Ask HN: Some noob co-founder questions

I think if the idea is a good one, and you don´t have a co-founder yet, try to get some cash and hire one or more freelancer instead of giving away 50% of your company for some days / weeks of work. It depends on your strategiy, the idea, the potential, cashflow planning,...

I would suggest that you do a business model / business plan, at least a small one, first, so that you have something to show to potential investors / co-founders.

First, if you're not a corporation, there isn't "really" equity. LLCs have ownership, but it's not stock like it is in a C corp, it's just whatever you define it to be. If you're an LLC which will eventually reorganize into C corp, or just a bunch of people puttering around together in your spare time, there's no legal structure or contract which could guarantee that the final incorporated form of your startup will preserve the equity arrangements you've discussed.

It is entirely possible, perhaps even likely, that someone will get screwed, when incorporation time comes. As such, I don't really see a point in formally defining equity for a non-C corp. Either everyone trusts each other or they don't, but paperwork isn't going to fix that.

Someone will sputter, "but you could just put it in a contract!" Yes, but if you can't afford to sue me over the terms of the contract when I form a new C corp without you, then what's the point? (I assume that's why you're not incorporated yet, that you don't want to spend a few thousand dollars for paperwork, and that your co-founders probably won't, either.)

The other problem you have by not incorporating is there's no independent entity which owns all the IP. When your co-founders write code, who owns it? Where is that defined? How is ownership transferred from them to the startup? If this is their side project, do their employment contracts allow them to have side projects, or do their employers own everything they do? Are they using their work computers to work on anything for your startup? Etc.

So, in a sense, it doesn't matter what percentage you say they have, nor how you validate it, because those arrangements aren't worth the paper they're printed on.

That said, my fourth startup attempt went the unincorporated route. We had a gentleman's agreement around IP and ownership. We used Joel Spolsky's equity plans, most recently discussed here: https://news.ycombinator.com/item?id=7610781

All the original founders were the first tier, sharing 50% ownership. We were all equally side-project-ing it; there were no full-time founders. Additional rounds of founders would have been in one of the subsequent 10% tiers. If we had any full-time founders, I'm not sure what we would have done; perhaps full-timers in one 30% tier, and part-timers in a shared 20% tier, to keep the 50% bracket for original founders.

For IP, we agreed to each retain ownership of our own code, and non-exclusively license it to each other person, for the purposes of working on a group project. We had a shared private code repository; anything in there was understood to be licensed as such, and only the things in there.

Everyone understood that all of this was effectively non-binding, but we all trusted each other, and the expectation was, come time to launch the app we were working on, we'd incorporate at that point, and formally define all of this.

You'll meet a lot of people who are really excited to be involved in a startup, and then a month later learn that they don't have it, or that there are fundamental differences in the way you guys do things. It's super hard to find "co-founders" which are totally a type of person.

My two first co-founders were very experienced. I picked this up from them.

Find out what they do and if you even like them, etc. After the trial period, negotiate based on their value, quality (experience, exceptional skills) etc. and risk they're taking (time spent) with emphasis on output (value). MAKE IT VERY CLEAR from the outset that the work you're doing together is to see how things go. If it doesn't work out, you go your separate ways. People who have done this before will appreciate this method and those are the people you want as a cofounder! You can set the trial period for 1 to 3 months.

You mentioned that people don't take you seriously as a one-man operation. This is not my experience when it comes to negotiation of standard contracts - businesses care about the value you create for them. Being a one-man operation has mattered when dealing with acquisition negotiations, but I think optimizing for that now is a bit of cart-before-horse.

Imagine you are pitching to your imaginary board or a potential investor. You want to bring on a cofounder to help you grow X% in Y months by adding Z strategic value. Fill in the blanks and then decide if you actually know anyone like that. When you do all that I think the % of the company to give away questions will become transparent.

Before that point, either pay the people (small amounts of) cash or treat it as something that they're doing for fun, with the understanding that you'll take care of them if it turns into anything.

At this point, there is not enough data to put a value on anything. If you want to be sure you are fairly rewarding people later, then have everybody track hours, and value their initial labor contribution at some reasonable per-hour rate.

If you want to bring somebody on as co-founder, remember that a business partnership is almost as serious a relationship as marriage. You could be spending years with this person at 60 hours/week. Ending a business partnership is often as painful and more complicated that divorce.