Startup founder - need urgent advice

Becoming a product manager FAQs
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Hey guys, how are you? I’m a co-founder of a pre-revenue startup while also fully employed in a demanding day job. Although I am working Mon - Friday, I am fortunate to have a boss / the autonomy that allows me to spend significant time on the start-up as well.

My cousin and I started the Company and have been working on it for around 2 years with an anticipated launch date of t-minus 2 months.

Originally, my cousin and I contributed 60% and 40% of all capital calls to the business, respectively. Within our first few months, we received a “small loan” (sarcasm) from his father of $140k to get us going, and split the equity 60/40 between the two of us. This equity is contractual and defined legally in the operating agreement which was signed by the both of us and encumbers our LLC.

To frame, my cousin is a trust fund kid while I am a self-made, working class grunt, which is one of the reasons I need to work a side job / career (albeit a well paying side job) while starting this company. Additionally, he is not business savvy, and would not be near where we are today without my decisions and guidance.

Fast forward, I bring a graphic designer / creative director into the company. At first we started paying her, but we loved her work and offered her 15% equity to provide us with significant work and commitment in lieu of cash comp. She countered with 5% equity and $800 / month, which I agreed despite my clear recommendation to her that 15% equity is a better choice.

Fast forward 10-12 months, my cousin and creative director have hit it off to the point where my cousin is willing to give her anything to stay in the company and believes she is an invaluable, irreplaceable asset. I believe he believed she is equally important, or more important than me at this point, regardless of whether or not I hired her and have made majority of executive level decisions.

Knowing this, the creative director has now, 2 months before launch, requested that she not receive the original equity that we agreed upon - but 20% equity in ADDITION to voting rights because she wants to feel like a partner.

To date, the graphic designer does not have any contractual ownership of the company (her doing - has been sitting on operating agreement for 5 months)

Because I work a high powered job, she says she’s more committed than I am to the business and is starting to question my authority and why I have “more” equity than her, even though I started the damn company.

I’m not sure what to do. My cousin wants to give her anything she wants, and without his fathers money the company would not be where it is. I also do realize the creative director is a massive asset.

However, I have an issue with 1) her disrespect towards me and 2) her near criminal (in my mind) change of negotiations in terms of what we agreed on her equity.

She has indicated that she would walk if we do not meet her full demands (which I believe to be BS) but my cousin seems to be in firm belief that she would.

In a pickle here and would really appreciate some advice as I feel like I am slightly being usurped and slightly taken advantage of.

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You’re giving away too much of the company. We have 10% set aside for ALL FUTURE HIRES COMBINED. 20% for your first hire will destroy any prospects of future funding.

5% is already too much.

However, her attitude is not an attitude I’d want in a partner. Can you see yourself fighting this person for the foreseeable future?

She wasn’t willing to take the initial risk of 15% and no salary. She can buy back those 10% if she returns all her salary. That’s fair.

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Agreed! I might be tempted to let her go. There are enough things to worry about as a founder - a disrespectful partner/ employee is not going to be helpful in long term.

Tell her she can leave or take 5% - her choice.

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I mean seriously, I know everyone has their struggles, yet $800/month in lieu of 10% equity? She defiantly didn’t have confidence in your company.

Also, the fact that she doesn’t want pay now, tells me she wasn’t absolutely in need of that $800/month and simply valued it more than the 10%.

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This is probably the most astute analysis in the comments. I agree 100%.

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It was actually in lieu of 15% equity! We offered her 15% no pay and she countered with 5% and 800 a month.

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Is she truly an irreplaceable asset? I’d be highly surprised - you haven’t even launched yet! You don’t know what impact she has had. Plus graphic designers, unless you’re a graphic design firm, is not a core competency of your business. How much of your business is graphic design? Even if it’s an e-com business where brand is important - execution is still 95% of any start up.

Anything above 10% is cofounder level - standard option pool for non founders is 10-15% TOTAL FOR ALL FUTURE EMPLOYEES.

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@Albert, Thank you so much for your response. Not that this matters but my cousin doesn’t like girls, so they’re def not sexual lol.

In regards to your questions, the 60/40 equity split is defined in the operating agreement so I own 40% of equity in addition to half of voting rights for the company.

Prior to the graphic designer, we had tried two precious designers which were crap and didn’t work out. Granted, I hired all 3 including the current.

My cousin firmly believes she “built” the brand and losing her would destroy us.

I disagree and know I could replace her, but ideally, would like to figure out a solution to make both of us happy.

She isn’t willing to budge.

I would say at this point he believes we are both equally valuable.

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The fact that she won’t budge shows that she isn’t partner material.

Partners (in life and in business) value the relationship more than the outcome. Which means that the best outcomes usually disappoint both parties at some level.

20% is ridiculous for a first hire (5% + salary is till high but I can see how she could be valuable enough).

My view is maybe cut and dry, but designers are plenty. Let her go.

But before you do, you need to have a heart to heart with your cousin and maybe his dad too. You need to be able to openly express your standpoint and more importantly allow your cousin to voice his concerns about your commitment if he has any.

Your designer has no say in the outcome. Only you and your cousin need to come up with a decision.

You can structure the negotiation with your cousin as giving your designer 5% and giving her another 5% in options over a vesting period of 4 years, and that will require her to buy-in. You also agree to make her a junior co-founder. And you tell your cousin that if she doesn’t agree, she needs to be let go.

This has more to do with toxic partnership dynamics, than it has to do with shares.

You ultimately do not want a co-founder disrespecting you. It will only get worse with time and money.

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@Nathan, I could not agree more. This was great advice - thank you. I have a question for you. Why couldn’t my cousin say then why don’t you take a vesting period for your equity? (It’s irrelevant because I already have 100% of my equity granted and am a original founder and equity investor - but you get my point).

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Vesting is usually the best way to de-risk commitment from cofounders.

And honestly if you love what you do and believe in your startup, vesting should not even be much of a problem.

In your case you and your cousin got your equity right at the start. That’s OK. But doesn’t mean any new shares that are given from now on cannot be given via a vesting agreement.

Remember though. Underneath it all, I’d like you to realize that the dynamic you have with your team is a warning for things ahead.

First have that heart to heart with your cousin. If you keep the designer and she agrees to stay, Then, you need to sit down with her and be straight on your expectations in terms of partnership relations. That’s where your corporate culture will be born from.

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@Nathan, I definitely agree with you here, thank you for your thoughtful response!

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Hello @Maria,

It is very hard to see/understand how much people have contributed toward a company from the outside. Nevertheless there are some tools that help. What you need is not so much ammunition to use against your co-founder, but rather a tool to come to a common understanding together. I would propose the following:

  1. Use one (or several) tools that help determine how much people contribute toward the success of the startup. choose one that fits e.g.

==> BOTH of you fill it in separately. THEN you fill it in again together and note where you disagree. Then decide where you stand today together.
==> Let the third person fill in the same questionnaire to get her input on the same basis as you did together.

  1. Coming into a company later requires a LOT more input for shares. Taking shares at the beginning and not taking pay is all about de-Risking. So coming into a startup at a later date means so much risk has been removed (e.g. you’re seeing customer traction etc.). So getting 5% not vs in the beginning is much more valuable. Review what you are willing to give the third person in this light.

  2. Define Milestones for the next 2-3 years for each of you. Then set aside for each partner a portion that is owned and a portion that is going to vest over the 2-3 years based on milestones reached. Standardly Founders get more owned (e.g. 50%) while later addons get maybe 20% owned and the rest based on the vesting plan.

  3. Define how much of the company you want to keep for an ESOP (Employee Share Option Plan) 10-20% is standard. You can always add more in the ESOP at a later date but it will of course dilute the shares of all involved. Often this is done during an investment round.

That should allow you to come to an agreement and ensure you continue to work towards the milestones. This kind of talk is absolutely necessary to have if someone joins on a co-found level percentage in the company.

Hope this helps!

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@DhirajMehta, First of all a very warm welcome to the community. Thank you for your response. That was really of great help. The Co-Founder Equity Calculators, I mean, Will definitely go through each one of them and see which suits best to our situation. Thank you once again.

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Welcome to the Community @DhirajMehta.
@MariaWilson,

  • When you say you work a high powered job so you mean your still working your day job full time?
  • Does your cousin value you and her equally at this point?
  • Sounds like you are in a tough spot.
  • When you two started the company did you have any agreements put in place?
    It may be a good idea to figure out if
  • You were to counter her offer back to 15% + a higher pay monthly to reduce your chance of losing a larger part of the company?
  • Have you sat your cousin down and tried to talk about this with him?
  • Also how is she an invaluable asset, your telling me no one on earth can do an equal job as she can?
  • If so you want to keep her because giving up 20% profits for 100x the success would be worth it.
  • Are you just blind to her abilities based on your prior conversations?
  • All things to consider and if she starts blowing your cousin …

Good Luck !

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I think it depends on what she brings to the table and how valuable it is for your company.

I wouldn’t give 20% for “just a logo and a website”. Especially this early “the brand” is not as important as you might think.

But, it depends, of what your company accomplishes, if it either “sells design” (hardware, t shirts, websites, etc…) or she brings more than just creative direction (prior experience building a company or a vast client network), she may be worth it.

You need to put emotions aside and look what’s best for the company.

Unfortunately her disrespect towards you, is somewhat of a red flag. You could just be overreacting though. But if it comes off as “hey I work more for this company, I deserve more.” That is a reason to pay her better, but not to give her more equity. You want to give equity to people who want to INVEST time into your company, not people who want to EXTRACT something.

The second point “her near criminal change of negations”… Well let me tell you having somebody on your team that negotiates without compromises, is a win.

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Welcome to the Community @DhirajMehta.

@MariaWilson, I would tell here to walk, although my patience is thinner than most. Tell her to walk, and offer to buy our the trust fund baby (Payment plan via company profits, etc, whatever it takes)

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@RisaButler, The trust fund kid is my cousin, who I actually really like. Unlike the creative director he is vital to the company from both a funding and day to day operations perspective. No getting rid of him. He’s my partner.

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Interesting I must say. First, everyone, I mean everyone can be replaced at what they do. No one has monopoly of any skills. Do you really think you can’t find someone better? If she signed any document on your initial agreement of 5%, then it’s binding. You are giving too much of your company away. It’s way to early. You need to have a good seat down talk with your cousin. Your cousin need to realize this is business and this is your life at stake. Let her walk if she wants to, there is always someone out there that will do a better job, in a much better way and for LESS.

I would look for another employee, 20% is too much. Even investors would probably ask for a lower percentage:

As I found in this article from InnMind called “What is a fair percentage for a startup investor?” investors percentage should be, for scalable early-stage projects which are hard to evaluate, having the Y Combinator deal of 7% for $125k as a basis is a good start.

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If you’re interested in advice from the founders of some huge companies: Monzo, Tide, BlockFi… There is a podcast called Founders Uncut which is great. Speaks about the difficulties of being a startup founder. Here it is

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