By Fernando Berrocal

After finally finding the perfect fit for the position of “Co-Founder” for your new Startup there are several things to plan. Surely, you are impatient to get started by having him/her sign a contract and everything that comes along with that (installing, introduction to the marketplace, meeting with key people, etc.). It’s important to figure out how you'll pay the newly co-founder and other bonuses in the contract. In a way, this may appear to be secondary to more pressing concerns; like the product to sell, coding to develop, angel investors to pursue, and various forms of funding to complete. When you are ready to start working with your new cofounder, take the time to determine the safest and most effective approach to reward him/her for their efforts for the sake of you and your startup's future. People frequently make the mistake of being overly generous with their starting offer, pleased that someone else is there to assist them to sail the boat through the storm. However, this is not the best option, focusing on choosing the most realistic and cautious approach might save you thousands of dollars in losses and years in court.

A caution to keep in mind: While it's ideal to start with a cautious payment offer in line with best practices, the contract can be changed in the future if both co-founders agree and it's in the business's best interests. There are some things to think about when determining how much to pay a cofounder:

Equity Allocation: As a method of remuneration with cofounders, “founder shares” (share given expressly to founders as opposed to ordinary equity) are included. The question is how much ownership should your co-founder have. There are numerous elements to consider when deciding the amount of equity each co-founder receives in general.

• Idea Generation: In the majority of cases, the individual mainly responsible for the startup's main concept is the one that has and deserves to hold the majority of the startup's ownership.

• Sweat Equity: However, the person responsible for the startup's main concept doesn't always have the majority of the startup's ownership. It's important to think in these, where one co-founder may have had the original idea, but the other has the experience, technical knowledge, equipment, network, and/or is willing and able to put in more time to see the idea flourish.

• Equal Partners: The ownership split may be about equal if both cofounders are expected to contribute the same amount of value to the business, whether through original investment or value production.  Calculating the correct amount of stock split amongst co-founders requires weighing the relevance of these elements in the business' future performance.

Equity Buy Back: Allowing the business to buy back a cofounder's equity if they leave the company after a short time is highly suggested in a co-founder contract. This means they won't be able to come back years later, when the business's worth has increased, and demand recompense for the shares they were granted in the beginning, cashing in on the success of an organization they didn't help develop.

Cliffs: This is a method of securing a stock price for a certain length of time to prevent employees or co-founders from selling their shares before completing a specified term of service. Your contract should specify what proportion of a co-founder's shares can be sold and when they can be sold. Allowing a co-founder to sell a large percentage of their shares in the near term conveys the message that you're okay with them cashing out early. You're effectively encouraging people to put money into the business in the near term while leaving them with little reason to put money into the long-term growth.

Salaries: Paying a co-founder a large compensation sends the incorrect message to employees who are frequently working long hours for little pay in the spirit of entrepreneurship, putting in the effort now to enjoy the benefits later. If one or both of the founders get paid well before the startup has even taken off, it indicates that resources are not being invested into the business where they should be. Employees are unlikely to have the same equity incentive as founders and earning small pay while the founders earn large incomes can be harmful to their morale.

If your business is still in its early stages and you're short on funds, you may consider offering a salary replacement or a reduced wage in return for stock. When suggesting this sort of pay swap, tread carefully. Deferring compensation or providing income in exchange for stock creates the expectation that the founder would be rewarded when the company receives funding, which can lead to legal difficulties in some jurisdictions. The issue is that this is incompatible with the idea of financing. Finding the proper remuneration for your co-founder is critical for establishing a culture of fair pay and expectations, as well as exhibiting your commitment to your startup's ownership.

The Disposal: Protecting your organization's equity is the most crucial consideration when deciding how to compensate a co-founder. Finally, if the co-founder is hesitant to sign a conventional contract with cliffs or demands a large pay, it may indicate that their primary concern is short-term remuneration rather than the organization's long-term success. Consult an attorney to avoid future regrets, and after everything is in place, sign the contract, shake your co-founder's hand, and get ready to start building your startup:

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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