Ask HN: Some noob co-founder questions
I want to invite more people in my startup but I have no idea how to evaluate their time. I have 30% MVP and business proposals that I done myself. How to value how much % of the company should I give to someone who is going to spare X time/week on this project as a co-founder? I can't seem to find this kind of information and I want to be fair with my proposals. More importantly, how to validate this if I am not yet incorporated? Make a draft contract and e-sign it?
23 comments
Everybody. Must. Vest. If you can't use someone else's paper for the employment and equity contracts, talk to a lawyer. Set up standard 4-year vesting with a cliff. If you hire someone and 3 months later come to the realization that they aren't working out --- which is likely --- they can't be walking away with a chunk of the company.
I run a profitable one-man SaaS business. I think before you seriously consider even bringing someone on, you should think about exactly what you want. If you have 30% of an MVP and a business plan, what are you looking for in a cofounder? Why is bringing them on material to your business?
You mentioned that people don't take you seriously as a one-man operation. This is not my experience when it comes to negotiation of standard contracts - businesses care about the value you create for them. Being a one-man operation has mattered when dealing with acquisition negotiations, but I think optimizing for that now is a bit of cart-before-horse.
Imagine you are pitching to your imaginary board or a potential investor. You want to bring on a cofounder to help you grow X% in Y months by adding Z strategic value. Fill in the blanks and then decide if you actually know anyone like that. When you do all that I think the % of the company to give away questions will become transparent.
You mentioned that people don't take you seriously as a one-man operation. This is not my experience when it comes to negotiation of standard contracts - businesses care about the value you create for them. Being a one-man operation has mattered when dealing with acquisition negotiations, but I think optimizing for that now is a bit of cart-before-horse.
Imagine you are pitching to your imaginary board or a potential investor. You want to bring on a cofounder to help you grow X% in Y months by adding Z strategic value. Fill in the blanks and then decide if you actually know anyone like that. When you do all that I think the % of the company to give away questions will become transparent.
Last time, when I met a VC associate, he was excited to hear my pitch, and in the end he asked about my team. When I told him I did everything alone (and doing it parttime), his facial expression changed, and started lecturing me (in a subtle way) about how hard it is to run business alone and part-time. I had a working product and some tractions. The idea was to get money from him, so I can confidently quit my job and working on my product fulltime. Sounds like catch-22 no?
"nobody on the internet knows you are a dog" - make your pet dog/cat/hamster a co-founder/imaginary friend. Create a facebook page/github account/stackoverflow account for them so they exist on a cursory Google search. At a later stage after you have done the money grabbing explain that your co-founder didn't really commit much code and you had to let him/her go. Dishonest? Yes, but women that posed as men to get publishing deals or to join the army were dishonest too. In the current scene there is this 'must have cofounder' rule that doesn't entirely make sense. It is mythical man month to a certain extent - if one person spends two years to develop an MVP and get traction that is somehow worthless whereas if a team of two do it in a year that is somehow perfect.
If you're making up imaginary partners to get someone to give you money when they wouldn't otherwise, you'd be committing fraud. If the investor found out, they could press criminal charges[1] or sue you to get their money back. (They'd be especially likely to do this if they lost money on your company.) Once the case ended up in court, you'd have no way out, since continuing to assert your lie would be perjury (a felony).
[1] https://en.wikipedia.org/wiki/Fraud#As_a_criminal_wrong
[1] https://en.wikipedia.org/wiki/Fraud#As_a_criminal_wrong
Don't investors do due diligence before wiring money to your bank, even it's just a seed funding?
"Team" doesn't have to mean full-on partners, but usually without money you can't get people on board to commit to anything resembling reasonable effort to get things done. Perhaps some things should be outsourced, with you still managing and making decisions, but outsourced to extremely low-cost people, then you'll have the 'team' the VC wants so desperately to see??
Given that you're already doing it, I'm not sure you need a lecture or reminding about how hard it is. It's also really hard to convince people to come work for you for no money (probably harder than just getting your stuff working and bringing in money in the first place).
Given that you're already doing it, I'm not sure you need a lecture or reminding about how hard it is. It's also really hard to convince people to come work for you for no money (probably harder than just getting your stuff working and bringing in money in the first place).
>> It's also really hard to convince people to come work for you for no money
I think this may have been why his face dropped. If your pitch isn't convincing anyone to take a risk with their career/time on you, then the investor is going to think twice about taking a similar risk with his money.
I think this may have been why his face dropped. If your pitch isn't convincing anyone to take a risk with their career/time on you, then the investor is going to think twice about taking a similar risk with his money.
Part of what they want to believe is that you have the personal network to get good people and the skill to keep them around and believing in your vision. One way you can finesse this is by finding people who will join you instantly when you have money. E.g., "My friend Joe has been helping me with the coding and will come on full time as soon as I can pay him enough to cover his bills."
I think you should just find some people who are excited by what you're doing, start working with them on a trial basis without any formality, and just see how it works. You'll probably end up cycling through a bunch of people before finding anybody of co-founder quality.
You'll meet a lot of people who are really excited to be involved in a startup, and then a month later learn that they don't have it, or that there are fundamental differences in the way you guys do things. It's super hard to find "co-founders" which are totally a type of person.
My two first co-founders were very experienced. I picked this up from them.
Find out what they do and if you even like them, etc. After the trial period, negotiate based on their value, quality (experience, exceptional skills) etc. and risk they're taking (time spent) with emphasis on output (value). MAKE IT VERY CLEAR from the outset that the work you're doing together is to see how things go. If it doesn't work out, you go your separate ways. People who have done this before will appreciate this method and those are the people you want as a cofounder! You can set the trial period for 1 to 3 months.
You'll meet a lot of people who are really excited to be involved in a startup, and then a month later learn that they don't have it, or that there are fundamental differences in the way you guys do things. It's super hard to find "co-founders" which are totally a type of person.
My two first co-founders were very experienced. I picked this up from them.
Find out what they do and if you even like them, etc. After the trial period, negotiate based on their value, quality (experience, exceptional skills) etc. and risk they're taking (time spent) with emphasis on output (value). MAKE IT VERY CLEAR from the outset that the work you're doing together is to see how things go. If it doesn't work out, you go your separate ways. People who have done this before will appreciate this method and those are the people you want as a cofounder! You can set the trial period for 1 to 3 months.
Please, please, please get a lawyer before you do anything as dangerous as "make a draft contract and e-sign it". Amateurs making up business legal documents is one of the dumbest false economies ever. Use a lawyer experienced in starting businesses.
Before that point, either pay the people (small amounts of) cash or treat it as something that they're doing for fun, with the understanding that you'll take care of them if it turns into anything.
At this point, there is not enough data to put a value on anything. If you want to be sure you are fairly rewarding people later, then have everybody track hours, and value their initial labor contribution at some reasonable per-hour rate.
If you want to bring somebody on as co-founder, remember that a business partnership is almost as serious a relationship as marriage. You could be spending years with this person at 60 hours/week. Ending a business partnership is often as painful and more complicated that divorce.
Before that point, either pay the people (small amounts of) cash or treat it as something that they're doing for fun, with the understanding that you'll take care of them if it turns into anything.
At this point, there is not enough data to put a value on anything. If you want to be sure you are fairly rewarding people later, then have everybody track hours, and value their initial labor contribution at some reasonable per-hour rate.
If you want to bring somebody on as co-founder, remember that a business partnership is almost as serious a relationship as marriage. You could be spending years with this person at 60 hours/week. Ending a business partnership is often as painful and more complicated that divorce.
Are you looking for a technical co-founder or a co-founder in the marketing / business fields?
I think if the idea is a good one, and you don´t have a co-founder yet, try to get some cash and hire one or more freelancer instead of giving away 50% of your company for some days / weeks of work. It depends on your strategiy, the idea, the potential, cashflow planning,...
I would suggest that you do a business model / business plan, at least a small one, first, so that you have something to show to potential investors / co-founders.
I think if the idea is a good one, and you don´t have a co-founder yet, try to get some cash and hire one or more freelancer instead of giving away 50% of your company for some days / weeks of work. It depends on your strategiy, the idea, the potential, cashflow planning,...
I would suggest that you do a business model / business plan, at least a small one, first, so that you have something to show to potential investors / co-founders.
I am more interested in a technical co-founder but I also will need marketing in the future. The thing is that since I am a full stack dev, I can do everything bottom up so I don't really need to pay a freelancer for a few weeks, I just need someone to work with me because doing it alone is so damn difficult. Also people don't take you seriously when it's a one man show (and it's correct).
Here is the equity equation by Paul Graham http://paulgraham.com/equity.html
I appreciate all the comments, but how do I test people for a limited period when they will have all access to my git in order to commit things? It's so easy to get all the code/fork when I let them go with my original idea on their plate right?
Make them sign NDA.
You can also have a look at this calculator: http://foundersolutions.com/founder_equity_solution
There are some assumptions in here we have to take apart.
First, if you're not a corporation, there isn't "really" equity. LLCs have ownership, but it's not stock like it is in a C corp, it's just whatever you define it to be. If you're an LLC which will eventually reorganize into C corp, or just a bunch of people puttering around together in your spare time, there's no legal structure or contract which could guarantee that the final incorporated form of your startup will preserve the equity arrangements you've discussed.
It is entirely possible, perhaps even likely, that someone will get screwed, when incorporation time comes. As such, I don't really see a point in formally defining equity for a non-C corp. Either everyone trusts each other or they don't, but paperwork isn't going to fix that.
Someone will sputter, "but you could just put it in a contract!" Yes, but if you can't afford to sue me over the terms of the contract when I form a new C corp without you, then what's the point? (I assume that's why you're not incorporated yet, that you don't want to spend a few thousand dollars for paperwork, and that your co-founders probably won't, either.)
The other problem you have by not incorporating is there's no independent entity which owns all the IP. When your co-founders write code, who owns it? Where is that defined? How is ownership transferred from them to the startup? If this is their side project, do their employment contracts allow them to have side projects, or do their employers own everything they do? Are they using their work computers to work on anything for your startup? Etc.
So, in a sense, it doesn't matter what percentage you say they have, nor how you validate it, because those arrangements aren't worth the paper they're printed on.
That said, my fourth startup attempt went the unincorporated route. We had a gentleman's agreement around IP and ownership. We used Joel Spolsky's equity plans, most recently discussed here: https://news.ycombinator.com/item?id=7610781
All the original founders were the first tier, sharing 50% ownership. We were all equally side-project-ing it; there were no full-time founders. Additional rounds of founders would have been in one of the subsequent 10% tiers. If we had any full-time founders, I'm not sure what we would have done; perhaps full-timers in one 30% tier, and part-timers in a shared 20% tier, to keep the 50% bracket for original founders.
For IP, we agreed to each retain ownership of our own code, and non-exclusively license it to each other person, for the purposes of working on a group project. We had a shared private code repository; anything in there was understood to be licensed as such, and only the things in there.
Everyone understood that all of this was effectively non-binding, but we all trusted each other, and the expectation was, come time to launch the app we were working on, we'd incorporate at that point, and formally define all of this.
First, if you're not a corporation, there isn't "really" equity. LLCs have ownership, but it's not stock like it is in a C corp, it's just whatever you define it to be. If you're an LLC which will eventually reorganize into C corp, or just a bunch of people puttering around together in your spare time, there's no legal structure or contract which could guarantee that the final incorporated form of your startup will preserve the equity arrangements you've discussed.
It is entirely possible, perhaps even likely, that someone will get screwed, when incorporation time comes. As such, I don't really see a point in formally defining equity for a non-C corp. Either everyone trusts each other or they don't, but paperwork isn't going to fix that.
Someone will sputter, "but you could just put it in a contract!" Yes, but if you can't afford to sue me over the terms of the contract when I form a new C corp without you, then what's the point? (I assume that's why you're not incorporated yet, that you don't want to spend a few thousand dollars for paperwork, and that your co-founders probably won't, either.)
The other problem you have by not incorporating is there's no independent entity which owns all the IP. When your co-founders write code, who owns it? Where is that defined? How is ownership transferred from them to the startup? If this is their side project, do their employment contracts allow them to have side projects, or do their employers own everything they do? Are they using their work computers to work on anything for your startup? Etc.
So, in a sense, it doesn't matter what percentage you say they have, nor how you validate it, because those arrangements aren't worth the paper they're printed on.
That said, my fourth startup attempt went the unincorporated route. We had a gentleman's agreement around IP and ownership. We used Joel Spolsky's equity plans, most recently discussed here: https://news.ycombinator.com/item?id=7610781
All the original founders were the first tier, sharing 50% ownership. We were all equally side-project-ing it; there were no full-time founders. Additional rounds of founders would have been in one of the subsequent 10% tiers. If we had any full-time founders, I'm not sure what we would have done; perhaps full-timers in one 30% tier, and part-timers in a shared 20% tier, to keep the 50% bracket for original founders.
For IP, we agreed to each retain ownership of our own code, and non-exclusively license it to each other person, for the purposes of working on a group project. We had a shared private code repository; anything in there was understood to be licensed as such, and only the things in there.
Everyone understood that all of this was effectively non-binding, but we all trusted each other, and the expectation was, come time to launch the app we were working on, we'd incorporate at that point, and formally define all of this.
I started an LLC, ran it with two co-founders and several equityholders for ~9 years, and then sold it, and what you're saying about LLC equity allocation does not square with my experience.
There are several lawyers on HN who might be able to shed some light here.
I think the advice that (paraphrasing) "equity doesn't matter if you're an LLC, everyone either trusts each other or they don't" is probably dangerous. Among other things, all equity issued must vest.
There are several lawyers on HN who might be able to shed some light here.
I think the advice that (paraphrasing) "equity doesn't matter if you're an LLC, everyone either trusts each other or they don't" is probably dangerous. Among other things, all equity issued must vest.
Interesting. I'd be interested in knowing exactly how that equity structure was set up for an LLC.
My lawyer was very convincing that, specifically with regards to reincorporating as a C corp later to take on investment, that there was no assurance that the LLC's equity structure could be guaranteed to survive that transition, and it wasn't worth our time or money to try.
We had no vesting in that instance, we were all immediate equal co-founders.
My lawyer was very convincing that, specifically with regards to reincorporating as a C corp later to take on investment, that there was no assurance that the LLC's equity structure could be guaranteed to survive that transition, and it wasn't worth our time or money to try.
We had no vesting in that instance, we were all immediate equal co-founders.
The all-equal-cofounders scenario is the one where vesting matters the most.
Thank you for your detailed comment. How did this worked out? The end is missing :) Did you get inc'ed and who got screwed if anyone?
As with most startups, it failed. The group dissolved inside of a year, due to internal and interpersonal pressures, rather than equity or contractual ones, before we got anywhere near a launch or incorporation paperwork.