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Ask HN: How would you split ownership in this scenario?

7 points by Axsuul ↗ HN
My friend, who is the CEO of a company in this industry that this startup will be in, and I came up with a great idea and we're going to pursue it. However, he wants to split it 50/50 but I'm not comfortable with that because

* I don't have a job so I have more to risk

* I will be the one developing the product (he is non-technical)

* He is already running another company, there's only so much time he can invest in this one

What he brings to the table is strong connections within the industry. He'll be able to get a lot of customers on board initially. Do you guys think 50/50 is fair in this scenario?

14 comments

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NonEUCitizen
If he also puts in a few million dollars, you might consider it. But otherwise, no.
aauldy
I think you guys should sit down together and write down a list of what you will be contributing to the company. Im sure it will become very clear as to how you should break up the company. In my opinion after reading your post it doesnt look sound like you should be splitting the company 50/50
vladd
If he's CEO but not the owner, be careful about non-compete provisions in his employment contract which might create legal liability for your company in the future, especially if he brags about bringing "lot of customers" with "strong connections within the industry".
trueneverland
Different people will have a different of opinion on this. As full disclosure, I am NOT a fan of 50/50 splits in general and have had my fair share of businesses and startups.

Here is my take:

1. Your first bullet point is irrelevant. You not having a job doesn't mean you couldn't get a job to lower risk if thats the way you think (although thats not a good way to think at all). Him having a job doesn't mean much. What matters is what you each bring to the table and what you contribute. If your argument was more base on time commitment rather than risk, I'd agree.

2. I HIGHLY disagree with this argument. A lot of HN love to downplay the non-technical founder (with good reasons) but a valuable non-technical founder who have the skills (which many who start out don't) is worth their weight in gold as well. The non-technical argument here is more of a bias use case than a fair assessment of what each is bringing to the table and how that will contribute towards the startup.

3. This one is valid. As someone else noted, check for liabilities regarding this. The fact that you are going to be putting in more time makes it somewhat valid that the split should not be 50/50 starting out. Unless he is investing some money and willing to put in equal time, among other things, it would be very difficult to justify a 50/50 partnership. That said, if you value and trust him, and he does bring the goods as you say (not just perceived), then you will need to figure out fair compensation otherwise.

TL;DR 50/50 probably doesn't make sense in this case but some of the arguments presented are invalid in my personal opinion.

tptacek
Equity splits have at least as much to do with risk as they do with contribution. But it's risk in a more general sense; you don't get compensated for being so financially insecure that the venture might wipe you out completely. Instead, it's "risk" that captures opportunity cost.

Unfortunately for the poster, despite the fact that his prospective partner already has a well-paying job, his risk in starting this company could be higher, because the opportunity cost to an established CEO of joining on with an unproven venture is very high. CEO's tend to "trade up" to other CEO roles at established companies.

trueneverland
I think doing a startup is risky for a lot of people in general. Comparing risk in the manner the OP did is poor. I think to succeed you have to have a certain level of risk tolerance. There are a lot more things to consider and compare than who risks more financially or in opportunity cost. Getting into a startup requires more commitment than that in my personal opinion.

Now if you're talking about risk appetite in doing things and jumping into a startup, then I'd agree risk is a factor worth taking note of.

tptacek
"Contribution" can actually be measured in terms of risk; the risk is the opportunity cost of the value of that contribution to any other business you had the option to be a part of.

Risk is more important than your writing seems to indicate. Equity isn't an achievement award.

trueneverland
I think you read my comment wrong then. I never undervalued risk in any way. I agree its one of the most important factors. But I think the type of risk is more important than what you lose out on as opposed to the other guy.
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tptacek
The problem you have here is not that you're unemployed and your prospective partner isn't (that actually hurts you, as it decreases your opportunity cost). Rather, the problem is simply that your partner isn't working for the company.

The tricky issue here isn't the split. If you think your partner is going to add significant value to the company (and: you clearly do), stop obsessing about the split, because how you carve up equity isn't going to change your outcome nearly as much as how well you two work together. Both negotiating for a better split, and, worse, executing the company as an unequal partnership are going to cost relationship capital. Save that capital for something that really matters.

The tricky issue is vesting. DO NOT ENTER A PARTNERSHIP WITHOUT VESTING. Anyone who gets equity, YOU INCLUDED, needs to be on 4-year vesting. Since you can't really "vest" someone who isn't even working for the company, you have a bigger problem than the split.

My suggestion is, don't offer your prospective partner any equity until they start. That default starting equity, while significant, won't be equal to yours; it'll be, as Joel Spolsky puts it, "second stripe" equity. (Joel's stripe examples are 50/10/10/10/10/10, but you'd obviously change that; perhaps 30/20/10/10/10/10).

At the same time, offer them an option to purchase equity equivalent to yours (ie, to buy 5% of the company). The price of that option should capture the value of the time you spent working on the company PLUS the added risk you took; think of it as a premium on your salary to prevent the partner from waiting- and- seeing how well things go before joining up (if the cost of the option was just your salary, it would be dumb for them to pay it until they had to, and they'd be disincentivized from joining).

Be aware that your prospective partner is probably going to balk at this, in which case, oh well; there's lots of ideas out there. If you're not in a position to amicably walk away, no-harm no-foul, you have no business negotiating at all.

hoodwink
These are some creative structuring ideas. In addition, you could keep the 50/50 split and structure some sort of "promote" or disproportionate share of the company after a return of capital or above a certain value. For instance, you guys could be 50/50 up to a $10 million valuation. After $10 million, you could be entitled to an extra X% as an incentive.
russtrpkovski
Can you acquire customers on your own? If your product truly solve a problem, it doesn't need someone with "strong connections"
thiagodotfm
Vest his 50% equity but instead of using time, use "customers" he bought on board(or define a different way to measure his value) and decide an amount of customers he should bring in order to make it worth those 50%.

Give him them the equity that he deserve based on this performance. :)