Founders equity split
Hi folks,
Can you help me understand the equity split process when drawing up the founder’s agreement?
My co founder has proposed drawing up a founder’s agreement and we are in the process of finalizing the equity split. Ours is a web start up in the cloud arena. He came up with the original idea, and has been playing around with it for a few months now. Going forward, my co founder will work on this project full time while I will work on it part time (8 hours per week for the first year and then full time after the 1st year). He will own R&D function. I am responsible for sales & biz dev. We will share the strategy, fund raising and back office ops functions though I will be running most of the “business side” and he will manage the “product side”. I trust my founder, since he has been transparent about his thoughts and flexible.
Would love to get your advice on the following:
1. My co-founder tells me that pre-valuation, the % of equity split matters and then it ceases to matter. He says that after the seed valuation, the right metric to track is the additional stock option granted to the founders since the % of initial founders equity will get diluted with additional rounds of funding. He is planning to start with a total of 2 Mn. shares for the company; 1 Mn. shares for the founders (4 of us) and 1 Mn. shares set aside for investors.
Can someone advise me/ point me to reading material that explains how the founder’s equity evolves over the early years of a start up and what are the right variables to track as additional funds are raised?
2. My co founder is planning to raise some funds from his friends and issue them a convertible note on company shares in return. Does this loan attract personal liability on the founders? How do issuing convertible notes dilute the founder’s equity? Is it common practice that if the initial FnF investors chose not to convert to equity, then they are repaid from the proceeds of the subsequent series A funds raised?
3. My co founder is planning to pay himself a salary from the fnF funds raised since he is working on this full time and is giving up his other current consulting assignments. Is this a fair/normal practice for one co-founder to pay himself a salary from the convertible notes raised on the company?
4. Given that he is working full time on this project, the initial equity modeled has him coming in at 50% with my share at 25%. Both of us vest over a 4 year schedule. Is such 2:1 ratio common? His logic for allocating me a lower share is that I will be expected to spend 8 hours a week (though I might spend more time on it as we get traction) while he will be on it full time (designing, cooding, engineering etc).
5. My co founder has registered a Delaware incorporated corporation for our startup before I came onboard. Apart from the founder’s equity that confers shares in this company, what are the other broad changes that we will have to make in the original incorporation documents?
6. What rights and caveats should I drive for in the founders equity agreement apart from the % share, vesting period, cliff vesting clause?
Much appreciate any support and feedback.
Thanks.
Cheers,