Negotiating equity with a co-founder.

A student entrepreneur wrote and asked how he should negotiate with his company co-founder, a Professor, for equity. The Professor has proposed the the student get almost nothing, and the Professor get the bulk of the equity. Here’s my response to the student.

Negotiating around equity is tricky. There are conventions, but at the end of the day, it really comes down to nothing more than the ability to conversationally create huge perceived value and then use that as a negotiating leverage.

Check out this article I wrote on the topic: http://www.steverrobbins.com/articles/equitydistrib.htm

The book Co-opetition defines your “value-added” in a negotiation as the value-of-the-deal-with-you-in-it minus the value-of-the-deal-without-you. Once you know your value added, it can help with negotiation. Let’s say you and a friend are starting a business and neither of you can be replaced. With both of you present, the business is worth $100. If either of you leaves, the business is worth $0, so you each have a value added of $100, which gives you symmetric bargaining power.

Let’s change the situation a bit. Let’s say that you have special technology without which the startup won’t work. He’s bringing valuable sales skills, but if he were to drop out, you could find someone else who could do sales, but let’s say it would take enough time and money that you’d have to spend $5 replacing him. (Thus, the value of the business without him would be $100-$5, since you spent $5 on a Craigslist ad to replace him.) Your value added is $100 – $0 = $100. His value added is $100 – ($100- $5) = $5.

In this scenario, you have considerably more bargaining power than he does. Note that having the bargaining power doesn’t mean you can or should get that proportion of the total pie, just that you have that relative strength of bargaining power.

I wouldn’t actually try to do specific numeric calculations. But do think about what you bring to the table that would be hard to replace, and use those as your disucssion points. There may be many things you bring to the table that justify a request for equity:

  • If you helped originate the idea.
  • If you plan to take lower wages or work longer hours that would be expected solely from your salary.
  • If you’re the only one who can do the work.
  • If you bring any unique resources or connections to the table.
  • If you put in initial cash to get it off the ground.

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