How much equity should I grant to a crucial programmer?

QUESTION:

I’m starting a Web service with two partners. I am Partner A and bring x to the table. Partner B brings y to the table. (The nature of x and y aren’t important for purposes of this question.) Partner C is our tech person and programmer. He’s an invaluable resource — years in the industry, past CTO of a successful internet company, etc. We’re lucky to have him aboard.

We’re going to launch this business out of our own pockets, i..e, there’ll be no compensation for anyone until sales start coming in.

Now, my question relates to Partner C. He wants, after setting up the business and seeing it commence operations, to be able to walk away from the company but retain an equity share in it. It’s an open matter what, if any, technical assistance he’d provide after his departure.  (The business will require some, but not much, technical assistance once it’s underway.)

The question is what equity share we should grant to him, given his desire to walk away from the company.  I’d be very interested in any thoughts anyone may have as to how to think about this rationally.

Let’s take, at the extreme, the notion that he’d own 33% of the company after departing, without committing to provide further technical support once we’re up and running. My knee-jerk instinct is that that’s unreasonable (and I’m not even certain he’ll go so far as to ask for it – but it’s useful to state it as an upper bound).

However, once one starts walking back from that extreme, the whole matter becomes completely negotiable, and I’m at a loss as to the right way to go about thinking of a reasonable proposal to make.  The fact is, (i) his initial contribution will be quite substantial and (ii) it would be difficult if not impossible for us to find someone else who could do what he’s qualified and willing to do.

So, I don’t know, perhaps it is reasonable for him to own a third of the company.  Or not.

I’m submitting this question very humbly, knowing my knowledge about business is dwarfed by many of the people here. Thanks for any thoughts anyone offers.

ANSWER:

Naomi Kokubo

Naomi Kokubo

by Naomi Kokubo cofounder of Founders Space

I think I can help you.  I’ve been in a similar situation myself.

Here’s what I would do and have done in the past.   I would give him 33% subject to a 4 year vesting plan.  To be fair, all three partners should have the same plan.   The stock purchase agreement would state that the founders shares would vest over 4 years, so if he leaves after working only one year, he would own 8.25%.

The same would be true for you or your other partner.   He may protest, but most venture capitalists who would invest in your company would insist on exactly the same thing.   The advantages of this type of plan are obvious.  He’d be incentivized to stay longer if he believes in the company and wants his shares to continue to vest.   Another advantage is that if he stays but you or your other partner wind up leaving, for whatever unforeseen reason, then the remainder of the unvested shares go back into the company.

This type of vesting plan is in everyone’s best interests.  What concerns me about your situation is that your lead technical person isn’t committed to the company.  Almost all startups go through radical changes, and the product often takes longer and changes dramatically over the course of the first year.  This means, you may need him longer than you expect.

Typically, a product isn’t completed when it’s released.  It’s just the beginning of the process.  Today, especially for software development, it’s an iterative process that involves constantly changing and updating and improving.  You may think the software won’t need more work once it launches, but that most likely isn’t the case.

I’d personally only bring on a partner who is 100% committed for the long run.  It makes it much easier.  That said, you don’t always have a choice.  The next best thing is to incentivize your partner to stick around with a proper vesting plan set up by a lawyer.

I hope this helps!

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