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I have a few questions regarding equity distribution that I would like to get cleared out, since I am the core developer and CTO of this project and have very little idea on businesses etc.

My Situation is like this -

Founder 1 - Investor 200k, came up with the idea, invests say 25% of his time.

Founder 2 - Developer, no funding, came up with the idea that makes this system unique from other existing ones, invests 50% of his time, and is a final year student.

Founder 3 - Investor 200k, helps develop the idea, has necessary contacts to get this business running very quickly.

I am Founder 2 in this situation. What would be the idea equity distribution among us. Currently this is what founder 1 and 3 have in store for me -

Founder 1 and Founder 3 own an LLC 50% each, this LLC owns 85% of the company that will run the business. and they are offering me 15% non dilutable funds in the daughter company.

I am very new to this and want to know what Im getting into.

Thank you

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Will you be getting a salary? That's a huge factor because the question is whether you are a first employee or a co-founder. – Alain Raynaud Aug 11 '11 at 16:50
It looks fair to me. $400k is a lot of money. Right now the valuation of the company is at about $470k. Your contribution is valued at roughly $70k (note this is rough/off the cuff seat of the pants number assignment) If you can't be diluted and you are happy to work for whatever you are getting then go for it. Talk to them about what you can expect as far as distributions or revenue or salary. Know what to expect so everyone is on the same page. – TimJ♦ Aug 11 '11 at 19:12
Thanks for the inputs, I think I will be going for it. I am going to be a co-founder and wont be making much till we start making profit. But i'm okay with that. Thanks again! – hackfanatic Aug 12 '11 at 13:29

1 Answer

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  1. Separate out the cash contributions from non-cash
  2. Decide how to "price" this initial cash investment (e.g. $400k = 40%)
  3. With the remaining equity (e.g. 60%) decide how much is granted to each of the founders, and how much is reserved for sweat equity vesting over time. E.g. each founder gets 5% and the remaining 45% is vested over (say) three years.
  4. Now that 100% of the equity is accounted for, you can make room for new investors and employee stock pool by issuing new shares and diluting the initial allotment of equity pro-rata

Unless there is a clear and present reason to create subsidiaries and other legal structure or separate classes of equity, it's a good idea to hold off. It can always be added later.

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