* 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.]
Thanks for the simplification and especially for the ratios for the co-founders. We do have a prototype as I'm also technical but I think we would benefit from faster development by bringing on another technical person.
When would it make sense to go 40%-40%-20%? And how would it look like when we bring in funding from outside investors?
Investors will have problems if the gap is too large. They'll wonder what discussions aren't being had with the 20% cofounder, if that person is motivated to be part of the company for the long term, etc.
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.
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.
* 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.]