Ask HN: Co-founding startup - Profit Share or equity?

https://news.ycombinator.com/item?id=3650445

by xman007 • 14 years ago

6 9 14 years ago

news.ycombinator.com

Hi HN. I've been asked by an acquaintance to join him in founding a business. He's a sales/marketing type guy and i'm all tech (dev).

The business will involve initially building a web-presence and a member portal behind it. The member portal will require a fair amount of effort in order to get the kind of experience and level of information he's going for. Once a member base is established, members will be offered promotions and services which they can take up. The step after that would be to integrate this service with mobile and other hardware devices.

The long-term strategy for the business is to start it up with minimal funding, build it to something meaningful and sell it off after 3-5 years. It is not intended to be a long-term project. In the arrangement details, he's recommended founding the company under a profit share scheme whereby I would have a 20% profit share and a 10% sale share.

I'm really only just getting into the startup scene and understanding what this means, but am concerned that both 20% profit share a 10% sale share seem rather low given the amount of effort I'm aware that the development and running of this site (and future technology development) requires.

Is there a generally accepted convention of profit share vs equity in starting a business? Also, are the figures above for the profit and sale share reasonable and in line with other startups?

Appreciate any/all advice.

Cheers, x

rksprst• 14 years ago

Companies have gotten acquired for very low or no revenue. In that case, you'd make nothing off the sale.

If you'll be a co-founder, ask for equity (50%). Or if he's looking at you as an employee, ask for a market-rate salary and the profit/sale share for the risk you're taking.

cr1t1calh1t• 14 years ago

Sounds like he's contributing the minimal funding (how minimal?), and you're building the entire app.

Without knowing more, I would say that you two need to go into this at 50/50 equity if you are going to both be bringing that much value to the deal. If not, you should allocate equity accordingly.

Just going off what you've written, I'd say he should be the one taking a 20% profit share and 10% sale share. It may be his big idea, but the world is full of big ideas, and short on people who make them happen.

cr1t1calh1t

jgreenough• 14 years ago

Keep It Simple S*

Do equity and if you agree to share profits later the corp can pay a dividend along the lines of ownership. You can have two classes of stock which is different than investor stock if you want to only pay dividends to founders but it will affect price of investment.

The percentage is a negotiation based on what you think that person can do vs. what you can do without the person. A great product with no development is worth little to nothing. Same thing for great BD with no tech, nothing to sell.

If you want to set up a sales/comp plan then that is slightly different than profit share but since you are tech this does not apply. In comp plans you would pay BD guy a percentage of the sales contract but if you don't know the value of the product then this will be a tough negotiation. Also remember the non-tech person probably has more practice negotiating.

If he wants you as a co-founder negotiate equity starting at 50%. If he wants you as an employee then you should get a salary. This is all a negotiation of who bears the risk. The more risk you bear the more you should get in reward, ie more than 10% for 3-5 years of work. Lots of advice about this on VentureHacks.

mirsadm• 14 years ago

If all he has is an idea then you're basically taking all the risk. I've been approached by people with "the next most amazing iPhone app" ideas. They expect you to do all the work and split the profits. Everybody has ideas but they're worthless...unless they succeed :).

staunch• 14 years ago

Some thorough advice from Spolsky that I agree with: http://answers.onstartups.com/questions/6949/forming-a-new-s...

brudgers• 14 years ago

Sivers has some insight which is applicable here as well: http://sivers.org/multiply

wtvanhest• 14 years ago

I'm a business person and would never think to ask a technical cofounder to join my business for 10% equity unless I had cash to pay them a salary, or some massive intellectual property advantage, or some other advantage that will make success extremely likely at a major ending valuation. (The third thing I cannot even imagine how it would work)

paulsutter• 14 years ago

Profit sharing makes sense for a lifestyle business, but not for a startup.

3-5 years is a big chunk of the productive years of your life. Don't waste it on an attempt to build a company that is half lifestyle business and half startup.

He who chases two rabbits catches neither.

xman007• 14 years ago

Thanks for the comments, everyone.

It sounds like my instinct wasn't wrong. 50-50 sounds like the way to go.

Appreciate all your comments :)

Thanks

Ask HN: Co-founding startup - Profit Share or equity?

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