Nevertheless, I don't say this just to rain on your parade. Businesses all start somewhere. But what you are saying is you have no cash on hand or ability to take on debt to pay for a software engineer to build your main product. Let's make it relatively clear, you cannot pay a person in equity in lieu of monetary payment. Why not? Because your equity isn't worth anything right now. If you have no revenue, no product, and no investment, you have no value. So if you were to "hire" an engineer who, at market value, might make $100,000 per year, how much would you pay them in equity? You cannot make the equation work.

So you are stuck with some other sort of agreement. You can make them a co-founder. But you don't want to dilute your equity. That's a major issue. The question then becomes how much benefit are you bringing to the organization in comparison to them? I've been asked this, personally, a number of times in my career. "Will you take 5%? If we take off with this production we will become a $1,000,000,000 company and you'll be worth $50 MILLION!" My answer, when the company is at your stage is no, I will not take .5%, 1%, or 5%. I will take 50%.

Of course, co-founders choke on this. But I have a lot of issues to weigh as a potential co-founder. First, often times the other co-founders aren't working on the product or the company full time. The aren't making any revenue and so how will they live without a second job? On the other hand, as an engineer, I must get that product out the door quick, so I am heads down full time. Second, this is a huge risk for me and I do not want my co-founders making poor decisions while I stand there with my tiny, non-voting amount of equity.

Some might say "But what happens when we need investors!" and this is a reasonable question which does come up. I give up a percentage of my equity to gain investors at the same rate as my partners. If we need to do a raise as 20%, I now have 40% and my co-founders have 40%. The math follows down to just about any level. We make those decisions together.

Anyway, I just wanted to give you the other side of this sort of discussion. Most entrepreneurs want to value their idea very high, while reducing the value of product execution. By sticking to my principles, I have been quite successful, starting 2 businesses and partnering in 2 others, all sold successfully. I hope you find the right fit for you!

My initial thoughts were to have an equal split amongst 3 people. I was warned that 3 co-founders would be too many and would not leave much on the table but I don't fully agree with that notion. I was willing to bet that anyone would want an equal share in return for what they bring to the table.

Just for clarification, when we raise at 20%, then all 3 of us would share the 80%? And how much do companies usually leave aside for employees?

As for splitting equity that is a bit more of a complicated conversation. Not all equity is the same. In a fair world you might say: 10% reserved for employees, 20% for investors, and 70% for us. That seems fair on the outside right? You would each get 23.3% and you could each outvote any investor you bring on board. However, often times you don't have straight equity deals when raising funds. You might take a convertible note. You might have an investor who will only accept preferred shares of equity with special arrangements. Even relatively simple and underfunded start ups can sometimes have very complex cap tables with multiple levels of shares of stock being given different rules and right. If you're not careful, the cap table can easily run away from you. I have known quite a few successful entrepreneurs who have gotten screwed in the end, not because of co-founders, but because the cap table went sideways. For example, one small start up was offered north of $80MM 4.5 years after starting up. The co-founders each, after taxes, walked away with a few hundred thousand.

So, to answer your actual question, it really depends. Getting a partner who has been through those whole ordeal before can be priceless.

https://sivers.org/multiply

3 founders can work fine. Many would consider it better than 2, all else being equal, since with 3 you can break some decision logjams. But that assumes all 3 are good, and that you have developed a strong working relationship. Reading your post, where you are technical, you are bringing someone on to help, and eventually he may be promoted to CTO, makes me wonder if you view him as more junior, currently. And whether he views himself more junior. That might drive both the equity split, and whether he participates as an equal in routine operational (or even technical) decisions.

That being said, I had a quick chat with him and apparently, he's doing another startup so looks like the decision has already been made for me for the time being.

The reason not to bring in a third cofounder is that you don't have access to the right person...a cofounder is like your spouse only there's more money at stake and you spend more time together.

Finally, if you find the right cofounder, you can bootstrap, generate revenue and have better control over the terms at which others may be offered the opportunity to invest in your company. Having investors is not a goal, it is a means to an end, just like bringing in technical talent.

Good luck.

There are already 2 co-founders but me being the only technical person, I wanted to bring on another technical person to speed things up.

* If you pay 95% in money and 5% of the salary in equity, he is an employee

* If you pay 5% in money and 95% of the salary in equity, he is a cofounder

Also:

* An employee only gets a few % of the total equity, say 2%, 1% or less

* A cofounder gets almost the same equity of the other cofounders, in this case about 33% (perhaps 40%+40%+30%, not 45%+45%+10%) (In this case, it looks like you don't have a prototype, so 33.3%+33.3%+33.3% looks better.)

[In any case, remember to use the standard 4 years vesting with 1 year cliff scheme.]

When would it make sense to go 40%-40%-20%? And how would it look like when we bring in funding from outside investors?

Unless you've done this many times before, its not really that big a deal to do an even split. Assuming success, you'll likely end up with less than half of your original equity, so what is a 20% gap now (huge!) might be 5% or less when you exit (ie no big deal).

Of course, go with a vesting schedule and cliff. And to make up for them coming on later, perhaps you start with 40 / 40 / 20 but have a plan (that you share with them) to grant them additional equity each year until it's roughly even, so as they prove their worth and commitment you make them an even cofounder.

Maybe in some corner case where it isn't a waste of energy? That's why it is worth at least considering Joel Spolsky's advice:

https://gist.github.com/isaacsanders/1653078

By the way, 40-40-20 is no better from a control perspective than even thirds. Two can sell the other out. And control is a bigger issue than percentages in the sort of pissing contests that matter. Even worse, the person with 20% has more to gain by cutting one of the 40%'s out...as do each of the 40%'s.

I'd like to bring someone on to help with product development, eventually transitioning to CTO. Just wondering if that person should be a co-founder or an employee. And how much equity stake would be right to offer?

So you've got nothing but want to convince the new guy you have value to deserve more?