2013 paper, and found that most were white, male, and highly educated. “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit,”

https://www.theatlantic.com/business/archive/2013/08/entrepr...

[zen928]

as someone never involved and never interested in being involved with anyone who has a mindset of cuckolding your company with VC interests, agree. my level of commitment isnt related to my level of attention and value to what I work on.

building the toxic association in your head that others have to match your own processes to "prove value" is a stunning display of lacking empathy, in the sense that you aren't looking to understand others motivations by superficially dismissing them to impose your exact working schedule and mental model onto others.

anyone right now with a remote job because of covid that stayed remote because of the perceptible lack of negative impact (showing this same scenario but from the context of upper management) would be a hypocrite to not also disagree with this stance.

[opportune]

It doesn’t need to be family money. Plenty of people have savings for 1y or so of living expenses (or much more) - the thing is, going that route requires a lot of conviction and commitment. You can also raise funding to cover their salary. IMO that commitment is what you want in a cofounder, rather than someone hedging their bets by continuing to work a day job.

If both parties were working day jobs it’d be less of a problem, also slightly less of a people if OP hadn’t invested a lot of their own time already, but I don’t think it makes sense to bring on a cofounder in this case. Compensate their efforts in equity sure, but giving founder level equity to someone investing much less time/risk could cause a lot of problems.

[iancmceachern]

You are right, ot doesn't have to be family money, but in pracrice it most often is:

https://www.google.com/amp/s/amp.theguardian.com/business/20...

[opportune]

yes, for Israeli entrepreneurs between the ages of 25 and 35

[iancmceachern]

Yes, and when we release a new drug we test it on Americans from a certain age range. It doesn't mean that the drug won't work for Canadiens too.

Proof and additional data from Berkeley:

Did you see the study? There is a whole study they did, it's not just the first paragraph or two with the anecdotes, there is meat later in the article that addresses your "plot holes"

Also see this data: "University of California, Berkeley economists Ross Levine and Rona Rubenstein analyzed the shared traits of entrepreneurs in a 2013 paper, and found that most were white, male, and highly educated. “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit,”

https://www.theatlantic.com/business/archive/2013/08/entrepr...

[paxys]

All of this is fine, just not for the case where someone is being given controlling stake in a company.

[drx]

My two cents:

- The equity split is about incentivizing/rewarding you both for the work ahead, which is going to be much harder than anything thus far

- I would treat the 2 years as a sunk cost

- If you are true cofounders, 50/50 or 51/49 is the fair way to go

- Vesting diffuses the edge cases (either of you leave early, either of you turn out to be flakes), and is a necessity if you want to ever raise VC money

- It sounds like there is a question of him working only part time. In this case he should not get founder equity. Read the clerky docs as there can be severe drawbacks of granting significant amounts of equity post-founding

[opportune]

How confident are you that your friend will quit their job to work full time on your startup when you start having a moderate (but not huge) amount of success? Will you get there with your friend only giving 1d/week?

If your friend can’t work fulltime on your startup it might be worth hiring them as an employee or contractor with some equity comp to match their commitment to the startup.

If you do go with vesting you may need to set up vesting for yourself to show good faith. But since you’ve already made some progress and are working fulltime on it, it might make sense to agree with your friend on different initial amounts of equity and/or different vesting rates. You may need to ask a professional to figure out how to structure it. I feel like an optimally fair way would be to have your half be structured as vesting over 4y but with you starting with some equity proportionate to the current work you’ve put in, then have your friend’s half vest at a rate conditioned on how much time they can give at any given time such that at fulltime commitment it would vest in 4y (but the so the vesting rate would change if they quit their day job to work on the startup fulltime).

Honestly if I were in your position though I would start with having your friend contract and then bring them in as a founder later if they’re ready to do it fulltime. A lot of people like the idea of working on something like this but lose interest when faced with the reality of grunge work, no immediate success, etc.

[benf76]

This can easily be handled by using Slicing Pie - it contemplates all of these scenarios fairly https://slicingpie.com/

You can pair it with something like https://mardukmethod.com to do all the tracking and set up the business.

[kmos17]

Based on my experience it’s highly dependent on the situation and especially on the personalities involved. One of the strongest human emotions is the resentment people can feel when they perceive a deal as being unfair. So if you can come up with an arrangement that you both honestly feel is fair then that is ideal, and maybe that is a 50:50 split or maybe not, that has to be assessed on what you both think is the value of your contributions today.

I’ve had a 50/50 split that worked beautifully because we complemented each other in our roles, we were committed and there was trust (so even if the workload wasn’t always equal it didn’t create any resentment.)

But I look on that as the rare ideal exception, I think giving a 50 split to someone not willing to commit is a formula for possible future problems.

[iancmceachern]

This is the single most important comment and answer you will receive. The details of the deal matter little, what matters is that you two remain aligned and motivated to see it through. I speak from experience being on both sides, keeping good, positive blood between you two is all that matters and that is what got you where you are, and will get you where you want to go

[JamesBarney]

You didn't give us enough information to answer this question well.

1. Like why can he only commit 1 full day per week, is it money, a bad time, he wants to see how the startup turns out before committing?

2. Do you have money to pay him?

3. Do you need him?

Situations you do want to be in.

1. Make him an insulting offer that sours your friendship

2. Company dies due to founder deadlock

3. Having a silent partner who didn't commit like you did

4. Be unable to raise money because he has 50% equity and isn't committed. Investors don't want to invest in a company a founder doesn't believe in enough to quit their job, and they don't want to invest in a company where 50% of equity is tied up.

Some general advice

1. Make sure he vests

2. If you give him 50/50 make sure there is a shotgun clause

3. Set a timelimit on when he has to join full time. (something like he needs to come work on the project full time with 365 days, and his vesting starts then. If he never makes the jump he doesn't get the equity. Basically he's working for the option to come on board if things work out)

4. I'd offer him the 50/50 split to quit his job and come work with you full time so he knows you value him as a partner.

5. I definitely would not give someone 50% of my company to work on it part time unless I absolute had to.

[askhn2023]

(thanks for your comments, sorry about my delayed response)

>> You didn't give us enough information to answer this question well. >> 1. Like why can he only commit 1 full day per week, is it money, a bad time, he wants to see how the startup turns out before committing?

One reason is that he has some major responsibility of existing job. Also because currently the hardware part is relatively self-contained and has a smaller scope.

>> 2. Do you have money to pay him?

Not now, and probably not in near future.

>> 3. Do you need him?

Yes as of now. I don't have the skills required to design / build PCB.

[twelve40]

Just plan out the time and reflect it in the grants and vesting schedule. Like, you get low x% grant for the first year because part-time, then after that first year, you become full time with another grant (with vesting, of course) that will top you up to 50%, or we part ways. Doesn't sound difficult to implement? It also sets the borders and timeline for commitment so that the person doesn't just linger around undecided.

As to whether or not go all the way to 50% in total... kind of a different question... Obviously better for you to keep as much as you can in the pool and not give away, not even out of greed but to keep the options in the pool to afford more star hires in the future, for example. But it might create bad blood if the person really comes through and starts contributing.

[oreally]

Keep in mind the HN crowd is attuned to VC methods of equity splits, and thus will recommend them out of familiarity rather than proper evaluation of fairness.

> I've read a book called "Slicing Pie handbook", but it seems to me it requires a lot overhead to get it right.

Part of business IS bookkeeping. But I've found Slicing Pie to be fair in that it takes into account hours worked, hourly rates (and experience), and risk (already) put in, and it implicitly adjusts over time. If you can't be arsed to keep records, you might not be suited to run a business with people in it.

To begin minimally with slicing pie, start keeping track of hours/pay in a spreadsheet - it really doesn't take much. Then refer to the book for scenarios like people leaving, 'baking the pie'.

[renewiltord]

Some quick notes:

- it doesn't matter how much time you spent on it, look forward

- incorporate first, very cheap

- you will have to set up a vesting schedule for yourself

- you can use a calculator like this to inform you of the roles you'll have in the future https://foundrs.com/ (number doesn't matter, but look at the questions)

- you will have to set up a vesting schedule for him

- if you can acquire the hardware IP for the company, just do that (you will have to raise to do this - don't spend own money - but it will be hard without the IP in the first place, so maybe precommit to price)

- I have no faith in part-time founders. Among my network of people running venture-funded startups, 100% worked full-time on it from incorporation. People worked part-time, but you were either in at incorporation or not.

- in practice, what you have to give away in equity is replacement-cost

- in practice, you currently have a company worth 0 and every person you bring on should change the EV up.

- you can hire this person as an employee and then provide equity commensurate and then issue more for when they come on full time

Sorry, not entirely useful but hope what's there helps.

[helph67]

There's a tale I recall of 3 hobos who pooled their funds so they could jointly buy a loaf of bread. They too faced this dilemma until one of them pointed out that the purchase was only possible because all 3 contributed.

[ipaddr]

For point 2 of why: you don't need a co-founder you need an advisor.

For point 1, it doesn't matter what they match skill wise if they are not putting in time.

You are better off as a strategic partnerships in separate startups.

[janalsncm]

There’s a pretty good article on Ycombinator about this. They recommend 50/50 splits. Basically, they say that most of the work is ahead of you.

https://www.ycombinator.com/library/5x-how-to-split-equity-a...

Now if your friend can’t commit right away, another option is to just buy their work and find another cofounder who is ready to go. Maybe something like 5% or 5k in 5 years, whichever is bigger. That’s just me spitballing though.

[ccrush]

I've heard of situations where founders issue a large pool of shares owned by the corporation itself and bill hours to the company, receiving a fair payout of their target share price in dollars as one share, and each founder can put in as much work as they have time to invest. I don't recommend this, but it's something I saw a couple guys do when they both had fluctuating free time to commit.

[notahacker]

If your friend's time commitment will depend on how things go (and presumably your startup's ability to replace income he currently earns working the rest of the week) and you regard yourself as having done most of the work so far and expect this to continue in the near future, it sounds like the actual relationship you are both looking for is closer to paid contractor than cofounder

[ITB]

You can apply something like this to do-founders if you can figure out your relative market value and how much cash/work each person needs/contributes.

https://blog.ivanbercovich.com/2022/startup-compensation

[iSloth]

Assume your friend does no more than a day a week, and in 5 years you’re worth a huge sum on money - what percentage do you think would fairly reflect his reward, that’s the percentage you should give now.

If you give 5% for example, there’s no reason you can’t give more in time based on increased input, but don’t give something you’ll regret in the future.

[askhn2023]

>> If you give 5% for example, there’s no reason you can’t give more in time based on increased input, but don’t give something you’ll regret in the future.

What would be your method to "give more in time based on increased input"?

Say now I give them 10% equity based on 1 day per week commitment. What's your suggestion if after 6-month, they increased to 3 days per week commitment?

[psyklic]

If you pursue this, make sure to research the tax implications of giving away large chunks of equity post-founding.

If you wait until the company has a large valuation, your co-founder could be taxed on the stock's current value, even if they aren't making enough salary to pay the taxes. This is why many founders purchase the equity up-front (at a very low par value) then do reverse vesting (where the company can claw back the equity under certain scenarios).

[bgirard]

You can negotiate that with them either ahead of time in an agreement, or when they are able to commit more time. It should be in both your interest to negotiate that in good faith if the startup is doing well.

[alfalfasprout]

Remember-- 50% of 0 is 0. Your initial founders should have a vested interest in the success of the company. If you believe someone is important enough to bring in at this very early stage, then no I don't think 10% is enough even if they're part time.

70/30 seems reasonable based on what you described.

[fakedang]

Bring him on as a founding employee with equity assigned to him as per the amount of time he's working on the product, relative to the amount of time you're working. Eventually, when you're seeing traction with your product, advise him to join you full time on equal equity terms.

[joshxyz]

i recommend going through yc's startupschool.org, they have modules that talk about cofounder criteria. on equity split there is yc investor school on youtube.

[xyzzy4747]

Never, ever give equity to a part-timer.

[twelve40]

i'm assuming the author can't just pay them cash for contract and needs their help, what else can they do but equity?

[joshu]

the answer is: vesting