Deena, Eli, and Fred
Deena and Eli have worked together for years. Over lunch one day, they discuss a problem they’ve seen their customers struggle with. They decide to quit their jobs and pursue a business to solve that problem.
Deena’s expertise is in marketing, both in designing products and creating marketing campaigns. Eli’s expertise is in sales. He was the top salesman at that prior company. Both agree they need a third co-founder with some expertise in software, and Eli has a friend, Fred, who is a perfect fit and interested in the opportunity.
All three agree to cover their own expenses for the next few months, and no cash or equipment is needed to get this business started.
They also agree that Deena should be the CEO, Eli should focus on sales and marketing, and Fred on product design and development.
They sit down to divide the equity and have the difficult conversation.
Deena expects a far larger share as CEO, as she notes she’ll be responsible for the whole team as it grows beyond the three co-founders. Eli expects a share as big as Deena’s, as (a), his department will be providing all the revenues and as (b), he recruited Fred to the team. Fred does not expect an equal share but at least 20% of the total.
After some back-and-forth negotiations, the team settles on a 45%/35%/20% split, Deena/Eli/Fred.
As founders, Deena and Eli each set up their shares with 25% of their grants as unrestricted and the remaining 75% of their shares “vesting” over forty-eight months. Fred’s shares are set up with a six-month cliff, at which time, one eighth of his shares will be unrestricted and the remaining shares unrestricted over the following forty-two months.