Choosing the right co-founder is definitely one of the most important decisions you will have when starting your company. It is very much like a marriage of sorts. You want to find someone, who shares the same values as you, yet has different strengths to balance things out and keep things interesting. Of course, you can start a company on your own but entrepreneurship can be quite lonely and very challenging at times and it is nice to have someone to share the load, ride out the lows and celebrate all of the small successes.
I have been lucky enough to have co-founded two companies with Danny Robinson and I would absolutely do it again. We both have different strengths, want the same things and respect each other immensely. Danny is also really good at having the uncomfortable conversations, which many of us want to avoid and has always taken the lead on raising money. He is a great mentor, friend and the best person I could think of to deliver a C0-Founder & Captable talk at Bootup last Wednesday. Danny kicked things off with a very timely joke:
“There’s a little Sheen in All of Us.”
Entrepreneurs are typically very passionate individuals, who have opted out of the safer, climb-the-corporate-ladder career path and put it all on the line (read: sold house, minimal salary- if any, eating ramen) in the hopes of creating something bigger, even changing the world and WINNING.
Splitting up the Pie
Once you find your co-founder soul mate(s), you may be tempted to just dig in and move fast so you can experience the ultimate high of WINNING sooner! As a result, you may not take the time to have the important C0-founder discussions like shareholder splits, vesting schedules and employment agreements but before you start to turn that idea into a valuable product, it’s best to have a co-founder heart-to-heart.
Danny stressed not to delay the equity conversation because it will only get harder down the road. You may also be tempted to just split the company 50/50 and call it a day. DON’T! If you do, you could put the company in serious jeopardy at a future date. Danny always take a few things into account when splitting up the company pie:
Danny places the highest value on a founder’s commitment to the company. For instance, if you quit your day job and are hustling nearly every waking hour on your startup, while your co-founder has a lot of connections but has a family and can’t commit full time until the company either raises or starts making money, then you score higher on the commitment front. On the opposite end of the spectrum, Danny places the least emphasis on the Idea itself. The idea will change, so just because you may come up with the idea, it does not mean you should get more equity then another founder.
After you look at all of the above factors, you may end up with a 50/50 split in the end but Danny rarely sees that as the case. So, have the difficult conversation first because it will force you to really think not only about the shareholder “PIE” but also about your roles and responsibilities within the organization and each cofounder’s ultimate vision for the company. For example, do each of you see the company as a long term play or would you prefer to build and sell the company in a few years? In the end, don’t get hung up on the % too much. Just get going…
Founder Vesting is usually different than employee vesting in the company. To start, Danny recommends keeping it simple and using a single class of voting common shares for founders with a standard vesting schedule of equal monthly installments over the course of 3 years. (e.g. 1/36 per month) Not all founders will stay on for the long haul, so if you are going to stick with the company – then your shares should vest.
Other types of vesting to consider:
- Cliff Vesting – when an employee/founder becomes fully invested at specified time rather than vested in increasing amounts over an extended period of time.
- Single trigger – upon change of control, 100% of your unvested shares would vest.
- Double trigger – accelerate 100% of your unvested shares if terminated after a change of control
Captable – “Your budget for dilution.”
This is a core document when you are starting a company. On Day 1, when the company consists only of Founders, your captable may look something like this:
As you hire new employees and raise money, your Captable will expand to include ESOP and financing information. Here’s an example of a Captable for a 2M Series A Financing Round:
The Captable is a reminder that you do not have an unlimited amount of shares to give away and will help you budget and plan for “What if” scenarios. What if I raise 2M dollars in Series A financing or What if we sell for $10M dollars? You can see in the above example that the founders went from owning 100% to 80% with the ESOP to 43% after raising a Series A round.
Danny covered a lot of ground in just two hours and left me thinking we could even go deeper into how to structure shareholder agreements, set up captables and other legal documents. Stay tuned for more info on that.
Thank You Danny!
Many Thanks To Danny for educating us and sharing his tips on the Captable & CoFounder topic and to Martin Ertl from Contractual.ly for offering some legal insight and helping answer questions. If you missed Danny’s talk, you can check out his slides below.
Q & A
1) What is the ideal # of co-founders?
Danny doesn’t think there is an ideal number while Venture Hacks recommends 2-3 co-founders. Each co-founder is just a shareholder. It can get complicated the more co-founders you have but it really depends on you, your company and the value each person brings.
2) Are titles important?
Danny thinks titles are a necessary evil. It helps people outside the company know what you do and also forces you to take ownership over certain things. Though in a startup, you may be doing everything from the dishes to pumping out code. He does not like to see Co-CEO titles or Vice Chair. In most cases, he thinks this is a result of not wanting to have the tough discussion but in some cases, like @summify he has seen the Co-CEO role work out nicely.
3) What if my co-founder invests more $ then I do in the business?
Danny thinks you need to keep money out of the shareholder discussion and treat the money as investment in the company, which could be treated as convertible debt.
4) We started a company 6 months ago, built out a product and there is a key employee who has been with us for a while. Should we make her a co-founder?
Danny said “No but do make sure she realizes how important she is to the company.” Perhaps, this would mean more stock options, responsibility and recognition but she does not need to have the title of co-founder.
If you have more questions or would like to see us cover another Startup topic, please leave a comment below.