Do you need a co-founder or an early employee?

FOUNDATION

Do you need a co-founder or an early employee?

November 22, 2019 | Education

You’ve succeeded in setting up the bones of an amazing business (snaps for you!), and you need to bring some people into the fold to make things start to happen. These super early-stage visionaries will be the ones building your business from the ground up. Once most other things have been decided, you might be wondering whether someone you’re trusting with your business should hold the title co-founder, or be a founding member or early employee.

What’s in a name?

It’s well known that investors tend to prefer to endow companies that have more than one founder; startups generally have two or three co-founders, sometimes four. It’s also likely that you’ll need to share the burden of running a company with someone who has complementary skills. However, sharing your brand story with someone else is a big decision. How do you know the right time and the right person?

We ask some questions that might help you shed some light on the matter.

Could the person grow with the company if it takes off?

Co-founder is a lifetime title that you’ll use alongside another, like CEO or CFO. If you bring on a marketing person who can kill it for your small enterprise, is it likely that a few years down the line they’ll be at a level to take on an omnichannel strategy for a Series A-funded company? Or could you imagine needing to bring in on a CMO with experience in bigger companies to guide them?

Is the person making a sacrifice to be part of this business?

If someone is bringing capital to the table, they’re a co-founder or investor. But what about other sacrifices your candidate might be making? A co-founder title could be good leverage for a talent war with a larger, less risky company, or to attract the person to move across the country. It’s a considerable bequest, but it might be necessary if she’s a perfect fit for your company.

Do you depend on their entrepreneurial spirit?

Similarly, if you need to bring in someone with a specific skill that’s vital to your company’s fruition, (an engineer, a designer, or scientist), the best person you can find who will consider such early involvement in your business is likely to be reasonably entrepreneurial. The co-founder title might help make your fledgling business a bigger priority in their life.

Are you committed to their story at the company?

As a co-founder, their story will be inextricably linked with your business. They will appear on every press release, their Instagram and Facebook posts will be found by your most loyal customers, and they may end up representing you in Forbes or Entrepreneur magazine. Does their story fit with your brand ethos? Do they inherently make sense in the space your business occupies?

What type of stock are you willing to give them?

While it’s true that both an early employee and a co-founder can have equity and/or a salary, a co-founder will have a significant share in the company. An early employee may decide to take a lower salary in exchange for more equity but is unlikely to receive more than 2% in the form of options or warrants, whereas a co-founder founder could have up to 40-50% in common or restricted stock. In this case, an early employee wouldn’t be able to cash in their equity until there’s a liquidity event or an IPO sale, or partial sale of the company. Gust goes over the different types of equity interest, and what they mean for an early employee or co-founder.

Co-founder equity splits are difficult to navigate and should take more than just an afternoon to figure out (hint, don’t default to an even split). The Startup lays out a formula to make the equity conversation about each founder’s value, contribution, and commitment level.

Can you negotiate an exit strategy that makes sense for you?

Thinking about the end of your relationship at the exciting start is a necessary evil. If something happens in your business and you want to part ways, you’ll need to have a setup in place that protects you in your co-founder relationship. Can you negotiate a vesting schedule that gives you an out if things aren’t going well? Does the formation of your company give you control to let someone go? If you’re set up as a partnership, you’ll be exposed to more risk if it doesn’t work out.

A staggering number of companies don’t create a formal operating founders agreement, including that the company, not the individual, owns the design, code, inventions, or recipes created by the team.

And lastly, if you were on a plane that was going down, would you want them sitting next to you?

Owning and managing a business is a beautiful mess. If your temperaments are different than one another’s, it can work out like yin and yang. But if the way you manage stressful situations together causes you tension, you might like to rethink. You have a lot of late nights, early mornings, irate customers, late vendors, and long trips to face together and things can become complicated when you both have a vested interest.

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