What would be a reasonable equity when you execute on some one else's basic idea for less than market salary?
I am in some what a unique situation. I work for a friend owned software services company which has only 1 share holder - Founder & CEO. I joined them to execute on a product idea that the Founder had. I decided to take 2/3rd of my market salary in the hope of a significant equity and seeing the product to the market. There was no written agreement. I worked on it for 2 years with a team funded totally by the Services company. We are thinking of spinning this off as a separate company and raise some funds. All of the investment came from the services company (single owner - 100%). My financial contribution was the difference between my market salary and what I was paid.
In the new company, I will be the CEO. What equity should I expect? I have been offered 15%. Is this fair? The Founder does not want to be involved in the new company and wants to retain 51% share. The rest is for new employees etc. Should I negotiate for a co-founder title? What trigger events should I be worried about given that I am not the majority share holder?
Thanks
Fillipo,
Thanks. Very helpful. We have not talked about the vesting schedule. My assumption was that since I am a "near-founders", I 'own' those shares. Isn't that the case? By 'co-founder' title, I wanted to ask if there is anything that provides additional benefits for being a founder/co-founder vs a regular equity holder (not options holder).
Co-Founder Equity Seed Funding CEO
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I dont have an answer but think of it like this.. ideas are worthless without a great execution. If you think you can execute that idea very well, then you should be the rightful owner of the idea. They shouldn't get more equity than you for just thinking of a billion dollar idea. 20-30% sounds reasonable but I would want way more if I am the only executor. – Bhargav Patel 13 years ago
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@Bhargav - that is nonsense. His boss paid him and had the idea probably as a result of other business. 20-30% sounds far too high. If I was the owner I'd think 15% is reasonable and I would have it vest. Otherwise there is no incentive to stay. I would also require non-compete, etc. I would ask for a board seat for sure. And insist on that. – Tim J 13 years ago
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@Tim, Fair enough. I would like to think that my 15% is for my work so far. If I am generating value in the future for every other share holder (including the idea-creator who will not be in active management), shouldn't I get some equity beyond the 15%, may be with a vesting schedule? – Bsk 13 years ago
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I think the idea-person is a little too tight with the 51% - he should probably just retain preferred shares and have less than 51% of the company - that way he can still control it, but has less equity. I think 15% is probably fair - but you need to talk to the person if that does not make you happy. The problem is you did not work this out beforehand... – Tim J 13 years ago
1 Answer
Since you have been paid 2/3rd of your market salary, I think 15% is a fair offer. You can maybe try to negotiate for something more, like 20%, but for me it's a reasonable deal.
On the other side, there are quite a few important things you haven't mentioned in your question and that you must really clarify:
- is there a vesting agreement? If they are proposing you a vesting agreement, since you already worked for 2 years in the company, you should try to have 50% immediately assigned, and 50% vested in 2 years.
- you say the company is going to "raise some funds". How the fundraising will impact your shares? If they are trying to sell 30% of the company for equities, that will dilute your shares considerably. How big is the option pool? If it's too small, the investor might ask to create an additional option pool, and that would dilute your shares even more
- board of directors: as a CEO, do you have a guaranteed seat in the board of directors?
- triggers: do you have (some) single and/or double trigger acceleration? (see this article on venture hacks )
As for the "negotiate for a co-founder title", I don't really know what you mean.
