Reasonable people can disagree on this point, but one thing that YC has said for years now that rings perfectly true to me: cofounder disputes can kill a company more abruptly than almost anything else. Rig your startup to minimize the possibility of resentment; you'll need all the unimpeded communications capacity you can get to resolve the problems that will arise intrinsically from your business.
I started with three other guys on day 1 of a startup. They had money to put into the startup from a previous venture. I didn't but took 50% pay cut to lengthen the runway, as it were. After 9 months the company was almost out of money. I worked for free for 3 months after which we got the product off the ground. (They paid themselves during this time from the little money the company had left.) Two years later we had a very successful exit. For the fact that I worked at 50% paycut and worked for free, I demanded equity. Had I taken an IOU I would have missed out on a significant payday. The money which I didn't take from the company was just as important as they money they put in: without either one we would never have had time to release the product.
Reasonable people can disagree; I'm invested only in the idea of giving 50/50+IOU its fullest, fairest hearing.
Situation #1. 2 founders, one investor. 2 founders quit their jobs, have no money in the back. Investor invests $1 million. Money is used to buy equipment, rent office space, play living wages, hire contractors.
Situation #2. 2 founders, one has $1 million, the other has nothing. Money is used similarly.
It seems like the founder contributing $1 million in the 2nd case should get all the same considerations as the investor in the 1st case.
In other words.
2 founders
founder #1 1/2
founder #2 1/2
2 founders, 1 investor
founder #1 1/3
founder #2 1/3
investor 1/3
2 founders only one of which investing
non-investing founder 1/3
investing founder 2/3s (1/3 for being a founder, 1/3 for investing)
Off the top of my head, one possible way to resolve it might be to let the founder contributing cash to vest quicker. So day one 25% of his shares have vested and he starts vest 2% a month immediately. That means in 3 years he'll have 100% of his shares where as the founder contributing no cash will require 4 years to vest at which point they'll be equal 50/50?
Of course arguably that's still not quite fair to the founder that contributed cash because his deal is not as good as if he was split into 2 people, founder and investor.
I thought this discussion revolved around forgoing a salary, not bringing in initial investment. They are distinctly different.
founders should be distinct from investors in my opinion, I realise beggers can't be choosers, but it feels like you are going to argue a lot over how much that initial investment is worth vs how much the initial effort was worth, and probably fail because of it.
If Ben goes it alone, he believes he stands a 40% chance of a $3,000,000 exit.
If Ben cofounds with Patrick he believes he stands a 10% chance of a $50,000,000 exit.
Why is Ben better off economically just giving Patrick half the equity despite his lack of cash?
Forget the math, if one founder takes issue with another founder's getting rich off the company, then there's a problem that may be deep enough to prevent both of you from becoming rich.
The $1MM in vs. $0 in situation sounds like a nightmare all its own, though. Has anyone here been in a situation like that? How did it work out?
When pursuing a startup cashflow is the biggest problem of all, you're bleeding out and trying to staunch the flow. Someone plugging a hole is just as valuable as someone providing a pint.
Again, the issues here are simple: dragging valuation into day-to-day operational discussions turns those discussions into negotiations, which I think isn't good for cohesion.
Reasonable people can disagree.
Let's say that you and I go in together for some startup. Neither of us has the $50k in the bank to pitch in immediately so that we're equal investors in the company as well as equal cofounders. But let's say that due to a book you published some time ago you're bringing in $4k/mo in royalties which is enough to pay the bills. And because I don't have the option to go without a salary, we get some seed funding to the tune of $100k so we can pay me a small salary and afford whatever mundane things we need to get going.
I would argue that as long as we agree to both pay ourselves $4k/mo until things really get going, and you just happen to be able to pay yourself that $4k/mo for the next year out of your royalties that is a $48k (or perhaps a bit more due to interest) investment. Sure it's not all delivered at the time of the seed round but it's all pledged by that time. So long as you don't start demanding a salary before the year is up (i.e. you make good on your investment) I think it makes sense for you to get some additional equity as a result.
If you disagree I'd really like to hear the particulars. You've written before that one shouldn't mix up the day-to-day with valuation, but if it's a one-time thing at the beginning it seems more like an investment and less of an ongoing negotiation.