Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 1 down vote favorite
3

Here is the situation. I'm working with two other folk on our startup and we are now planning to incorporate. We're trying to figure out how to allocate founder equity between ourselves.

So far, we have been keeping track of hours spent and the total is as follows:

Person A: 800hrs

Person B: 500hrs

Person C: 300hrs

No one has invested any money so far.

A is working fulltime on the startup and B & C are part time, but promise to become fulltime in Dec 2010 (because of commitments to their existing job)

Our current thinking is that we want all three founders to have the same equity ( B & C will buy hours @ $50/hr) to equal A's 800 hrs.

The issue is how do we vest the founder stock going forward since B & C are not fulltime until Dec and may end up never going fulltime. Similarly A is fulltime now, but may have to go part time if no revenue comes in soon?

We want to incorporate and do the IP assignment asap which is why we are trying to figure out the equity split for the incorporation.

In general, how do you vest founder stock if the founders are not fulltime, but you can only pay them in equity?

share|improve this question
We ended up assigning 2000 shares to each founder at incorporation and after that, we assign one share for every hour worked. It's working great so far. – Matt Jul 17 '10 at 19:28

4 Answers

up vote 2 down vote accepted

Matt,

Yours is a fairly common situation. My suggestion would be to deal with contribution prior to incorporation and set up a separate arrangement for the time period post-incorporation to full-time participation by the other two. For example, you could:

  1. Get a good Founder's Agreement in place before you incorporate that outlines each person's participation and contributions prior to incorporation and the intention to distribute equity in the company when it is formed based on each person's contribution up to the date of incorporation.

  2. Incorporate the company; take the buy-in amount from the other two as a contribution to the company; have the board issue 100% of issued shares equally among the three of you (you should authorize X number of shares and what isn't issued will remain in your treasury). For example, each of you hold 100,000 shares for a total of 300,000 shares authorized and outstanding and no other shares are issued to anyone else.

  3. When the other two join the company full-time, consider another issuance of shares to each of you with the distribution at 50%; 25%; 25%. So, if the board issues another 100,000 shares, the resolution will state that 50,000 to the full-time person and 25,000 each to the other two. They can each then buy shares in the company to be on-par with you if they choose to do so.

  4. You can also prepare a deferred compensation agreement for yourself upon incorporation to account for the 50% more time you put in until the others join full-time. In this case, you could take the steps in 2 above, issues shares for services as in 3 above but in equal lots to each of you. When they join in December, your compensation agreement can be triggered at that time for your to receive more shares to account for your additional work or you can receive compensation in cash from the company if there is money in the bank.

The good news is that just about anything that you can agree with your partners is an option.

Good luck!

share|improve this answer
up vote 2 down vote

I can see several approaches:

  1. Pay for what people are doing right now. This means that the promise of going full time later is ignored, assume they will never go full-time.

  2. Pay based on who is critical. Usually counting hours in a startup doesn't sound right. Who is critical? Who is the CEO?

Let me assume that person A is the CEO. Start with 50% for A. Then, do persons B and C hold essentially similar/equally important roles? Then do 25% each.

Did you incorporate yet? If not, I recommend you check out my pre-incorporation co-founder agreement. You don't want to have people contributing IP with no paperwork at all.

share|improve this answer
Alain, Thanks for the response Matt Re 1: We can't pay anyone with money, only equity. So would we pay equity per hour worked? Milestone based seems more ambiguous Re 2: Right now, all three are critical and we need to get more people on board to finish our MVP. We want to pay in equity, but everyone cannot contribute the same time to the startup. We want to incorporate and do the IP assignment asap which is why we are trying to figure out the equity split for the incorporation. In general, how do you vest founder stock if the founders are not fulltime? – Matt Mar 2 '10 at 22:59
wow, they really screwed up my formatting :( – Matt Mar 2 '10 at 23:01
Matt, what did you think about my proposal to do 50/25/25? – Alain Raynaud Mar 3 '10 at 22:33
up vote 1 down vote

If you do anything other than 1/3 each then the part timers have even less incentive to jump to full-time later on. I am not saying you have to do it - it is just a consideration.

You can certainly come up with other means of repaying the differences in productivity.

share|improve this answer
up vote 0 down vote

Matt,

My partner and I are going through the exact same situation now. Can i ask what you ended up doing?

Thanks, Mili

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.