Ask HN: How to compensate a co-founder who leaves after shipping MVP?

https://news.ycombinator.com/item?id=4379079

by harrob • 14 years ago

12 7 14 years ago

news.ycombinator.com

I'm currently struggling with a fair compensation (equity) that would not jeopardize our chances of bringing in new technical talent/investors in the future. How much equity is reasonable considering that the product currently has zero traction (pre-launch stage), and all the sweat that will go into turning this web app into a real company is yet to begin?

jdg• 14 years ago

None.

dabogy• 14 years ago

Give your co-founder (1/48)(50% equity)(# of months working on the mvp). This is basically saying that your co-founders 50% stake vests monthly over 4 years. If they've worked 4 months on the mvp, 4 months worth of equity is released to them. If they leave, the remaining shares go back to the company.

For future reference, you really should have figured out the arrangement with your co-founder prior to working on ur mvp.

CodeCube• 14 years ago

A great resource discussing this is Joel Spolsky's answer on how to dole out equity/compensation: http://answers.onstartups.com/questions/6949/forming-a-new-s...

More specifically, this passage:

"Now that we have a fair system set out, there is one important principle. You must have vesting. Preferably 4 or 5 years. Nobody earns their shares until they've stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it's terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there's some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work."

jason_tko• 14 years ago

How much work have they done? A few hours, or several full time months?

If they've just done a few weeks and they're leaving, it's less of a co-founder, and more of a contractor arrangement.

If it's a few weeks, how about a structure like:

"Zero equity. $150 per hour worked, payable on any funding/liquidity event, or within/over 5 years."

trueneverland• 14 years ago

You guys should have had vesting in place. I am going to guess you didn't. Vesting is designed to protect founders for this very reason. Typical vesting is usually 4 years to earn the full 100% of their vested shares with a 1 year cliff.

So to break this down, lets PRETEND (i.e. example scenario) you guys started out as 50/50 partners. The way vesting would have worked would be, for simplicity sakes, let says there are exactly 100 shares and that suppose you both had vested the full term (4 years) and stuck it out, you both would have 50 shares each.

Typically if anyone leaves sooner, the way it works is, if you leave before the first year (hence 1 year cliff), you leave with zero equity. At the 1 year mark, you earn 25% of your vested stock (1 year of 4 year vesting period). That means 12.5 shares of stock (1/4th of your 50 shares). From that moment on, for the remaining 3 years, shares would vest 1/36th of the remaining share for each month that goes by.

Thus at the end of the 4 years, you are fully vested. In this case, I would treat this the same. You would need to do a termination agreement (you should talk to your attorney about this), give him any vested shares he would have earned or if he is leaving before he's been there for a year, and give him some additional compensation for the termination agreement you think is fair (not stock; usually cash). In either case, you are recommended to do a termination payout whether he gets stock or not.

Talk to an attorney!

brudgers• 14 years ago

Ask your cofounder what they think is fair. Figure out what you think is fair. Keep in mind that the equity is probably worth nothing. See if you can work something out.

mchannon• 14 years ago

It all depends on what's on paper and what's been agreed to thus far.

Assuming nothing's on paper, here's what I would do: Set up a corporation (yes, get that lawyer), allocate something to the cofounder (even 50%), but make the total number of shares small, and keep voting rights enough to dilute out the cofounder by issuing additional shares no matter how they vote. Add in for yourself and other hangers-on additional equity based on time worked from this point forward, with industry-standard vesting.

You can also fold in an acquisition: Start new company, all the old company's assets are valued at X and you proportionally issue Y nonvoting shares in the new company to all the old shareholders (where Y is a small percentage of the total). Cofounder must either sign off or be outvoted at old company, or else you're stuck.

Crackpots always think that their work begins and ends before a product gets traction (even many prodigious successful businesspeople lean this way until they learn by succeeding) when the truth of the matter is that the work is much more back-loaded than it seems.

If you hired a general contractor to build a house, and he left it 50% done, lots of times you'd have to pay more to get it completed than if you'd never hired him at all. This is the wicket your cofounder has left you in by leaving when things are just getting interesting.

Ask HN: How to compensate a co-founder who leaves after shipping MVP?

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