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I would really appreciate your guidance and advice. Great community.

I am a co-founder of a two year old start-up that is finally getting proper VC funding ($1MM injection). Currently, the founders all have full-time jobs and have been running the company part time. We both thought we would quit our full time jobs if we get the funding.

Well, one of the partners doesn't want to quit his full-time job and as one of the VC requirements (after negotiations) is that at least one us quits. Looks like I will have to quit my full-time job to make this happen. I am not happy at all - as the chances of this company making it with only 1 partner diminishes. My partner still commits to 10 hours week or so, but this is a very optimistic view.

My partner still wants to keep all his shares (~40%) and do this part-time. Moreover, I will be getting paid a salary from the funding we receive. However, I am trying to understand what is the norm in this situation?. Something about my partner sitting on %40 share while I go on a limb to run the company is not too encouraging.

My objective is to save this company and maintain a healthy relationship with the co-founder. What normally happens to co-founders facing this scenario?

Thank you very much

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What does the board have to say about this? Why would he be getting a salary for doing part-time work? Why would he keep 40% of the company after the investment if he only works part time? – TimJ♦ Jun 30 '11 at 21:12
@Tim: Why should he not be getting compensation for hours worked if there's funding to compensate any staff? – alphadogg Jun 30 '11 at 21:21
Oops - I misread - OP says he will be getting salary - nothing about the other founder. – TimJ♦ Jun 30 '11 at 21:34
So I guess the question is: does the fact that I am getting salary and they are not make the deal fair? Or should I be seeking more equity via some structure? – sbeekar Jul 1 '11 at 6:58
Equity is a long-term compensation, salary is short-term compensation. IMO, the two should be planned for independently and should not influence each other. They are orthogonal. – alphadogg Jul 1 '11 at 15:57

3 Answers

up vote 3 down vote

Hedging the bet both ways is dangerous, as much as you want them in.

I'm surprised the VC hasn't put in a clause which says you need to "earn" your side of the shareholding over the next say 2 years.

I think the retaining all the shareholding without providing the same contribution is unbalanced and longer term will not go well for you ... but keeping them in and giving the the option to contribute is I think where you should focus.

You could build in a sliding shareholding based on contribution.

  • All in = 100% of the existing shareholding
  • Half time would be less and you could agree to how the curve down to 9 would look between you.

If they want to do less and be more of an advisor role then maybe a 5-10% stake would be more appropriate for the part time effort put in so far and their ongoing adivce.

The salary your drawing now that you have VC funding is only part of the picture. As the company grows you will be gaining a massive amount of understanding and experience, stress and sleepless nights that the other partner won't be in their safe 9-5 job.

Other issues.

At some point if the company is going really well they may want to come across to the "now safe" envrionment and expect to slot into a top job ... without the background, understanding that comes from having been there and done it.

If I was the VC I would be very nervous about this with someone having 40% of the vote who isn't involved and really has no downside. Your relationship with your VC is now or should be now a fairly high priority next to your partner.

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Hi Robin - your post was informative. My partner looks at it from the perspective that he worked for two years to earn his shares and now I will be getting salary and he wont. The problem here is that we are trying to keep the VC out of these discussions because as soon as they sense some of this tension, the entire deal will be jeopardized. – sbeekar Jul 1 '11 at 6:21
Yeah, I understand their wanting to retain their shareholding given the effort to date, but you aren't out of the woods yet. You should run through another 2 and another 5 years forward senarios with your partner and say "today we start with the shareholding as is" but our shares should have a scale based on the effort, the salary is very seperate as your partner is earning one two and has the option to earn one from your new company ... that should be neturalised in the discussion. I would say perhaps agree to award both of you 20% each for effort todate and you BOTH can earn the other 20%. – Robin Vessey Jul 1 '11 at 6:49
That sums it very well. Thank you so much. Now lets hope my partner agrees without too much damage! – sbeekar Jul 1 '11 at 7:01
"Earning your equity" is something that you do with a fresh, inbound partner. It's much harder to do so when the pool has already been distributed and you are wondering how to re-allocate based on individual responsibilities and investment levels. IOW, if both partners agree to re-allocate, own 20% ea. and vest into another 20%, who owns the last 20%? – alphadogg Jul 1 '11 at 16:02
We do it as actual number of shares rather than percentages. You get X shares per month rather than %. The remainder is "reserve stock" or what ever you want to call it. – Robin Vessey Jul 3 '11 at 1:18
up vote 2 down vote

Don't get hung up on the "part-time" label. And, don't chuck your co-founder simply because he/she is unable to commit to the exact same degree as you. I know a lot of people obsess on the "if you don't commit fully, you are dead weight" idea, but that's just over-simplification that comes out of frustration on the part of those who carry more weight, but don't get more equity.

What should normally happen is that you have to take a holistic picture. Not just time, but skills, expertise and other factors and equitably distribute the equity. (pun intended) Look at this recent post of mine, or use a few internet equity/founder calculators out there. Lots of recent posts have links to them.

Essentially, for a startup, every hour anyone can give is mighty precious, but overall should be weighed relatively against the sum total of contributions.

Re-evaluate often. At some point, your partner will be diluted into amounts that won't bother you, or he will join fully, but have been dinged a little by not having participated fully at all times...

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Thanks alphadog, so I am trying to summarize what you are saying, basically we should agree on some structure moving forward where I earn more of their share as I contribute more? – sbeekar Jul 1 '11 at 6:29
Somewhat. IMO, to keep it simple, you should immediately distribute all common shares between you and your partner(s) now, based on what has recently come to pass and what the best-case, near-term (handful of months POV, assume no VC) look like, using a semi-objective "calculator" approach with defined items. You should review this on either/or a fixed schedule/major company milestones. – alphadogg Jul 1 '11 at 15:57
Earning equity and vesting on proper milestones is a parallel issue that is best reserved for new partners and trialing the relationship. – alphadogg Jul 1 '11 at 16:07
up vote 0 down vote

Robin has covered most of the bases in his answer. I'd just like to reinforce that it's very surprising that a VC would agree to a partner who worked part time and is not quitting his day job to retain 40% of the stock. Maybe you haven't reached that stage in the negotiation yet.

The bigger red flag to me is when you say "while I go on a limb to run the company is not too encouraging." This would really scare me as an investor that you're considering running the company going on a limb. Most entrepreneurs I know would be very excited about finally having the money to build the company up and realize their dream. It sounds like you both prefer the security of your day jobs which is is going to be problematic for people who want to run a startup.

To answer your specific question, no, it's not fair for your partner who's going to work part time to keep his 40%. Usually, these things are covered in the initial incorporation papers. You should each vest over 3-4 years, and that way if someone leaves or doesn't do their share, there are relatively easy legal solutions.

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