Founder’s equity vs ownership vs salary

AAnonymous ·March 5, 2014 ·2 answers

I’m a bit confused on the topic of founder’s equity and how this translates into ownership and eventual salary.

There are two founders.

Founder 1 = 20% equity

Founder 2 = 80% equity

There are cliffs & vesting schedules built in.

Question 1: Does each founder own their respective equity % on day one without it being fully vested? i.e founder 1 owns 20% of the company after legal agreements have been signed.

Question 2: If the monetization strategy of the company is based upon monthly subscription rates. Assuming the company makes $10,000 in its first month.

My assumption is that we’ll determine what our salaries are (arbitrarily). But it won’t be on the basis of equity ownership of 20% or 80%. Therefore, having equity within the company means NOTHING unless there’s a liquidty event — buyout of shares, selling of company, or going public. Is this correct?

2 answers from the community

AAnonymous· Mar 5, 2014

EQUITY/DAY 1: They could but it's not recommended. Have a vesting schedule it just can't hurt and make sure to have an operating agreement which speaks to changing roles/participation and, possible, divorce.

SALARY: Generally, correct. Salary might be based on a reduced market rate. You may never have a liquidation event and in that case you can pay dividends which would be based on the amount of equity owned.

Disclaimer: I'm early the startup space.

AAnonymous· Mar 7, 2014

The way vesting works is they OWN it but the "company" has the right to buy it back at a low price as long as the stock is not vested. So if you leave and you're only 50% vested, your other founder can elect to make the company buy back your unvested stock.

OR not.

Whoever has control of the board, can always change the "rules". So say the founder of the 80% stock decides to quit. If you have 3 people on the board and he gets the other board member to agree, he might be able to technically get the board to approve an accelerated vesting schedule before he quits. The board has has a fiduciary duty not to screw over the shareholders and that includes the minority shareholders but having control has its perks.

Plus even without a liquidity event, you guys could always offer to buy each other out by valuing the company and coming to a valuation.

So equity means something.

But yes equity has nothing to do with salary. The Google founders took a $1 salary for a long time, but of course that means shit since they owned a chunk of the company.

Founder’s equity vs ownership vs salary

2 answers from the community

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