Slicing the Hypothetical Pie: Part 3

In this series on slicing a startup’s hypothetical pie, so far, we’ve talked about the levers used to control ownership and how founders can negotiate. They’re a 6-8 minute read each if you’d like a comprehensive look at the topic. This article will address how you can build a mutually beneficial deal with the primary founder while negotiating equity as a co-founder.

The steps involved in the negotiation process and ideas on how you can leverage the fundamentals of negotiation strategy are the same whether you’re a founder or a co-founder. So if you’ve read the previous article on negotiating as a founder, you might have a sense of deja-vu as you read this one.

Analyze your Situation Outside-In

First, as we’ve done in the last article, let’s take a step back to evaluate your situation. How important is it to be the co-founder of a startup at this stage of your career? Are there other opportunities you’re pursuing? How promising are the different startups compared to this one? Is there one that’s more interesting to you? Co-founding a startup is a long demanding journey that requires a lot of motivation to get through. Picking the right one to co-found is crucial.

Consider what stage the startup is in. Is it just a concept, or does the founder already have funding, or is it in use by early adopters and ready to scale? Consider how far the startup is from a significant milestone. Say, securing a Series B funding round. A startup closing Series B funding has an established user base, proven product-market fit, and is ready to scale – good indicators that it is on the right path. The further away it is from this stage, the more work there is, and thereby more equity needs to be shared with co-founders.

Consider the skills, experience, and connections you think the founder needs to move the needle in the right direction. What is missing? And what do you bring to the table? The more your skills and expertise fits this gap, the more effective and valuable your partnership with the founder will be.

Put all of this down on paper so that you have a list of considerations for later.

Determine Minimally Acceptable Terms

You now have a better understanding of your needs. However, you also need to determine the minimum acceptable terms for you as a co-founder. It’s a concept known as Reservation Point in negotiation strategy.

What minimum equity are you willing to accept and still be motivated to put in the significant effort it’s going to take for the next 7 to 10 years? It will be tempting as a co-founder to set your reservation point high. However, go back to why you’re interested in joining this startup. What’s your alternative?

Now, write down your reservation point for the equity you’re willing to accept to co-found this startup. Keep this number confidential – its purpose is only to help you negotiate and make decisions.

Consider and Strengthen your Best Alternatives

The next step is to assess what your alternatives are. What is your plan B if you’re unable to strike a deal with this founder? Have you identified other potential startups to join? The stronger your alternatives, the more aggressively you can negotiate. You might be inclined to postpone this exercise until your current negotiations fall through. However, trust me, you need to understand all your alternatives and build a powerful one before you start negotiations. Continue to improve your options, even after you’ve begun discussing with the founders. Write down every alternate possibility and select the one that seems the strongest.

If you’d like to dive deeper into how psychology and behavioral economics principles can help you negotiate efficiently to make better deals for everyone at the table, I recommend this book. It can come across more as a textbook that you’d want to reference. After all, it is written by two professors. So, the print version might work out better than the audiobook.

Once you know your best alternative, it’s equally important to assess your founder’s options. Understand how closely your skills and expertise match what they are looking for. Are they having conversations with other potential co-founders? How unique is your skillset, and will they quickly come across other possible candidates? Are you able to offer something unique that they cannot get from other co-founders? Formulating options based on your founder’s best alternative will ensure it’s competitive.

Determine your Added Value

Let’s go back to when you assessed what you bring to the table compared to the skills, experience, and connections this startup needs to succeed. 

A great tool to evaluate the anticipated contributions of the founding team is the Co-founder Equity Calculator. Keep in mind that this tool cannot be used independently, as the website also admits. The calculator suggests an equity-split determined by the anticipated effort-based contributions. Investing financially in the startup is another way to contribute. And you’ll want to factor that in separately

Take Time to Prep for Negotiations

To create a win-win situation, you’ll want to list all of the items you could negotiate with the founder. Have open conversations and really listen. Equity is the big elephant in the room, but you know how to tackle it. By now, you have the minimum equity you’re prepared to accept from the founder.

Equity is controversial because it’s essential to both sides. But there may be other things critical to your founder that don’t matter to you as much. Perhaps it’s your expertise in the industry or making valuable connections that are within your network. Use these factors to negotiate a higher equity share for yourself. Put everything on your list of negotiable items.

The negotiable items you’ve examined so far will set the terms of your agreement. During your negotiation talks, you could go through each item separately with the founder to draft your contract terms. However, doing so will draw out the process, make it more contentious than it needs to be, and create inefficient deals.

Instead, put together two to three packages that you can present to the founder. Use the negotiable items you’ve listed as levers. If you notice some have a higher priority, assign weights to make them comparable. Play around with it until you have distinct packages that roughly add up to the same score or dollar amount.

Usually, founders propose agreement terms and initiate negotiation talks. However, if you want an advantage in the discussions, be the first one to present options. Once you anchor the terms and equity expectation, the rest of the negotiation will revolve around making adjustments from there. You will walk away with more of what you want this way.

Remember to use competitive numbers that you’d prefer to accept and not your reservation point. Keep all your discussions at the package-level, including any changes you may need to make as well. You’ll notice the founder is drawn towards a specific package. Find out why. Make it mutually beneficial and build that trust. Good luck!

I hope this article helps you navigate negotiations as a co-founder to build a valuable agreement. I’d love to hear your experience negotiating with a founder and what lessons you took away from it. If you have specific questions, please feel free to ask in the comment section below.