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Ask HN: How to bring on co-founder almost two years later?

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Ask HN: How to bring on co-founder almost two years later?

#1

Post by dalerus »

Hey all!

I am the founder of a small company, mostly consulting work for large organizations, but we do have our own SaaS product that is gaining traction in our small market. I'm in a strange position and would love if the HN community could help with some advice.

I've been able to bootstrap the company so far, I feel like we could grow more significantly in areas if I had another high-level person come to help us in areas that I just can't do and don't have the time for. I have a person in mind, but I am worried.

Without getting into too many details about the company, I've bootstrapped the company, put my own money into it, built the technology, networked to close the deals with our customers, and we're profitable! I don't make a lot from the company yet, but enough to provide a modest income for my family and I employ one other developer.

My question is, do people generally bring in co-founders years after the company launched? And if so, what do those deals generally look like?

The person I have in mind wants a share of the equity, but I have an impression he wants to come in around 50/50, which to me doesn't make any sense. I was thinking something more like a smaller salary (we don't have the capital for what he would want) and something like 5-10% with a vesting period, but honestly I have no idea how you even begin to calculate this type of arrangement. Or if it's even something I should do.

Is this even considered a co-founder? Or should I treat him more like an early hire?

Thanks!

Re: Ask HN: How to bring on co-founder almost two years later?

#3

Post by brudgers »

Why doesn't 50/50 [with a vesting schedule] make sense?

The sunk costs are sunk. Presumably the cofounder will more than double the rate of growth and value of the business.

To put it another way, if you're going to treat your business as a startup, then assume it will fail and that 80% is as valuable as 50%. And if it gains startup style growth, your life will be roughly equivalent with 50% or 80% of the exit.

On the other hand, if this is hard negotiating then there's a poor fit because the relationship is already adversarial. If the potential cofounder is not someone you want to become rich, don't marry them. 5~10% equity is not "co" anything.

Good luck.

Re: Ask HN: How to bring on co-founder almost two years later?

#4

Post by dalerus »

siscia wrote: post #2

A very naive idea could be just to get some money from the bank and hire somebody. Why you need a co-founder anyway ? It sound that you just need a great technical leader.

I wish I could, but we don't have enough cash on hand to commit to that level of employee.

Re: Ask HN: How to bring on co-founder almost two years later?

#5

Post by dalerus »

brudgers wrote: post #3

Why doesn't 50/50 [with a vesting schedule] make sense? The sunk costs are sunk. Presumably the cofounder will more than double the rate of growth and value of the business. To put it another way, if you're going to treat your business as a startup, then assume it will fail and that 80% is as valuable as 50%. And if it gains startup style growth, your life will be roughly equivalent with 50% or 80% of the exit. On th…

Thanks for the reply!

You're right, sunk costs are sunk costs. I guess I am try to also figure out if I want a "co-founder" or just another early hire.

Re: Ask HN: How to bring on co-founder almost two years later?

#6

Post by siscia »

dalerus wrote: post #4
siscia wrote: post #2

A very naive idea could be just to get some money from the bank and hire somebody. Why you need a co-founder anyway ? It sound that you just need a great technical leader.

I wish I could, but we don't have enough cash on hand to commit to that level of employee.

Well, still you can pay some one part time, doesn't need to be a full time hire.

Re: Ask HN: How to bring on co-founder almost two years later?

#7

Post by soneca »

dalerus wrote: post #5
brudgers wrote: post #3

Why doesn't 50/50 [with a vesting schedule] make sense? The sunk costs are sunk. Presumably the cofounder will more than double the rate of growth and value of the business. To put it another way, if you're going to treat your business as a startup, then assume it will fail and that 80% is as valuable as 50%. And if it gains startup style growth, your life will be roughly equivalent with 50% or 80% of the exit. On th…

Thanks for the reply! You're right, sunk costs are sunk costs. I guess I am try to also figure out if I want a "co-founder" or just another early hire.

Something closer to 50/50 is what Paul Graham always advise for later co-founders. Forget the past, imagine how both of you will work equally hard from now on. But remember that he is talking about startups that aim high. Maybe a billion dollar company, at least worth tens of millions. If this is also your ambition, to get your company from bootstrapped regular income to a $100 million dollar company, then go for a 60/40 deal (I am not convinced 50/50 is really desirable). But remember to have a good lawyer and take all precautions about vesting and if this person it really the right one.

But if you aim at a good, healthy, profitable small company; I would just hire someone. Even if it is another more junior person.

Re: Ask HN: How to bring on co-founder almost two years later?

#8

Post by brudgers »

dalerus wrote: post #5
brudgers wrote: post #3

Why doesn't 50/50 [with a vesting schedule] make sense? The sunk costs are sunk. Presumably the cofounder will more than double the rate of growth and value of the business. To put it another way, if you're going to treat your business as a startup, then assume it will fail and that 80% is as valuable as 50%. And if it gains startup style growth, your life will be roughly equivalent with 50% or 80% of the exit. On th…

Thanks for the reply! You're right, sunk costs are sunk costs. I guess I am try to also figure out if I want a "co-founder" or just another early hire.

Cofounder implies is that there is a new company founded and that the person involved is someone you trust enough to build a business with. Anything else is just a "what goes on the business card" distraction from real work.

If you're negotiating terms, then it's a finite pie model and you're in the hiring business. That's a distraction from the core business mission - it's a means to an end -- [but an often necessary one]. Founding a company is about grabbing a slice of an infinite pie, it's outward focused. That means bouncing ideas off each other.

I'd be wary of anyone who is looking for the title. That's resume building, not business building. I'd be wary of anyone who is negotiating for a founder role. Founding is about doing not getting.

On the other hand, I'd be wary of anyone who wanted to be a founder without equal equity. Anything else creates friction on the relationship between founders. 50/50 equity is simply a way of testing whether it's a cofounder relationship or not.

I'm not saying you should give away half your company. But I'm not saying it isn't the right business decision either. It's a hard problem because the decision is about whether or not to take a leap of faith.

As a final thought, 10% or 50% if the person you are considering is not the right person, the business is going to suffer. Be equally selective in either case. Pick people you want to be in business with.

Re: Ask HN: How to bring on co-founder almost two years later?

#9

Post by debacle »

50/50 doesn't even remotely make sense here. You've taken on a huge amount of the risk in starting and pushing your company to profitability.

Calculating the equity distribution should be easy:

4 * (His current salary - what you would be paying him) = His risk (I use 4 here because that's the usual vesting period)

Your profit * [5-10] = Your valuation (You'll have to work out the coefficient on your own, as it depends heavily on your market and growth potential)

His risk / your valuation = His equity

This should give you a really rough number. This is the absolute upper limit of what you should be giving him in equity (otherwise there is little to no risk). Keep in mind that if you are growing 20%+ year over year then your valuation doesn't conform to the formula above and should be adjusted much higher (or just think about what you would be comfortable selling the company for today).

Equity is all about risk/reward. Because you are profitable, much of the risk is already out of the equation. Consider also how much greater the responsibility in having 30%+ equity to the company - do you think this person will be loyal to that?

Re: Ask HN: How to bring on co-founder almost two years later?

#10

Post by davismwfl »

Ok, having started down this path a couple of years back and trying to bring in a co-founder here is my 2 cents. btw, I ended up not doing it but learned some really valuable lessons. Also, I am identical to you in that we are a consultancy that has 2 SaaS products.

This will rarely work if you are using "co-founder" as a way to get a higher dollar (caliber) employee for a cost which you can afford today. Co-founders are either all in and you have to forget what you have already done or you have to admit they are not a co-founder and instead are a critical employee hire.

There is nothing wrong with offering a lower than market salary and giving the employee a 5-10% ownership with vesting. That is completely legit.

I think the main problem is don't call someone a co-founder and mislead yourself or them if they will not be splitting decisions and the hard times with you. A true co-founder may be taking a salary when times are good, but has to be willing to forego it when times are tight (bootstraped especially). If not, they are not a co-founder they are an employee.

As far as an equity split, I do not feel every co-founder deserves an equal share, but I would always start there and then see what other facts might affect it. For example, 15 years ago in a startup I was an early contractor for, a group of people started the company but one of the co-founders had family to support. So he kept his day job quite a bit longer until the company was more solid and could afford his monthly minimum without struggling. They all agreed that meant he wasn't going to get the equal split, and I remember even he felt that was fair and they were great people to work for/with. And no one was trying to be an asshole to him, just he didn't have the same risk and skin in the game.

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