What Percent Equity Would You Give a New Co-Founder…?
Note: This question was originally asked of me on Quora (Q&A platform). The original question is: “What percent equity would you give a new co-founder when you (a software engineer) so far have built the idea, MVP, the business plan, the pitch deck, and conducted beta testing? Their role will be mostly financial and growth planning.”
To listen to the mini-podcast version of this answer, you’ll find it below:
Hi, my name is Erika Jose and I’m the founder of the Female Founder Club. I’m also a former Entrepreneur-in-Residence at Startupbootcamp. I attended their e-commerce program in Amsterdam, in 2019.
One of my hobbies, when I’m not busy working on my business, is answering Quora questions.
So I’ve been asked a question. And today, it says:
“What percent equity would you give a new co-founder when you (a software engineer) so far have built the idea, MVP, the business plan, the pitch deck, and conducted beta testing? Their role will be mostly financial and growth planning?”
So first, I want to say congratulations on building the idea, the MVP, the business plan, the pitch deck, and beta testing!
I’m curious when you mention beta-testing if you actually included any live users?🤔
But aside from that, if you bring on a co-founder — considering all of the leg work you’ve done — this co-founder is going to be responsible for the financial growth planning.
In other words, they’re going to be the one who is bringing money into the company.
Because I take it — as it is now — you have the software built-out, but you don’t yet have any paid users.
That means you can’t continue to develop your software without someone bringing in new clients & bringing in new business.
WheNever I think about equity, I always like to think about it as a “pie”….
Whenever I think about equity, I like to think of it like a pie 🤤 — Erika Jose” >
Whenever I think about equity, I like to think of it like a pie 🤤 — Erika Jose
And you split that “pie” — not necessarily half-and-half, not 50%.
But, you split that “pie” — based on:
- how much work they perform for you,
- how much value their work has,
- what other skill-sets they have, and/or
- connections that they bring to the business…
…that you wouldn’t have without them.
And so, in saying that, equity varies quite a bit!
I mean, there’s no hard-fast rule for it.
And it’s something that you DO need to get straight in the beginning. Because, a lot of founder’s disputes occur over how much their equity split was, or what the value currently is.
And that’s assuming everything goes well!
That means you’re able to either:
A) Raise funds from investors, or
B) You continue to bootstrap.
In other words, you’re earning enough revenue to cover your costs.
Equity starts to become REALLY critical once money comes into the business.
You want to clearly set expectations of:
- who is entitled to equity?
- how much equity are they entitled to, and
- you want to feel that it’s been decided upon “fairly”.
In this case, back to the question…
On one hand, if this co-founder is going to be bringing in the “financial and growth planning” — and to clarify if you mean solely planning, you could hire a contractor to do the planning.
Most consultants and advisers can provide you with a plan of action and then it’s up to you, as the founder, to implement those actions.
That’s not a problem.
AND they don’t have to be your co-founder!
On the other hand, if this co-founder is actually implementing the “financials and growth”. That means they’re actually going out there:
- They’re meeting clients.
- They’re doing demos.
- They’re closing deals.
I’d say they’ve earned a share of up to 50%!
Because planning and implementing are two COMPLETELY DIFFERENT functions.
There needs to be a differentiation between planning and implementing.
I’m really hesitant to answer, and I’ve been trying to dance around the answer! 😩
There’s no hard fact or tangible solution to how much equity you should issue this person.🤷♀️
Because truly, without this person, you won’t be bringing any money or business into your startup.
Developing software can be very expensive in terms of time, money and resources.
And if you’ve done all of that work, but then you haven’t secured any paying users or customers, then you may have done all of that in vain!
And so, if there is an individual who’s willing to come into & essentially, save your startup from financial failure…
This person could be entitled to half of the profit…
Now that’s a dangerous split! You can’t just go out and do a 50–50 equity split!
First of all, it’s likely to lead to gridlock when it comes to decision-making. Every issue from work ethic to work/life balance– which could lead to power struggles.
What happens during a founder dispute?
Second of all, no investor wants to see a 50–50 split.
They are just going to assume that you guys were “best friends” and you decided “50/50” is “fairest”. Therefore, they’re not even going to take your startup seriously!
Investors are going to think that you’re both amateurs (ie, super risky!).
Finally, to answer your question…
Intuitively, I want to say, if you insist on bringing on an equity co-founder — then, 15% is a safe bet.
Only if — this person is actually implementing strategies that’ll bring in business — (and at this moment, all you have is software — with no users).
Remember, they don’t necessarily have to be your co-founder! Because a co-founder would be entitled to the equity shares in your startup.
A contractor… on the other hand, is entitled to their agreed-upon rate, for the performance & delivery of their services, to your startup.
It’s a lot less risky if you hire a consultant or contractor — to come up with a financial plan and a growth plan.
Some consultants or contractors will even do the implementation for you. But it’s likely going to be more expensive.
I hope you found this answer insightful!
If you’d like to learn more or get in touch with me, you can visit my website:
PrivatLux.com to read more about my tips, tricks, best practices, and just general startup advice. 😊
If you’re interested to learn more, I also offer 1:1 coaching.
