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Originally when first talking about the company myself, and the 2 other cofounders.. at the time decided to do a split on equity.

Now, we're about a 1.5-2 months in and the other two cofounders think we shouldn't assign any formal 'titles' yet or any 'equity' as far as the three of us stand because they see it as just a 'project', which in all honesty it still is until we can get funding.

Their reasoning: since we're just a project saying "oh you get xx% and you get xx% and you get xx%" is pointless if we 1) dont even have investing yet and 2) are just beginning development of this product.

is this the right way to go about this or is it better to have in a formal, signed contract exactly how much equity we each get? The one cofounder who I work day and day out with says he promises when the product is built atleast at a beta stage and we get investing that "i'll get taken care of, financially"(I'm the developer).

Is this risky on my part and should I have something formal?

Thanks

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Your question title is not very clear. Something like "Should I split equity (on paper) with my cofounders now?" would work better. – tomeduarte Jul 13 '11 at 20:53

2 Answers

up vote 2 down vote accepted

I think it's a must to define specifically what each person founding gets. Besides the possible legal protection, I think it helps people to commit - you mentioned your cofounders are still treating the startup as a project and you'll see that once everyone signs a piece of paper, it's different.

To have each founder's signature on an agreed upon document reflects commitment from each one and really takes things further. However, I'd like to press the point that you don't need (IMHO) a legal term sheet or even to start the process of incorporating. A FriendDA-style equity split document works wonders.

It'll help the startup if everyone thinks seriously whether they want to be in (and in which amount of effort) the startup or not. I guess what I'm saying is: make everyone accountable - to the others and to themselves.

Hope that helps.

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This is awesome advice. Thanks :) – user9968 Jul 13 '11 at 23:46
Hope your startup grows well :) – tomeduarte Jul 14 '11 at 9:47
up vote 3 down vote

Well said by Tom. Also, "founder vesting" of say 4 years I've been told is also important. What this means is that, the partners only get their full share of the equity if they stay committed to the project. It's important to align equity and incentives.

This can be done, I believe, on a sliding scale. Say you and a partner agree to 50% each. If the partner quits in year 1, he or she gets 10%, year 2 = 20%, year 3 = 30%, year 4 = 40%, year 5 = 50%. Does that make sense?

Mark Suster and Fred Wilson have each written a blog in the last 6 months that shines a lot of light on this issue. So it may be worth googling their names, and searching "founder equity" on their blogs. Mark would tell you he's seen more than one entrepreneur who's partner quit but still owns 50% of the company. Also, Mark would encourage you, when appropriate, to consider taking more equity than your partners if you are driving the effort.

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With this founder vesting.... do you outline exactly what constitutes "commitment" ? – user9968 Jul 15 '11 at 13:00
I've never actually seen how the language is written, so I speak more in general than specific terms, but I think you would outline exactly what constitutes commitment. – Bertrood Jul 18 '11 at 3:20
What constitutes commitment... People who are willing to quit their jobs to work on an idea full-time should be eligible for equity (founder vesting). If someone wants to work on the idea part time, then they should get paid cash or IOUs, but they shouldn't get equity. what constitutes commitment should be laid out specifically for each year of founder vesting. This being said, I've never seen what this contract language looks like, and am paraphrasing a Mark Suster or Chris Dixon blog entry. – Bertrood Jul 18 '11 at 3:32
+1 because it's important to define both what people will get out of the arrangement and what they must put in to be entitled to it. (Otherwise one of you might end up doing 90% of the work and take 90% of the risk for 10% of the value). – Mike Jul 19 '11 at 21:28

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