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Ask HN: How to handle one (of several) co-founders providing seed funding?

6 points by webb ↗ HN
I am in favor of evenly splitting founder equity. What typically happens though when one co-founder is in a position to bootstrap the company but one or more co-founders isn't? Specifically is this handled with an equity round where preferred is issued to the funding founder? How is valuation typically determined? Or should this be handled some other way? Is there any reason to avoid this situation entirely?

11 comments

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Mz
I think your title needs work. I read it to mean "one person company" rather than "one of two (or more) founders" and "bootstrapping" has been defined on this forum as "making enough money from it to support yourself while you grow it" (or something along those lines). I didn't hear "one of the two (or more) founders supplying the seed money" at all.

Good luck with this.

webb
Rereading the title I agree that it could be stated more clearly.
Mz
Much clearer. I hope you get the info you need.
Ciacco
One solution is split stock ownership in the manner you would without any funding. Then determine the amount of seed capital you will raise and the cost of equity or implied valuation. Then attempt to actually raise that money from an outside investor. If the implied valuation needs adjustment before there are any takers, then use that figure for any stock sold in your seed round. Whether you actually take outside money or not (or sell stock in part to an outside party), let that valuation govern the stock sale. And whether co-founder(s) partake(s) in that round, its treated a separate matter and a separate dilutive transaction from your "founder's stock."

Of course often when the amounts involved are relatively* small (*depends on the venture and the people involved), sometimes the costs that one co-founder incurs is handled in an informal way, and is part of the relatively even contribution between co-founders. Partnerships are never equal (contributory aspect) all of the time anyway. Sometimes you pull more weight, sometimes it's the other(s), maybe it never evens out -- but if it's close enough it's a better working dynamic to leave it simple.

jayzee
Another way of valuing the company is deciding at what value you would be wiling to do the work.

if the guy gave you the $ and wanted 100% you would not do it and you would jump on it at 0%. The reality is somewhere in the middle.

webb
Both sound like good ways to get comfortable with determining a value for the equity. Appreciate the insight.
mishmash
In my experience, one thing to remember before taking any money from a co-founder is that money _will_ change relationships. What happened to me was that within days of taking $5000 of seed from a partner, he/she basically decided to quit working on the project and suddenly saw their financial contribution as equally important to my programmatic contributions.

Needless to say, the situation didn't end up working out very well. YMMV.

jayzee
Depends on the amount but I am guessing that it is <50k

1. First Vesting. Always vesting. 2. Second Vesting. Always vesting. 3. Do not do preferred for a small round. The legal costs for preferred are high >20-30k 4. Do common. Can be done in less that 5k 5. You could consider what Y combinator offers and tee of that (20k,60%, very valuable connections)

5.

webb
Didn't realize costs for a preferred round we so high. Looking to apply to YC and others next year. Thanks.