Ask HN: We made a successful algo trader. How to split the equity?

#1

Post by _pygv » Tue, Sep 29, 2020, 1:03 PM UTC

Two years ago I started a crypto trader based on machine learning (working fulltime since june 2018 on it). By the end of 2019, I had a decent prototype with good live results. In march of 2020, a guy (B) I met on reddit algotrading joined me. He was convinced to come flatshare with me and work on this together fulltime. He dropped out of school for this. At the time, he was doing his own algotrading project, but his project wasn't as promising, and he didn't like school, so he joined my project. In April of 2020, another friend (C) started working part time on the project, doing mostly data engineering for taxes, and working with accountants to handle taxes. He doesn't have as much ML expertise as the rest of the team, but he still is a good coder. In July of 2020, another friend (D) joined the project full time to work on ML algos and data engineering.

Everyone put in about 10k of his own money when he joined. Our activity has grown a lot and is now making around 2% of one of the biggest crypo-exchange's volume. We are now incorporating a company. We plan to do a 4 year vesting schedule.

What do you think would be a fair equity split should be given the situation I just described?

Re: Ask HN: We made a successful algo trader. How to split the equity?

#2

Post by Pick-A-Hill2019 » Tue, Sep 29, 2020, 4:45 PM UTC

TLDR; Assuming there is no contract (written or verbal) then the fact that you put in roughly the same amount makes it slightly easier to say - Equal Stakes, Equal Share (20% each).

Longer version -

Ouch. The fact that you are posting it here suggests that there is some disagreement between the 5 of you.

Let me guess - you think you should get more as the founder and source of the idea. Person B says "but without me you would not have continued with development, so I should get the same as you". Person C says, "if it wasn't for me then you then you would not have managed to survive or be as profitable (tax expertise)". Person D says something like "well I tuned the algorithms and increased profits by x% so without me there would be no profits".

Personally I can't imagine investing 10k in to something without something in writing (in fact I'm truly trying to imagine the scenario and I just can’t). What was the agreement when they invested their money? Not trying to be snarky but I just can't see a situation where the conversation went "We need more money", Person B (or C or D) just went "cool, here's 10k, enjoy".

Re: Ask HN: We made a successful algo trader. How to split the equity?

#3

Post by _pygv » Tue, Sep 29, 2020, 5:34 PM UTC

Pick-A-Hill2019 wrote: post #2

TLDR; Assuming there is no contract (written or verbal) then the fact that you put in roughly the same amount makes it slightly easier to say - Equal Stakes, Equal Share (20% each). Longer version - Ouch. The fact that you are posting it here suggests that there is some disagreement between the 5 of you. Let me guess - you think you should get more as the founder and source of the idea. Person B says "but without me…

The disagreement is mostly between C and B, and C and D. I'm actually the only one being fine with C having as much as A and B. And I want everyone to feel the equity split is fair.

Also to clarify, until now we only kept separate trading accounts, so there wasn't really an issue about who own what. Only now we want to put everything under a company.

Re: Ask HN: We made a successful algo trader. How to split the equity?

#4

Post by Pick-A-Hill2019 » Tue, Sep 29, 2020, 6:25 PM UTC

_pygv wrote: post #3

Pick-A-Hill2019 wrote: post #2

TLDR; Assuming there is no contract (written or verbal) then the fact that you put in roughly the same amount makes it slightly easier to say - Equal Stakes, Equal Share (20% each). Longer version - Ouch. The fact that you are posting it here suggests that there is some disagreement between the 5 of you. Let me guess - you think you should get more as the founder and source of the idea. Person B says "but without me…

The disagreement is mostly between C and B, and C and D. I'm actually the only one being fine with C having as much as A and B. And I want everyone to feel the equity split is fair. Also to clarify, until now we only kept separate trading accounts, so there wasn't really an issue about who own what. Only now we want to put everything under a company.

Sounds tricky and I hope you manage to find a solution that satisfies all parties. All I would say to each of them (in a round table discussion) is that as Founder you are happy with all (including yourself) receiving an equal share as you consider each of them to have been a crucial part of the success. By implying that you could have asked for a greater share but didn't it may help to sooth the greedy $$$ signs that appear to be about to rip your as of yet to be launched company apart.

Good luck & chalk this issue as a Life Lesson. Money, Friends, Co-Founders. Pick two and never mix all three, especially without anything in writing. Friendships go sour all the time, especially when money is involved.

If all else fails, try to see if you can find a local mediation service which is both a lot cheaper than sitting in a law office as the clock and bill runs up and also often a skilled mediator may be able to word things in a way that all sides can see what a fair and equitable solution might be. Good luck.

Re: Ask HN: We made a successful algo trader. How to split the equity?

#5

Post by _pygv » Tue, Sep 29, 2020, 7:25 PM UTC

Pick-A-Hill2019 wrote: post #4

_pygv wrote: post #3

Earlier quoted context omitted.

The disagreement is mostly between C and B, and C and D. I'm actually the only one being fine with C having as much as A and B. And I want everyone to feel the equity split is fair. Also to clarify, until now we only kept separate trading accounts, so there wasn't really an issue about who own what. Only now we want to put everything under a company.

Sounds tricky and I hope you manage to find a solution that satisfies all parties. All I would say to each of them (in a round table discussion) is that as Founder you are happy with all (including yourself) receiving an equal share as you consider each of them to have been a crucial part of the success. By implying that you could have asked for a greater share but didn't it may help to sooth the greedy $$$ signs tha…

It's not that big of an issue, we can all talk calmly about these things. I just want a reference point to make sure what each one suggests is not unreasonable

Re: Ask HN: We made a successful algo trader. How to split the equity?

#6

Post by neximo64 » Wed, Sep 30, 2020, 12:34 AM UTC

1) Do a calc of hours worked by everyone in the past

2) Split proportionately amongst those hours

3) Apply a wage rate to those hours depending on the job involved

4) Adjust the wage rate so earlier is higher (more risk), later is lower (as the business started working)

Use that as the equity split going forward that you have to still work to vest.

Using a mechanical way to attribute effort everyone can acknowledge is extremely important. The area you'll really have disagreement on is the wage rate to apply & how much premium to apply for an earlier vs late joiner. But those are easier conversations.

Re: Ask HN: We made a successful algo trader. How to split the equity?

#7

Post by _pygv » Wed, Sep 30, 2020, 9:27 AM UTC

neximo64 wrote: post #6

1) Do a calc of hours worked by everyone in the past 2) Split proportionately amongst those hours 3) Apply a wage rate to those hours depending on the job involved 4) Adjust the wage rate so earlier is higher (more risk), later is lower (as the business started working) Use that as the equity split going forward that you have to still work to vest. Using a mechanical way to attribute effort everyone can acknowledge i…

Thanks for your input. I agree with this. One thing that's not obvious is how to weigh work in the past vs work in the future (I would weigh that equally) Another thing is how to weigh the amount of risk taken. B "gave up" his studies and a personal project he had, and B and myself (A) both work for a long time with the doubt that we could make the project successful. I think A and B should be rewarded somewhat for this, the question is how much.