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Does Being The First Full-Time Paid Employee Affect That Founder’s Equity In The Company?

Question: I am one of three founders of a company.  Up until now we have been bootstrapping the company from our own funds and working part time on the company while having full time jobs.   However, we are now looking to raise some private funding and one of us will be transitioning to the first full time paid employee of the company.   The question is, does being the first full-time paid employee affect that founder’s equity in the company?     I can see two sides to this issue.  The first is the founders that are not yet paid employees would think that the other is  getting paid so FTE’s equity should decrease.  The second is the found that is now a paid employee is putting themselves at higher risk as they left there prior job to go fulltime at the new company.    How have you seen this structured in the past?

You do an excellent job of looking at both sides of the question. While the founder who is working full time for the company is getting paid and the other founders are not, the other founders presumably are still getting paid from the day jobs.

Usually in these kinds of situations, the comp being paid is (or should be) modest – just enough so the full time founder can cover his basic living expenses. Assuming this is the case, I think you can comfortably separate out the equity as a separate concept. Specifically, whatever the equity splits are separate from the compensation should remain.

Now, the full time founder could make the argument that he should get more equity since he’s working full time for the company but the other two founders aren’t. This is a stronger argument if the founder working for the company isn’t drawing a salary.

Of course, the equity doesn’t necessarily have to be split three ways between the founders. However, if you can separate the compensation from the actual equity splits, you can usually have a more rational conversation.

Regardless, it’s never easy. Just have the direct conversation and keep working through it openly until you get to a happy place. If you can’t reach a consensus among the three of you, then you will have bigger problems down the road.

April 19th, 2012 by     Categories: Equity     Tags: , ,