Introduction

In the early stages of a pre-revenue startup, the allocation of equity between co-founders can be a delicate and complex issue. This article delves into the specific scenario where a co-founder, responsible for technical aspects, has no salary and is not contributing to the company's cash flow, yet the startup is bootstrapped and has an initial product to further develop.

Equity Allocation for a Technical Co-Founder

When a startup is bootstrapped and relies on funding from abroad, the question of how much equity a technical co-founder should receive becomes even more nuanced. On one hand, the technical co-founder provides critical expertise and a unique skill set. On the other hand, they are not contributing to the immediate cash flow. How is the co-founder funding their life with no salary, and is offshoring a viable solution?

Paycheck vs Equity

The necessity of a salary cannot be understated. Founders and co-founders need stable income to meet their basic needs, such as paying the mortgage and buying groceries. Without a salary, the co-founder may find it challenging to maintain their commitment to the project. However, if the co-founder's background and experience warrant it, a valuation of 10-20 points (equity in the company) could be considered reasonable. But if the initial product is convertible to a larger business, this range could expand significantly, potentially to 80 points.

Ethic-Based Equity Distribution

A fair distribution of equity should reflect the contributions and commitments of all co-founders. The ideal approach is to create an option pool of stock, representing a portion of the shares in each funding round, as the company seeks additional capital. This method ensures that all founders are aligned with the long-term success of the company. Another method is to calculate the real income the co-founder would get and apply a 10-30% discount, as I did in my own company where I offered 40% of my current income for more shares.

Contributions Beyond Skills

While technical expertise is valuable, it's important to recognize that contributions can go beyond just skills. If one founder is also funding the development through a priced round of funding or a SAFE (Simple Agreement for Future Equity) or Convertible Debenture, this funding should be valued and incorporated into the equity distribution. A priced round at a reasonable price helps establish a valuation for future investors, avoiding both overvaluation and undervaluation.

Slicing Pie Model

I recommend the Slicing Pie model, but it requires careful consideration. An hour of a founder's time is often equal to an hour of another co-founder's time and should be awarded equal equity. However, if the co-founder is also providing cash (e.g., funding from abroad), their contributions may weigh more heavily in the equity distribution over time.

Conclusion

Equity allocation in early-stage startups is a critical decision that requires careful consideration. Balancing the contributions of all co-founders, especially when one is not contributing to immediate cash flow, is essential. Offshoring can be a viable solution, but the equity distribution should reflect the full spectrum of contributions, including financial investments, technical expertise, and long-term commitment.