Ask HN: Would this method work to split equity of a startup? | Hacker News Reader

Ask HN: Would this method work to split equity of a startup?

4 pointsEnvec8310 comments

I am a developer/entrepreneur, and a couple of weeks ago I went to see a friend of mine who owns a chain of stores. I asked him what problems he was currently facing while managing his business, because I wanted to see if I could solve them with software. Out of this discussion came the idea for a B2B software that will solve a big problem for him and potentially for many other stores.

Since the idea looks promising, I said I would start developing it right away, and he said he would like to join me as a co-founder, saying he wants to help with the sales part, and that he is OK with me having the larger equity.

We didn't discuss specific percentages yet, and I am also not sure how much he will be able to contribute, as he owns and runs 10+ stores as his full time job.

I am trying to come up with a fair way to split the equity, and here's my idea:

1. We say that developing the product is 50% of the job, and selling it is 50%.

2. Since I'll be developing it myself, I already own 50% of the product, so we just need to figure out how to split the remaining 50% (i.e., the sales part).

3. Once we start selling the product, we track how many sales each of us will generate during the first year. I expect that he will mainly sell via his network of contacts, while I will focus on selling it online, so we wouldn't duplicate efforts.

4. After one year we split the 50% sales equity according to the percentage of sales generated by each one. For example, if we sell similar amounts each one gets 25%, so I end up with 75% of the business and he with 25%. If he outsells me 4 to 1, he gets 40% and I get 60% (50% + 10%).

I believe this could be fair and even productive, as it would stimulate each of us to give our best trying to market the product.

Do you guys think this would work?

Bad idea. The fact is that he will never work full-time on this startup. Treat it has such. Since he probably doesn't need a salary (he already has a job), just treat him as an advisor (a few percent of stock), and a huge commission for any sales he brings (30% of profit for his leads).

You don't want to have conditional/future equity based on some formula. You'll spend the next year arguing about what the formula should have been, why things that were not planned should be taken into account (or not), etc. Just don't. You can't forecast the future enough to make fair deal.

As long as both sides agree that the percentages are OK, you're fine, as long as:

(a) You VEST EVERYTHING (including your own shares)

(b) You know how you'll legally handle control after one of you leaves

(c) You have a serious conversation about responsibilities, one that confronts all the ways you can see things not working out; at this stage in my career if I was doing this I'd turn that conversation into a simple, bulleted MOU

(d) You remain observant about what the equity split is doing to morale. Frankly, sales of a new product is very hard, and it's more likely that vesting and termination are going to be your problems, but if they do really well, you need to remember that, again, sales is hard, and you don't ever want to lose someone who can perform in that role because they think they're getting an unfair deal.

Very good points. Thanks for the feedback.

You have a product idea, the skill to develop it, and a potential first customer. Charge the customer, don't pay him with equity for the privilege of working on his problems.

If you get the problem solved, then think about scaling with a sales person. Keeping in mind that someone who has a full time job and may be seen as a competitor to future sales leads may not be the ideal candidate. Though if the candidate has an extensive track record closing B2B software sales, that is worth considering.

The fact that you don't think a fifty fifty split is fair and that your friend does not want to commit to the success of the venture to the same degree as you indicates there is a misalignment of interests.

What happens if he sells 4 to your 1 and never does anything else? is that worth 40% to you? You also need to work out some kind of salary arrangement for either of you that goes full time once the sales can support it. Also your not leaving any equity for the first full time sales person you have. Plus your going to need 1-10k to turn it into a busness with lisences etc.

Sounds better to decide % upfront. So you both know, who owns what form the start. About sales, just set a commission per sale. Note that he's bringing into the startup the know-how about the problem you're solving. I bet you'll be consulting him as the "expert" in the matter. This is a valuable part of the equation.

What if we decide he should get 30% upfront in exchange for helping to sell the product, but he ends up not selling much because he is too busy managing his current business. Do you think this is a risk I must take?

Unless he's giving you money, why would you give him any equity before the sales phase?

Also you need to validate this with customers that aren't partners.

We definitely will. I am lining up a couple more pilot customers.

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