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At the moment, my co-founders and I are working on our startup part-time. We're in the process of figuring out how many shares to allocate to each person.

If one of us quits their full-time job to work on the startup full-time, how should that affect things? For example:

  • Should that person be given additional shares? If yes, how do we determine how many?
  • Should we consider that person's time as cash invested in the startup?
  • etc

If additional shares are granted to that person but we don't known when the other co-founders will work on the startup full-time, how can we be sure that any share allocation decided upon now is "fair" X months in the future?

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2 Answers

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You've described a common dilemma. I guess the typical sequence goes something like this. We're all excited about what we're doing, and we're all committed. And one day, we realize that there needs to be at least one person available at any time for customers and prospective customers. But it doesn't need all of us, does it?

So now, someone on the team is going to take a different kind of risk, foregoing their existing income. It's not a cash investment, but it's a cash risk: personally, I think you best calculate it as the nominal salary you've agreed to take when you all go full-time. And that's the cash amount that the others need to be ready to cover in order to equalize the risk again (assuming we've agreed so far that we're equal co-founders).

If you choose not to equalize the risk, then the person who willingly and by general agreement goes full-time should expect that to translate into increased equity/reward, either immediately or through a convertible debt-type arrangement.

Or, if none of those works for you, then you need to decide how to avoid the issue. Which means either working out when you'll all quit your jobs and take the risk together, or going out looking for investors to back you in that move.

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This is a pure negotiation problem. However what I would consider for doing the split would be who is more critical to the project. In general at the early stage I'd rate cash as more significant then time.

Perhaps set aside some shares that you payout as compensation for work above and beyond to each other. Then say for each quarter or each milestone a certain amount of shares between the two of you would be rewarded. Say 1000 total split by the amount of work. So someone works 90 hours the other 10 reward it as a percentage.

This would be above the core shares that you each rewarded to each other.

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Hey John. Thanks for the advice. Both my co-founder and I are critical. I have the technical skills, and he has the business skills and domain knowledge. – a_fake_username May 20 '11 at 14:11

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