Ask HN: Would this method work to split equity of a startup?
Since the idea looks promising, I said I would start developing it right away, and he said he would like to join me as a co-founder, saying he wants to help with the sales part, and that he is OK with me having the larger equity.
We didn't discuss specific percentages yet, and I am also not sure how much he will be able to contribute, as he owns and runs 10+ stores as his full time job.
I am trying to come up with a fair way to split the equity, and here's my idea:
1. We say that developing the product is 50% of the job, and selling it is 50%.
2. Since I'll be developing it myself, I already own 50% of the product, so we just need to figure out how to split the remaining 50% (i.e., the sales part).
3. Once we start selling the product, we track how many sales each of us will generate during the first year. I expect that he will mainly sell via his network of contacts, while I will focus on selling it online, so we wouldn't duplicate efforts.
4. After one year we split the 50% sales equity according to the percentage of sales generated by each one. For example, if we sell similar amounts each one gets 25%, so I end up with 75% of the business and he with 25%. If he outsells me 4 to 1, he gets 40% and I get 60% (50% + 10%).
I believe this could be fair and even productive, as it would stimulate each of us to give our best trying to market the product.
Do you guys think this would work?
10 comments
[ 4.9 ms ] story [ 31.1 ms ] thread(a) You VEST EVERYTHING (including your own shares)
(b) You know how you'll legally handle control after one of you leaves
(c) You have a serious conversation about responsibilities, one that confronts all the ways you can see things not working out; at this stage in my career if I was doing this I'd turn that conversation into a simple, bulleted MOU
(d) You remain observant about what the equity split is doing to morale. Frankly, sales of a new product is very hard, and it's more likely that vesting and termination are going to be your problems, but if they do really well, you need to remember that, again, sales is hard, and you don't ever want to lose someone who can perform in that role because they think they're getting an unfair deal.
You don't want to have conditional/future equity based on some formula. You'll spend the next year arguing about what the formula should have been, why things that were not planned should be taken into account (or not), etc. Just don't. You can't forecast the future enough to make fair deal.
If you get the problem solved, then think about scaling with a sales person. Keeping in mind that someone who has a full time job and may be seen as a competitor to future sales leads may not be the ideal candidate. Though if the candidate has an extensive track record closing B2B software sales, that is worth considering.
The fact that you don't think a fifty fifty split is fair and that your friend does not want to commit to the success of the venture to the same degree as you indicates there is a misalignment of interests.