Understanding Equity Stakes for Tech Cofounders

When two individuals come together to build a startup, figuring out how to fairly divide equity can be a complex task, especially when one of the founders is also being compensated financially. This article explores how to determine the appropriate equity stake for a tech cofounder who is helping you build a prototype and is also receiving a salary.

Key Considerations for Equity Distribution

The equity stake offered to a tech cofounder who is contributing to a prototype while also being paid a salary should take into account several important factors:

Contribution Level: Evaluate the value of the work they are doing in relation to the overall project. If their technical skills are crucial and significantly contribute to the success of the prototype, a higher equity stake may be warranted. Market Rates for Equity: Equity compensation for cofounders typically ranges from 10 to 50 percent, depending on their role and contribution. Since this cofounder is also being paid a salary, their equity percentage could be on the lower end of this scale. Time Commitment: Consider the amount of time they are dedicating to the project compared to your own. If they are working part-time while you are full-time, this could influence the equity split. Future Contributions: Discuss expectations for ongoing involvement after the prototype is completed. If they are likely to remain as a full-time partner, a larger equity share may be justified.

Negotiation and Clear Communication

Equity is often negotiable and may depend on personal relationships and the specific context of your startup. Open communication about expectations and contributions is key to reaching a fair agreement. It's important to have a candid discussion about these factors to ensure a mutually beneficial outcome.

Example Scenarios

Scenario 1

If the cofounder is working part-time on the prototype while receiving a salary, offering an equity stake of around 10-20 percent might be reasonable. This reflects the lower level of time commitment and ongoing involvement.

Scenario 2

If the cofounder is dedicating more time, say full-time, and is integral to the success of the prototype, a range of 20-30 percent equity could be justified, even with a salary. This better reflects the contribution of their time and expertise.

Equity Vesting Schedule

Consider implementing an equity vesting schedule. This means the equity is earned over time, which can help ensure that both parties remain committed to the project. By slowly releasing the equity, you can ensure that the cofounder is fully invested in the success of the venture.

Conclusion

The equity split should ultimately reflect the value each party brings to the venture, balancing short-term compensation (salary) with long-term rewards (equity). It's advisable to have a candid discussion about these factors to arrive at a mutually beneficial agreement that ensures both founders are motivated to see the project through to success.