Co-founder or employee?

#1

Post by solofounder » Mon, Oct 12, 2009, 8:41 PM UTC

I am the sole founder of a year old software start-up that is modestly profitable. At this stage I need another technical person to help me develop the product further. I want to hire a top notch engineer, and am willing and able to pay a market salary. I recently pitched my start-up to a grad school classmate who is currently working at major tech company in the Seattle area, and he seemed very interested. This guy is one of the best engineers I know, and if he joined it would be a huge help to me, both from the point of view of sharing the technical work, and just the emotional burdens of start-up life. I have been looking for a kick-ass 2nd employee for a while, and this is the first one I have found who is interested in my start-up. The problem is that he wants to join as a co-founder instead of as an employee.

However, I feel that I am the one who took all the real risk in taking the start-up from scratch to where it is today. I don't want to give up half of my start-up to another person!! I am willing to pay him more than what he currently earns, plus 5-10% equity in the start-up. But I have a feeling this won't be acceptable to him.

If I am not able to hire my friend, I don't know when I will find another equally talented guy. So I am in a bit of a dilemma. I would like to get some advice on this from fellow hackers. If someone else has been in this situation from either side of the equation, and he can share his own experience that would be very helpful in making up my mind. Thanks.

Re: Co-founder or employee?

#2

Post by noodle » Mon, Oct 12, 2009, 9:08 PM UTC

i'd pitch your best non-cofounder option first. it sounds like your offer is an appealing one, and something that i don't think anyone would be offended at receiving.

if they reject it and push for cofounder, sit down and figure out which one you want more -- to retain total control or to have this person on the team.

Re: Co-founder or employee?

#3

Post by sfall » Mon, Oct 12, 2009, 9:10 PM UTC

don't give in, ask him why he thinks he deserves co-founder status. If he is being reasonable he will realize you have done far more than what him walking in the door offers.

co-owners brings more issues than you may expect

Re: Co-founder or employee?

#4

Post by zaph0d » Mon, Oct 12, 2009, 9:17 PM UTC

I think you can still make him a co-founder without giving him a 50% stake. Give him 10% and make him a Director of your company (or whatever works).

Re: Co-founder or employee?

#5

Post by cgherb911 » Mon, Oct 12, 2009, 9:28 PM UTC

5-10% plus pay!? And you're already profitable? Sounds like a kick ass deal to me. Give him a nice title and the deal sounds amazing and nearly too good. Especially at 10% equity. Just make sure to have vesting on his shares over 2 to 3 years.

Re: Co-founder or employee?

#6

Post by trevelyan » Mon, Oct 12, 2009, 9:49 PM UTC

I'm a solo founder, and think 5% is way too much. Your classmate has already decided that earning less is acceptable to him. If you're offering him more than he currently earns, you're already paying more than market rates. And you want to add ownership in the company?

You (and him) seem more concerned about issues of face than issues of compensation. This is dangerous. Quantify the value of your business and the value he brings. If you're not sure how much value he brings (emotional support? you're kidding me!), don't give equity. Come up with a plan to evaluate things in six months, or make a commitment that require hitting aggressive performance targets that are linked explicitly to his work. And make sure things vest.

One approach might be giving him the option to purchase up to a certain percentage of the company at a set value. Then figure out the value by asking yourself a simple question: if you had to sell the whole company, how much would you want for it? If he really cares about ownership he can purchase equity out of his salary over time. If he doesn't want to invest that is a warning sign he won't be contributing to growth.

And ultimately, remember that friendship and business is hard to mix. You will have a working relationship with him. He could easily come to resent working for you for "so little" at the same time you may come to resent giving him "such a good deal". People's relationships change when money is involved. At least by focusing on the numbers you won't toss away your business for nothing, and can be dispassionate with him when discussing what you can offer.

Re: Co-founder or employee?

#7

Post by RiderOfGiraffes » Mon, Oct 12, 2009, 9:52 PM UTC

If he's such a great engineer, go through the sums with him. Get him to sign an NDA, then talk about the value of the company. If he wants shares, he should pay for them.

Rough order of magnitude - Supposing your company has a turnover of 100Kpa and is 20% profitable. Finger in the air, the company is worth around 700K, and 10% is worth 70K cash (ignoring the details of pre-money/post-money investment).

Is he willing to put in 70K for 10% shares, and then work for dividends? Probably not. However, that's what you're doing (in effect) so why should he get a better deal?

Do the sums. They are more convincing than woolly ideas. Better yet, get him to do the sums. Then you can see what he thinks things are worth.

If he's so good, don't alienate him, get him on side. Work through the issue with him. Negotiations can be win/win and don't have to be zero-sum games.

Re: Co-founder or employee?

#8

Post by myared » Mon, Oct 12, 2009, 9:55 PM UTC

In my opinion, don't hire your friends unless they complement perfectly. Even then, have a backup ready in case that person wants to move on.

Re: Co-founder or employee?

#9

Post by npost » Mon, Oct 12, 2009, 10:00 PM UTC

If you do decide to work together, be sure to have a strong legal agreement between you two. Especially, if you bring them on as a co-founder.

Key points: - Stock vesting - Dispute resolution - Out clause - the usual boiler plate

Otherwise, if things don't work out (and if they are a friend, it can get nasty) you want to have a clear plan that everyone has agreed to.

Re: Co-founder or employee?

#10

Post by vaksel » Mon, Oct 12, 2009, 10:16 PM UTC

this post is the reason programmers shouldn't be business guys. There is no dilemma here, the guy is offering to rape you over a barrel and you are actually thinking about pulling down your pants and bending over. Anyone who takes advantage like that is no friend to you.

Want some real numbers? At this point there are two choices: a) Full Salary + 1-2% equity. or b) 8-10% equity vested over 4 years and minimum wage salary.

Paying full salary AND 10% equity, when the startup is already beyond ramen profitable stage is insane, it only makes sense if the guy is a real genius. I mean Larry Page/Sergey Brin level, and on top of that his knowledge, is something that you MUST have. Noone else in the world has that knowledge, and you NEED it to get your product to the next level. Then, and only then can you even consider that sort of deal