Hey everyone! 👋 I need some advice on something that’s been on my mind lately. So, my friend and I started this startup together – he’s handling the business side, while I’m the tech guru working on the backend and APIs.
We agreed on an equity split of 20% for me and 80% for him, with any investor equity coming from his share. However, after two years, my equity will be reduced to 10%, no cost, whether I stay or leave. But that 10% will still be mine if I decide to move on.
Here’s where I need your help: Do you think this equity distribution is fair to me with the reduction after two years? 🤔 Am I making the right decision to stick around?
Possible solution:
– Consider negotiating a better deal that factors in your ongoing contributions
– Seek advice from a legal professional or mentor who is experienced in startup equity agreements
I’d love to hear your thoughts and any advice you might have! Let’s chat. 🚀 #StartupLife #EquityAgreements #TechStartup
This is a little confusing. You start with 20% that cannot be diluted but if you stay for 2 years your equity gets reduced to 10%. What happens after that? Is it still non-dilutable? Or do further investments reduce your share?
Edit: what happens if you leave before 2 years or are fired? Seems like a complicated and non standard structure.
I’m gonna say you deserve more – the idea is easy enough to come across, the execution make or break the startup.
Are you getting a market-rate salary? What is your cofounder’s contribution?
You are getting hosed. Ideally you should be getting closer to 25%. There also should be a small pool put aside for any potential employees/advisors, etc.
As other said, too small.
For your co founder to keep some decision power he could have 51% or 60%. More seems unfair.
As for “investors will take from his shares, so he should have more”, I would advise that you don’t have any legal difference.
Otherwise there is always a way for one of you to be taken advantage of. E.g. what happens if you pivot and don’t need or don’t find any investors?
Either you are on the same page or don’t start this with your friend.
Unless he’s putting in significant cash and network it’s 50/50, no exceptions.
Sounds like a bad deal for you. My friend and I are building a startup where I handle the business and he handles the tech. When I first pitched him my idea, I said we would be 50/50 partners; we either win or lose together.
Just build it yourself and own the whole thing
Is there a structure in place that you have reviewed that protects you from dilution when the company raises money? It’s complicated to put in place. More typically, I hear founders say this is how it will work because they do not understand the mechanics around issuing equity in a fundraise. In other words, though it may be the intent, it is not how it will work in practice.
It’s either 50 50 or walk away if there’s no cash injection being made. You know his idea, he needs your tech more than you need him tbh
51% for you and 49% for him.
This doesn’t sound good. Is he doing 80% more work? Has he put in 80% more money? Are you getting paid 80% more than he is?
Ideas and “business requirements” are worth 0% if he isn’t working his ass off to execute on a successful business.
You should split 50/50, 4 years vetsing with one year cliff. If you leave after 2 years you’d still own 25% but you both earn the equity as you work on the business.
Don’t sign anything. These terms make no sense. This is not how equity should work, and you deserve much more than that.
Edit: feel free to PM me if you want any advice.
If you do 50% of the work then you earn 50%. The idea is the easy part. What do you mean with business requirements?
I don’t think he can actually give the investor equity front his share only – that’s selling his shares. In this case, the money would go to him not the company.
When an investment is made, the amount of shares increases, investor gets new shares, you keep the same amount, but it’s a smaller percentage of the total shares now, because the amount of shares is bigger.
About the other part – why would you lose 10% of equity after 2 years? The company is worthless now and it will be potentially worth more later. If you sell in less than 2 years you’ll most likely not get much out of the sale.
He’s basically giving you 10%.
When you raise funding, the investors will insist on a 4 year vesting with a 12 month cliff (at least). Or something similar.
If you leave, you’ll lose shares, no matter your deal. If you leave after vesting, you can still lose shares if you’re a “bad leaver” (board decides so).
He’s probably not paying you either. In this case, 20 or 10 % is not okay. You’re an equal founder (51/49 to make decisions easier) except if he brings in money, amazing sales skills or something other that’s super valuable (not just the idea).
I’d pass
A lot of serious VCs won’t invest in startups where there is such an uneven distribution of equity.