Why “How much equity is fair?” Is the Wrong Question
Photo by Cytonn Photography on Unsplash
Article originally posted here by Paparelli
“I need a technical co-founder!” Ted exclaimed.
Ted has deep industry knowledge. He knows how the industry works. He knows the industry language. He gets the industry culture. He knows the players. He identified the problem that needs solving. He realizes he needs to build a technology solution to solve this problem.
He is stuck.
He knows how to use technology but not how to build technology. He needs a technical co-founder to get this business off the ground.
Ted worked with a couple of developers to build an alpha product. His goal was to prove a solution can be built and that his market would use it. This first cut at the product was put together with duct tape and baling wire, but it did work. More importantly, his market responded with a “Let’s build it!”
Here’s the problem.
Every talented developer already has his own company. At a minimum, it is a contract programming business. And being a good small business person, he is in search of revenue. The business founder, however, wants a real partner, an honest-to-God co-founder. He doesn’t want a partnership or joint venture with this talented developer. He wants a real partner.
The question Ted asked me was this, “How much equity is fair?”
If you are looking to get some programming done and you have no money, then this is the right question. If you are looking for a real partner, then this question is premature.
The question isn’t equity. The question is mission alignment.
Getting a talented tech developer to join you as a co-founder is really a business merger. The developer already has a business. And the developer’s business has a vision, mission, market, and product just like yours. You are asking him or her to drop their mission and adopt your mission.
How hard is this?
Real partners are on the same mission. They are thinking about accomplishing their mission 24/7. It is all they think about and talk about. It is hard to birth a business. Really hard. You are creating something real and financially sustainable from an idea. And this is why it takes absolute alignment between founders in order to have a chance at being successful.
Maybe it is just transactional.
If the developer is not captured by your mission, then the relationship will forever be transactional. He wants to help you with your mission but only as a part of his business’s mission. He is excited about his business and mission and will not give it up.
This results in a client-vendor relationship. You are not partners. In this case, work to get the economics right for both companies. If this is not possible given your personal cash and equity constraints, move on. Find another developer who will work with you.
The buy-in.
When I explained this to Ted, he said, “That will never happen. The developer I am working with will never give up his mission for my mission.” Ted threw his hands in the air and said, “I’ll never find a talented developer to be my co-founder.”
I said, “I agree. It is impossible. But all things are possible with God.”
Finding a partner is like finding a spouse. There is the initial attraction. You take your time and go on dates. You get to know each other better with each encounter. You get more involved with each other’s lives. You share your dreams. And if the attraction continues, you go deeper. You come to a shared vision, a shared mission. Then you get married.
I was talking to a Christian businessman yesterday who helps build startups in developing nations. The startups always have included in their mission, “To help build the local economy by creating jobs and sharing the Gospel of Jesus Christ.” His fiancé knew what she was getting herself into. She gave him a wedding band with this inscription: “Where you go I will go, and where you stay I will stay. Your people will be my people and your God my God.” Ruth 1:16
I have to tell you, I was blown away by this level of love, trust, and alignment. But this is what it takes to come together at the start of a marriage. And this is what it takes to come together as co-founders of a new enterprise.
Take your time.
Like dating, it all starts with sweat equity. No guarantees, just trust.
Your potential co-founder will go one of two ways as you begin working together.
They will either show continually increasing commitment and engagement to you and your mission.
You will see and feel them losing their enthusiasm and beginning to distance themselves.
In either case, you will know if this is your co-founder.
This is the one!
Once you know this is your co-founder, it is time to formalize the equity deal.
Here are a few criteria to consider:
How far along is the company?
What did you bring to this company?
What is your relevant business experience?
What does your co-founder bring to this company?
What is the business experience of the co-founder?
These questions prompt tough conversations. And this topic is just the beginning of tough conversations. This relationship, like marriage, will continue for a very long time. And no relationship is easy.