Technical Co-founders' Guide to Equity Negotiations

You left your job as senior engineer at $COMPANY early this year and since then you've been figuring out what to do next. You thought it'd take 2-3 weeks max and then you'd be on to your next thing. Ok, maybe a month to 6 weeks. At worst, 3 months if it takes a really long time to find the perfect idea, but then it'll be the best one.

But now 8 months have passed, and you still haven't found an idea you're in love with. You've had a couple of close calls, but none of them clicked. You occasionally go back to The Idea Maze and wonder why you're the one person who just can't seem to figure it out. Ideas and markets matter quite a bit, so it makes sense to spend time here.

Then you remember. A few months ago, a friend introduced you to someone who's been working on a new company for a little while now. And he wants to talk to you because you're the proverbial technical co-founder he's looking for. But you're not sure.

It's late in the year now, and even though you say you don't care, in the back of your mind, you're thinking about how to tweak your LinkedIn profile to hide this gap in your productivity. Maybe if you omit the month from your exit date, it'll read "2021," and as long as you start working on something new, this year, people in the future won't think of it as a resume gap, right? Spoiler: everyone knows or has done this trick before.

Bereft of completely new ideas of your own, you choose to spend more time getting to know this person and spend a few weekends in front of a whiteboard together. You're starting to understand the business your potential co-founder wants to build, and it seems like it could be a good option. You're feeling the pressure and really want to change your twitter bio to something meaningful instead of "working on something new," or even worse "stealth."

And that's how you got here: you're the potential technical co-founder, and you're now negotiating the equity split.

The Negotiation

While it seems like it's just starting now, the equity split negotiation actually started a long time ago.

It started four years ago when you published that open source github repository of random code snippets you found helpful that suddenly now has 200 stars. (Remember: it's never about how long it takes someone to make it. It's about how valuable it is for others.)

It started two years ago when you started a personal blog and kept it up to date with things you found interesting.

It started when you met your potential co-founder and instead of showing up in a ragged hoodie from three companies ago, you wore a pressed polo shirt and decided to look presentable.

It started when you showed up on time and made it clear you valued their time. Or maybe it even started five mintues ago because you chose to show up early.

But now we're in the actual negotiation stage of the co-founder equity negotiation.

Your potential co-founder sends you docs - more often than not, it means a google spreadsheet. The spreadsheet has on it their name and yours, some percentages, maybe some number of shares. There's also a lot of conditional formatting, VLOOKUPs, pivot tables, "basis points", and other things that sort of make sense but not totally.

It's easy to get intimidated in a situation like this. Surely they know all these things that you should also know but don't. Maybe there was class you skipped in that one accounting course you took in college where you were supposed to learn this stuff but you didn't, thinking you'd end up as employee #3 at Facebook and by this point you'd have wealth managers who have assistants who have interns who do this for you. But the truth is, you don't. You've been at it for a while, and what do you have to show?

That voice.

You know the voice I'm talking about. That is the voice of you wanting to be excellent, but not quite sure how to do it yet. Maybe you feel tormented, confused, frustrated. If you're lucky, you've learned to use it to your advantage. If you're not lucky, then learn to use it to your advantage and start getting lucky.

Back to the spreadsheet.

You're faced with a decision: you can look at this spreadsheet and think "wow I don't speak business," or you can decide that this is no different than learning any other new skill. So here's what you do. Start a markdown file (or a piece of paper, whatever you use to learn) and write down all the things you think you should know but don't.

Then, the same way you know can sleuth through three degrees of library dependencies to find out how a program works, do the same thing with every business and accounting term you read but don't completely understand. Pro rata? Preferred shares? Double trigger acceleration? I hope you're writing them all down.

You spend a couple hours doing that, and now you have a rough understanding of how the spreadsheet works, and what your potential co-founder is offering you. You now can now start to have an opinion on the offer because you've put in the work to have an opinion. And now that you're informed, it's time to either get going or move out of the way and go back to doing nothing (er, sorry, I mean "stealth mode").

Headspace

There are a lot of things you should figure out before you come in and decide that you want an even 50-50 split. Maybe I'll cover some of those questions in a future post, but let's fast forward and talk about the goals of this negotiation:

1. ✅Best outcome: you both agree on a split that feels reasonable. You agree on responsibilities, it's clear who's going to be in charge of what, and you have 30/60/90 day plans to check in and discuss this.
2. ✅Second best outcome: you don't reach an agreement and walk away
3. ❌Worst outcome: you take an offer that doesn't feel right, and this ends up derailing your company / the next 2 years of your life, because for some reason you feel resentful.

You're going to feel some pressure. Some of it internally, some of it externally.

Internal Pressure

Internal pressure sounds like this:

Besides, Butch, how many fights you think you got in you, anyway? Hmm? Two? Boxers don't have an Old-timer's Day.

– Marsellus Wallace, Pulp Fiction: https://www.youtube.com/watch?v=c1q2PitIM9w

But deep down, you know that: 1) technology moves fast, 2) if you feel like you haven't "made it" and want to try again, show up to the negotiation with your best foot forward and see where it does.

Anybody can look back at a win and tell you what worked for them (in actuality: what correlated with past success), but I think one of the most important things you can do is to get comfortable in your own shoes and your own feelings. Because you're not really negotiating with another person -- there's a good chance you're actually negotiating against yourself. Like Dr. Seuss would say, "Games you can't win. 'cause you'll play against you."

So what do you do?

Ask yourself:

Who are you really negotiating with?

All you can do is get to know who's actually at the negotiating table, versus who you see sitting across from you at the negotiating table. Yes, indeed there's your potential co-founder sitting across from you at the table. But, pause and really reflect for a moment. Ask yourself: who are you really negotiating with?

Ostensibly it's your co-founder, but maybe it's also what you thought your parents wanted you to be when you grew up, but you couldn't live up to that expectation so you're gonna feel threatened. Maybe it's a feeling of authority you can't handle. Maybe it's something else. It'll vary from person to person, but remember: your parents are probably actually more proud of you than you think. You're safe, worst case you'll figure it out.

Ok, so now it's time to speak. Here are some principles to remember:

Do not negotiate positionally

Positional negotiating is like the junk food of life ambition. It's easy to get an offer for X and say you want X+5, but the problem is that mathematically, you'll never be satisfied if every time you get something good, your first thought is to want more.

Jan: Okay, Michael. I can offer you a 12% raise, but you have got to ask for 15.

– The Office

It seems funny on the surface, but you know what happens if you approach everything as a positional negotiation? You'll end up thinking every hand you're dealt is a 2-7 offsuit. There's a verse from Pink Floyd that that feels like a punch to my face every time I hear it:

Tired of lying in the sunshine, staying home to watch the rain

– Pink Floyd, Time

So: decide what number you want. The answer is never "5% more than what I was offered"

This is price discovery for the market of you

"Dude, fuck your model. I'll make you a market. There are seventy - seventy-seven. You have three choices. You can sell them back to me at seventy. You can buy some more at seventy-seven. Or you can give me my fucking one point two billion dollars," said Greg Lippman.

– Michael Lewis, The Big Short

This is price discovery for the market for you. That's all there is. If you pick a price that works, great. If you have unrealistic expectations, go back to your idea spreadsheet and work on something else.

Don't anchor to an even equity split

There are some cases where an even equity split makes sense, but I think that culturally, we do ourselves a disservice telling people they should expect to join a company and get an equal founding share. Some cases where this isn't true:

1. There's more than an idea: there's a prototype that works and has some traction
2. Your co-founder has domain expertise: example you're starting a fintech company and your co-founder used to be a bond trader and has your first 10 customers lined up.
3. Your co-founder's BATNA is better than yours.

This is not immutable

If things go really well and your future board decides that you are irreplaceable, you can increase your ownership stake in the future. Just focus on being valuable and getting the job done.

Your time is valuable but not that valuable

Is your time worth more than $1/hour? Probably.

Is it worth more than $1MM/hour? Probably not.

Ok, so the number is somewhere in-between. But ultimately your job is to drive results; that will take as long as it takes.

This isn't about your self-worth

When you open up your stocks app and you remember that you hold 10 shares of GME, does that make you question your own self-worth and make you wonder whether you're valuable as a human being? Hopefully it doesn't.

That's the same disinterested feeling you should have about this negotiation. This isn't about your self worth. And if it is, there's no quantity of stock that will convince you that you're valuable.

You are becoming more relevant

That excel model they sent you, you know the one with conditional formatting and sparklines? It's a lot easier to learn Excel and financial modeling than it is to learn to code and make things from scratch. This is way more your domain than you think it is, and you start belonging in the room only when you start to believe you've earned the right to belong in the room. And that doesn't happen through positive thinking or repeating the same affirmation 100 times every morning. It happens through putting in the work.

Timebox the negotiation

Before you say anything, set a timebox in your mind. Think to yourself - "if we can't resolve this within the next 3 days (aka Monday at 5pm), then I'll walk away."

If it doesn't feel right, walk away

If something stop feeling right, then think about walking away. But realize that you might be walking away from something big.

This is your legacy. Act accordingly.

Remember, if you reach some agreement, you're going to be working with this person for a very long time. So sure, you could drop the thermonuclear option and play a really strong hand, but remember - if you decide to continue, this is going to be the first of many many hands and they all count.

And even if it doesn't work out this time around - remember that this is your legacy. Your legacy isn't something that starts when you feel like you're ready to start it. Your legacy is being written now. It's how you interact with people every day, and this is an opportunity to be the person you think you want to one day become. Start now.