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7 Comments

A tricky equity situation with 2 potential partners

I am the solo founder that is about to launch an MVP. I know 2 non-technical people who are interested in helping me with marketing efforts and other misc tasks in exchange for equity alone. Im just having a hard time deciding what the partnership should be exactly.

On one hand, they have not put any time or money into the product. On the other hand, they are willing to work for equity alone without pay

The best solution I have come up with is to have a certain amount of equity vested over 4 years for a certain amount of hours committed per week/month.
Was thinking something maybe 5% apiece vested over 4 years? but really hard to say.

Any thoughts?

  1. 5

    your product is useless without users. That said, do not give any % of your company to any sales people unless they bring real money in
    whatever the percentage you decide to give must be strictly linked to performance goals with time.
    Ask them what they thing they can do, put it in writing as X paying customers in Y amount of time = % in the company.
    and 2 sales people as partners is pointless unless you targeting to different market and you can keep them separate

  2. 3

    Taylor, are you the tech lead? You don't need two marketers. They'll step on each others' toes and be less productive than 1 marketer. Can you do commision based on sales for the first X months?

    1. 1

      No, I have a part time developer.
      Yea that could work. They are more interested in getting equity and I am leaning toward that too. Just wondering if there is a viable option here.

  3. 2

    A few things to consider:

    When will they expect to be paid in cash, in addition to equity? People tend not to work forever for equity alone. Even founders eventually take a salary unless they're already rich. So when will they expect to be paid in cash? Could be in calendar time (e.g. in March), milestones (once cashflow positive), or a time/effort threshold (once you need > 5 hrs/wk). It's worth getting specific so you understand what you're really buying with your equity.

    Put another way: when will they feel like they are being taken advantage of if they don't get cash?

    What's the game-changing, couldn't-have-done-it-without-you contribution you expect them to make? Can they do that with the effort they're willing to devote? How long will this take? Do they have the track record to make you confident they'll deliver? You could even build a milestone-based vesting schedule if you really wanted to.

    What's the team you expect to build? What precedent do you set with these people? Can you be fair to the rest of your future team given that precedent? Here's the math people will do:

    "X and Y got 5% each for < 10 hr/wk. That puts the going rate for equity at 1% per 2 hr/wk of work. I work 40 hrs/wk and took a 50% paycut to join. I need the other 20hrs to be made up in equity, so anything less than 10% is unacceptable."

    That's an exaggeration, but not by much. Not necessarily a concern if you're not building a team.

    Have you figured out the future of the business? Are you aligned with them on it? Presumably, they expect the equity to pay off at some point. Are they expecting a quick exit? Or that you'll be profitable and pay out earnings to owners? Or that they'll have a say in how the business is run? Can you deliver on these expectations?

    Are you considering this mainly because it feels easier than cash? It probably isn't, not over the full lifetime of the relationship. But if you really want to work with these people, it could be worth the effort. But treat this initial arrangement as a trial that you all acknowledge isn't sustainable. The equity isn't meant to be compensation in that case but a gesture to show you're serious about growing the relationship and will treat them fairly once you're ready to take the next step.

  4. 2

    This is always a tough question and almost impossible to get right. I would definitely have a vesting schedule, 4 years is very standard, but might be worth adding a cliff in there. Since they are working only for equity, I think a full year vest would probably not be fair, but you could try a few months.

    Another big factor is how much time they will be spending on this compared to you. Are they working full time? Just on the weekends? A few hours a month? If they are coming on full time, before funding, before product launch, then you should probably consider them more as cofounders and offer them a bigger chunk of the pie. If it is a part time gig for them, while you are full time, something in the range you are suggesting makes more sense.

    1. 1

      Thanks @jdiprete!
      Yea all that makes sense. I think it is going to be something small to start. Like maybe 5 ish hours a week is a good start to try things out for a couple months and like you said have a cliff sooner rather than later.

      But just hard to come up with a strong rationale for specific numbers.

      1. 3

        Another thing to remember is you can always give them more equity, but it is much harder to buy it back. If they become more involved or turn to full time work, you can give them more equity on a new vesting schedule.

        I think if both parties are happy with a starting point (say 5%), then that is probably a good place to start. Having an open conversation with them about equity will help reduce any problems in the future.

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