Ask HN: VC Firm suggesting my cofounder should get more equity in next round?

4 points by sultanofswing 2 years ago | 8 comments

A little context:

My cofounder and I started our company about a year ago and have already raised a pre-seed round. My cofounder (CEO) and I (CTO / Product) agreed at the time that we would do a 50/50 split with 1 tie breaking vote going to him to avoid gridlock.

We had a minority stake cofounder at the time who was since left the company with some additional equity re entering our pool.

This was done at the advice of YC. We both started the company together at the same time, and I also quit my job to start with (former FAANG employee).

All in all I would say this split has been positive for us. There have never been any tie breaking votes, our delineation of responsibility is very clearly stated and we meet 2-3 times a week.

The problem:

Our lead VC has this idea in their head that the CEO should have more equity and even brought this up during our initial raise, though didn’t really push the issue (again my cofounder DOES have more equity to avoid gridlock, and ultimately has final decision making power if things came to a vote).

My cofounder actually likes our current arrangement because he feels like we are as close to 50/50 as we could reasonably get and are extremely invested in the company. He suggested I meet with them to hear them out but at the end of the day said it’s our choice, and the most important thing to him is that our relationship goes undamaged.

What is the best way to handle this convo and give reasonable pushback. If I’m being frank it honestly annoys me that this keeps getting brought up (feels like they are trying to screw me on some weird level) and I can’t think of any rational reason for it besides some cargo cult type thinking they have.

Is there something I’m missing here / any rational reason why this would actually make sense for me and the company?

gms 2 years ago |

At least amongst Bay Area startups at your stage, a 50/50 split is common. It has its advocates (YC amongst them) and detractors.

Given how common this is, it's peculiar that this VC is bringing this up so early in the lifetime of the company. CEOs often get different refresher packages as the company grows and assembles a board, but you're not at that stage yet.

If your co-founder is happy with the current arrangement then he can just tell the VC no thanks and everyone can move on. It's your company, not your VC's.

More generally, the most troublesome part of all this is that, at your early stage, every minute spent talking about this is a minute not spent on your product and customers.

sultanofswing 2 years ago | |

Wholeheartedly agree. I really don't see any rational basis for this, and it feels like a huge waste of emotional energy.

I guess it would be good to know: What is the good faith argument for detractors in this case? (assuming that in the 50/50 split there is a tiebreaking vote like in our case)

gms 2 years ago | | |

Some arguments here from a bygone era (none are convincing to me): https://hbr.org/2016/02/the-very-first-mistake-most-startup-....

We have the same model as you at the company I co-founded. The only valid worry that comes to my mind is a 50-50 split with no person designated as the boss. But you already have that part sorted.

dustingetz 2 years ago |

your cofounder (CEO) is suggesting that you (CTO) meet directly with the pre seed VC, without CEO present, to discuss a reduction of your equity? repeatedly? yeah, facts as presented don’t look good

sultanofswing 2 years ago | |

I wasn't asked to meet repeatedly. The first time this was brought up it was squashed by my CEO without me being present.

This time (during our seed round) it was brought up and my cofounder thought it might make sense for me to get facetime with them about it to at least hear any of their rationale (for the record he's in agreement it just seems like something "they believe" without any actual reason.)

To be honest it feels like there are a lot of these VC cargo culty beliefs like "having a clean cap table" which upon examination don't seem to have any basis besides it being "what VCs (or a particular group of them) like"

What don't you think looks good in terms of me meeting individually in this instance?

fuzzfactor 2 years ago |

>no one can leave the company high and dry.

I would be suspicious that this is the type of thing that this particular capitalist would like to change.

They are not your partner, they are your investor.

Sounds like your equal partner & you may have a relationship more faithful than the average marriage.

Maybe the potential to be more long-lasting too. This can be so rare people don't believe it, or don't know how to deal with it.

It can also be unobtainable for the vast majority of business operators, and itself worth more than money.

I would stand my ground and constantly work toward equal financial participation total in all forms, you have always been fine with ceding final decision making. And your partner has always been fine with you making the same as him. This should be the ideal structure to go forward. You need to march together in step.

Now for those people that you might need to negotiate with in the future, some of whom could be much bigger capitalists, this might limit their ability to offer enough temptation privately to a single individual, intending to leave everyone else in the dark.

IOW it might cost them twice as much to accomplish the same thing if the situation comes up.

If you think about it, a young startup of college-age founders may not have any assets or revenue, but the relationship among the founders starts out definitely worth more than the entire company (since there is no money at this point), and I would have to estimate the average value today is about $500,000 for the relationship alone if the technology is viable. Simple math says that an unusually outstanding relationship between business partners would be worth twice as much, so now we're up to $1Million. Your technology and ability to execute should be quite a bit better than average. So that's what you bring to the table that makes sense for capitalists to invest comparable funds into the leverage and/or acceleration you have in mind.

To maintain that paired momentum, "all you have to do" is everything possible to make sure that the relationship intuitively remains worth more than the entire company from the very beginning, by growing together in value all the way forward from there.

Now there may be more hesitation from the greediest of capitalists to invest in the future, but those who do recognize the value of your co-ownership will be rewarded way more than the figures on paper would indicate beforehand.

Basically you need to get this behind you and gently but directly iterate that you are like brothers to begin with, everything is based on equal sharing, and might as well treat you guys like brothers just like everyone else does. Tell them it's OK if they want to start calling you Bro-1 & Bro-A if they want to ;)

Reassure them there is no Bro-2 or Bro-B, you could have brought your biological brothers in but you didn't.

This is their best bet of the kind that doesn't come along every day, there's so many real family businesses raking in the bucks that capitalists will never have a chance to invest in.