Ask HN: New founder in need of advice

[newstartupguy]

Hey guys, launching a startup and need some advice. I'm the technical co-founder/CTO, he is the business development guy.

My cofounder seems to think VC are more concerned with appearance than performance... He thinks the most important thing in a VC's mind is that we have an office with a full team in it every day. I disagree.

He thinks that having our team all in the same city/state is necessary to be taken seriously by investors. I disagree.

I'm constantly getting yelled at any time there is a bug... In his mind if a VC sees a bug, we're finished. My opinion is that as long as we're forthcoming and open and honest about mistakes and communicate with our clients and investors, we'll be fine (to an extent).

He wants a 90/10 split because its his idea and he's put about $80k into the business so far... I think 65/35 is more fair because I've built the software from scratch, have put in about 500 hours so far (no pay), and will continue to work around the clock for free until we're profitable. 10% is pretty unfair right? In his defense, he has crazy connections in the VC industry, has sold a (domain) company before, and has pretty deep pockets. That's the only reason I'm comfortable with going less than 50/50. I'm a sr engineer making $150k/yr now and I've worked for several software startups. Also I'm functioning currently far beyond my CTO capacity -- managing contractors, handling finances, and more.

I also don't think we should raise money... He's got tons of money and we're already making money. Our burn rate right now is about $10k/month and most of that is going to our designer. At the rate we're at, we should be break even in then next 3 months. I don't see a need to pull in a few million dollars and give up 1/3 of the business.

[mchannon]

With regard to the first half, your cofounder requiring an "office zoo", where visiting VC's can show up unannounced and whistle past, gawk, and throw peanuts at poor creatures who are not in their natural environment, I sympathize.

But you're going to have to pick a side here. Either your cofounder knows what he's doing when it comes to investor relations (and showing off downtrodden employees shackled to their desks can count as that) and you need to trust him, or he doesn't and you shouldn't keep treating him like he does.

[richkuo]

This post sounds like an attempt to settle an argument - some of the issues you mentioned should be settled as a team. A poorly settled "You're wrong and I'm right" argument might lead to bigger and more serious disagreements down the road.

If it were me... stop what you're doing and sign some papers. Friendships tend to break when dealing with the potential for making a lot of money. Is your relationship worth a million dollars? Maybe. What about a $100 million dollars? You're friendship isn't going to hold up if what you are forecasting is true. (I'm sure Zuck has 'lost' a lot of friends)

Without much other information on your company, here are some considerations:

If you don't get your % split, would you still be as motivated? work as hard? be as involved? What about your partner? How will it affect your business?

Your partner has crazy connections - how has that helped your business? How will it help your business in the future? How come you haven't raised money yet? If you don't raise money, how else does a VC play in your business?

He's put in $80k, why don't you just give him $80k for 100% of the company?

What if you just up and left, would the company be able to continue without you? (aka are you reasonably replaceable?) What if you just took the code and left?

How will all of this play out with the rest of the team?

Just some food for thought. Good luck!

PS. Unless your designer is doing front-end dev, I feel like you are overpaying your designer.

[newstartupguy]

Thanks for the input! She's full time (though more like double full time) front-end engineer and designer. Designing both the web app and ios and android apps. Definitely worth it :)

[cheeyoonlee]

Have you guys incorporated yet? I'm assuming you have but in any case, the sooner you guys settle the shares/vesting the better. How much of an asset do you consider yourself to be in the company? If you were to leave next week, would the company suffer a huge loss? If so, you have the edge and I do believe you deserve more than a 10% stake, even for the work you've done thus far.

EDIT: I also agree that you don't always need to raise money. If you guys have the means to continually fund yourselves (as you mention break-even in 3 months), it's really not necessary especially once you hit a substantial profit margin.

[newstartupguy]

Yeah, we're an LLC at this point. He incorporated before I joined.

[gus_massa]

Just for reference, YC invest ~$20K for ~%7 equity. So 30+35/35 doesn't seems to be so bad

http://ycombinator.com/apply.HTML

> 3. We decide who to fund after each day of interviews. Yes decisions will include the amount we'll invest and the percent of the company we'd want for it. We usually invest $11,000 + $3000n, where n is the number of participating founders, up to 3 (i.e. 2 founders get $17,000, 3 or more get $20,000), in return for between 2% and 10% of the company. The average is 7%.

Another thing. You got no pay yet. Did he get payed during this time?

[newstartupguy]

Neither of us have received any pay at this point.

Also, YC invests at that rate for companies without even an idea. We have a product launched in beta making several hundred dollars a day (inflates on weekends), with about 82 signed up clients most of which are going to start becoming more active (spending more money) as soon as we launch our iPhone app. We should be fully launching in the next month, at which point we expect to start raking in way more money.

[cheeyoonlee]

At that rate, you shouldn't even bother with an incubator or accelerator. If profit is looking good, no need to raise funds unless you guys are looking to expand your team.

[robin_reala]

Hang on, you’ve done 500 hours unpaid work and haven’t signed a contract stipulating a profit split?

[newstartupguy]

No, we're good friends... We've been more focused on just getting going. Admittedly stupid on my part, but if anything does go sour, I own all the code and all tech stuff is in my name.

[dylanhassinger]

you are naive to keep working without your arrangement written in stone.

You're good friends - for now. That can change in an instant.

Code "ownership" doesn't matter if he can afford better lawyers than you.

[newstartupguy]

I agree with you and will be rectifying it soon.

[lfuller]

I've been in this position 3 times now. Trust me - you want to get documentation signed as soon as possible (yesterday, really). When money and equity is on the line, "friendship" can, and often does, go out the window in an instant.

[caw]

If you assume your market rate, you can figure out how much money you would have drawn as a salary (since it's unpaid), and consider that as an investment. Compare that to the 80k he's put in, and maybe that will help settle the numbers.

[mztwo]

Founder here, on the business side but I've seen and heard plenty of stories about companies where things don't go as planned. Please share even a throwaway email with us - happy to share insights and legal info with you.

[newstartupguy]

I'm admittedly a bit lost as this is my first time in the position I'm in so any input would be great. Also if anyone is looking for a mentee, I could really use someone to talk to about stuff on a weekly basis.

[mchannon]

Since you're green we can't see an e-mail address. May want to share a contact method with us directly.

If you're not compensated in writing in the LLC agreement (which you would've signed), and you haven't been compensated otherwise or signed away your rights, then you own the code you've written and can act accordingly when it comes to negotiations. That may not get you very far, but it does give you some leverage.