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NOTABLE! How much equity should I give this All-Star?

What percentage of equity should I give my COO?


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Scot

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Alright brain trust, I'm putting this out to the forum community to see what ya'll think.

The Situation

I was introduced to a guy who became very interested in what my company is doing while at a conference. And he's semi retired but looking for a project to be part of. He's also as perfect as a candidate you could hope for. He spent over 20 years as a Brand Manager and VP for one of the largest salad dressing brands in the US. (if you haven't read my progress thread, I own a food brand that makes dressings and condiments) He wants to join the company and be part of the founding team. He didn't throw out words like "cofounder" or "partner" which is good.

If he came onto the company I would give him a role akin to a COO position. He would work part time for the company, 3 days a week. We haven't completed our fundraising yet, so we don't have capital to pay his salary, and he knows that. He is willing to work for equity. In addition to his COO role, he would be helping with the fundraise by leveraging his network and connections, but I'd be the one in the pitch room selling the investors.

My situation

I've spent 2 years working on this business, creating the products from nothing, selling into over 100 grocery stores and selling over 3,500 units online. All the money that's been put into the business is my money, he will not be contributing capital.


When we reach an agreement and equity is granted, it will definitely be on a vesting schedule over 4 years.

Everything I've researched on equity grants to founding team members is geared towards Silicon Valley/Tech Companies and usually is about paying your developer. And estimates on what to pay C-Suite level team members range from 2% to 49%.

What does the forum think is an appealing, but appropriate equity percentage to give someone of this caliber?
 

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@Ravens_Shadow I'm tagging you because you're one of the few guys I know who's actually given up equity in his company.
 

AgainstAllOdds

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Make all the equity performance based. If he doesn't do anything, he doesn't get anything.

For all you know, this guy's an alcoholic that met you before drinking.

Create the incentives so he can own up to whatever you're willing to give up, but cover your a$$ so he doesn't get anything if he doesn't deserve it.

Don't get too excited to bring on a partner - some of them are great, most of them are not and would've been better off as employees.
 

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Alright brain trust, I'm putting this out to the forum community to see what ya'll think.

The Situation

I was introduced to a guy who became very interested in what my company is doing while at a conference. And he's semi retired but looking for a project to be part of. He's also as perfect as a candidate you could hope for. He spent over 20 years as a Brand Manager and VP for one of the largest salad dressing brands in the US. (if you haven't read my progress thread, I own a food brand that makes dressings and condiments) He wants to join the company and be part of the founding team. He didn't throw out words like "cofounder" or "partner" which is good.

If he came onto the company I would give him a role akin to a COO position. He would work part time for the company, 3 days a week. We haven't completed our fundraising yet, so we don't have capital to pay his salary, and he knows that. He is willing to work for equity. In addition to his COO role, he would be helping with the fundraise by leveraging his network and connections, but I'd be the one in the pitch room selling the investors.

My situation

I've spent 2 years working on this business, creating the products from nothing, selling into over 100 grocery stores and selling over 3,500 units online. All the money that's been put into the business is my money, he will not be contributing capital.


When we reach an agreement and equity is granted, it will definitely be on a vesting schedule over 4 years.

Everything I've researched on equity grants to founding team members is geared towards Silicon Valley/Tech Companies and usually is about paying your developer. And estimates on what to pay C-Suite level team members range from 2% to 49%.

What does the forum think is an appealing, but appropriate equity percentage to give someone of this caliber?
I never give anything to anyone that did not earn it before my own eyes. I don't care how great they look, sound or lead me to believe they are. You get an hourly until you prove yourself.

It is a HUGE mistake to assume any single human being is going to work hard for you until they actually work hard for you.
 

CareCPA

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I think it was mentioned in your other thread, but I'd make sure no equity vests until at least 12 months in.
And have a way to keep it from vesting if he turns out to be a dud.
 

csalvato

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The startup standard is 4 year vesting with a 1 year cliff in the form of options.

At your stage of the venture, anywhere from 1-10% equity is normal for a person in that sort of role. Based on what you said, I wouldn't go over 5% personally unless he makes a very strong case.

This gets rid of all your major concerns. Is there a reason you wouldn't do this?
 

pmaloneus

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I would say anywhere between 10-15%, build in a vesting structure that mitigates some risk on your end.

Any solid partner that you bring on that really brings value (whatever value is... knowledge, relationships... whatever) is not going to work for no salary and no equity. Suppose he busts his a$$ for fundraising, but you know how hard fundraising is, and you don't get it within the a short time period. If he's performance based, why would he continue to bust his a$$ to find funding?

You could add a 6-month dating period into your vesting schedule, or structure it in a way where he gets where he gets 0% vested for 6 months, 1-2% at the year mark, and ramps up exponentially in subsequent years. This way you can weed him out if he doesn't stick or if you all are not a match early on.
 
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I think it was mentioned in your other thread, but I'd make sure no equity vests until at least 12 months in.
And have a way to keep it from vesting if he turns out to be a dud.
Oh yeah, 100% this. He would have a 1 year vesting cliff. At 366 days he'd be granted 25% vesting, then 1/48th of this shares vest monthly after that.
 
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This gets rid of all your major concerns. Is there a reason you wouldn't do this?
I think this guy will be very valuable on multiple fronts. So, yeah, if we both feel comfortable with the equity and the way it vests, I'd definitely bring him on board.

I would say anywhere between 10-15%, build in a vesting structure that mitigates some risk on your end.
Sorry, I didn't see your response as I was responding to @CareCPA Pretty much mimics what I wrote to him above.
 

Ronak

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Right now, you're in a binary situation. Either he accepts what you offer, or not. If he feels you are his only option, it puts you in a weak negotiating position.
I think you're making the false assumption that there is no alternative. I would go on LinkedIn, and within 5 minutes, you can find 10 other guys that have a similar profile. These guys are reachable and interested.

It may end up that your current guy is the best, but you wont know that for sure until you go searching for it, plus, now you'll have more leverage in case he says, I want 25% of the company, and you can answer back with, "the 10 other guys I've spoken with for the position only want x%"

That said, my opinion is 8 to 10% for an operating person that's full time, less for part time. If you're both just part time, then who is going to be your full time guy?
 

csalvato

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@Ronak surfaces a great point. Are you planning to shop around? Has this guy surfaced the need you have for a COO, and you should start looking for a COO where he is one of many candidates? Or are you feeling FOMO that you might miss out on working with someone who seems experienced and expressed interest, so you're making up a role to fit him in?

The former would be great. The latter makes me wonder...
 

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JunkBoxJoey_JBJ

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I know nothing about this arena other than asking myself:

“Who wants who more?”

“Who needs who more?”

“Who holds the cards and is dealing from a position of strength?”

And finally, double-check emotions/excitement verses logic and gut.

As always, staying tuned...
 

MTEE1985

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Without sharing exact numbers, what is your timeline for exit and what do you believe the business will be worth in 2,4,6 years with his help vs. without?

If he can shorten that timeline considerably to a buyout then why not bring him on at a decent % (10-15)?

Can you call Doug and ask him what he thinks?
 

Kevin88660

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Alright brain trust, I'm putting this out to the forum community to see what ya'll think.

The Situation

I was introduced to a guy who became very interested in what my company is doing while at a conference. And he's semi retired but looking for a project to be part of. He's also as perfect as a candidate you could hope for. He spent over 20 years as a Brand Manager and VP for one of the largest salad dressing brands in the US. (if you haven't read my progress thread, I own a food brand that makes dressings and condiments) He wants to join the company and be part of the founding team. He didn't throw out words like "cofounder" or "partner" which is good.

If he came onto the company I would give him a role akin to a COO position. He would work part time for the company, 3 days a week. We haven't completed our fundraising yet, so we don't have capital to pay his salary, and he knows that. He is willing to work for equity. In addition to his COO role, he would be helping with the fundraise by leveraging his network and connections, but I'd be the one in the pitch room selling the investors.

My situation

I've spent 2 years working on this business, creating the products from nothing, selling into over 100 grocery stores and selling over 3,500 units online. All the money that's been put into the business is my money, he will not be contributing capital.


When we reach an agreement and equity is granted, it will definitely be on a vesting schedule over 4 years.

Everything I've researched on equity grants to founding team members is geared towards Silicon Valley/Tech Companies and usually is about paying your developer. And estimates on what to pay C-Suite level team members range from 2% to 49%.

What does the forum think is an appealing, but appropriate equity percentage to give someone of this caliber?
I don’t have the experience.

But I have a Chinese friend running start-up in Indonesia. The rules of thump is as this.

-Do not choose a partner who cannot commit full time. Since he can only work three days a week he can only be an employee

- Reward your employee with share options not shares. Because it will create problem and it will be hard to divorce other shareholders later.

Check this out it might help.

 

Real Deal Denver

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I don’t have the experience.

But I have a Chinese friend running start-up in Indonesia. The rules of thump is as this.

-Do not choose a partner who cannot commit full time. Since he can only work three days a week he can only be an employee

- Reward your employee with share options not shares. Because it will create problem and it will be hard to divorce other shareholders later.

Check this out it might help.

Thanks for the insight and the linked article. I am dealing with this issue right now, so I appreciate this information!
 

SteveO

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Regardless of his value, are you making money now? I would have a hard time giving up any equity. I like the idea of paying based on performance. You can pay someone based on what they bring in to the company but keep your ownership intact.
 

Kak

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I know we have discussed this in private, but I am going to post it here too so others can see it.

In my opinion, the answer to this question isn't definite. The answer lies with you. The business is you and you are the business at this point in time.

You should decide what he is worth to you assuming the expected performance. Ask what kind of deal makes him excited to be part of the project. See how closely that matches up to your expectations. From there you have something to bat back and forth.

My best advice is to have complete candor and explain your reasoning in good faith.

Beyond all of this... Protect yourself contractually in case he does not live up to expectations and make sure that he is cool with an across the board dilution on future money raising. You don't want to pay for the investors by yourself. What is best for the whole company is best for him and he should understand that.

With that taken care of it becomes a no-brainier. He preforms, in which case he was worth it, like you thought, or he doesn't and there is no bloodshed.
 

Kak

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Regardless of his value, are you making money now? I would have a hard time giving up any equity. I like the idea of paying based on performance. You can pay someone based on what they bring in to the company but keep your ownership intact.
This is an interesting point...

More like an opportunity ownership situation. You could always offer STRONG and ongoing commissions on anything he brings to the table. That makes things really easy.

You can also do a phantom stock arrangement...

He brings in X... X is about 20 percent of the bottom line profitability... He normally gets a 10 percent commission... Company sells for 15 million... The 20 percent he was involved in was worth 3 million... Give him his commission in the form of a phantom stock sale. $300k payout.
 

MJ DeMarco

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Some great takes in this thread, thank you to everyone who responded and will respond thereafter... upgraded to NOTABLE.
 

Johnny boy

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Structure an agreement for an equity payment over time (1% equity a month for 2 years) or some other way.

His connections and advice will help you the first few months.

People have a tendency to make unrealistic commitments early in a relationship. Like drunk people who meet at a club on a friday night and say they need to hangout again but never do.

The "idea" of working in your company has very little weight but the actual commitment is large. Saying "I'll give you a quarter of my company over the course of 2 years" sounds okay to him, but you'll get your value from him early on in the process. You'll get his connections and everything will either work or not work within the first few months. You can fire his a$$ after 2 months and lose very little. I wouldn't do it any other way.

If he is against it, you'll be seeing his true colors that he doesn't plan on delivering value. You wouldn't want him anyways.
 

FierceRacoon

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Delay the decision.

There are other instruments besides equity and salary, if you are concerned about giving away too much equity. For example, once you are profitable, you can pay him 3X the normal hourly amount for all the hours worked (e.g. $500/hour). That can be in addition to equity. Alternatively you can have a buyback agreement, which is effectively the same thing.

The thing with giving away too much equity is that it may cause problems with your future fundraising. Even if it is unvested, future investors may not want to contribute unless your renegotiate the equity percentages down the line. Furthermore, inappropriate amounts of equity can create a weird dynamic, both if he has too much or too little. If possible, try paying him some cash, even $500/week, during a "trial period". Do anything possible to try working with him over a period of time.

For the time being also consider granting equity on a $ basis rather than on a % basis. Once he proves himself, you can give him %.

It is also possible that there is no room for agreement. For example, you have contributed too much and are not willing to give, say, 25% even over the years. However, he may not care to work for 1%/year of something that may not have any value, at this point in his life.
 

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This guy has the chance to make the company. Up to 25% based on metrics achieved. 75% of 10,000,000 will always be worth more than 100% of 2,000,000. Overnight VC funding with him on board.
 
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Without sharing exact numbers, what is your timeline for exit and what do you believe the business will be worth in 2,4,6 years with his help vs. without?

If he can shorten that timeline considerably to a buyout then why not bring him on at a decent % (10-15)?

Can you call Doug and ask him what he thinks?
Timeline for exit is 4-5 years from close of our first round of financing. The goal is to get the company to multiple 8 figures by the time we start entertaining M&A's.

I believe his involvement in the company will make it more valuable, for sure. His real strengths will be at managing the margin and expense side of the business, improving our profits. He will also make distribution deals much safer and equitable for us.

I'm not sure he'll be able to shorten the time to cashout.. but I certainly think he'll shorten the time to funding.

I do need to call Doug, we haven't followed up and he'd be a great guy to bounce this off of. My guy is right in Doug's league.
 
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Regardless of his value, are you making money now? I would have a hard time giving up any equity. I like the idea of paying based on performance. You can pay someone based on what they bring in to the company but keep your ownership intact.
This is an interesting point...

More like an opportunity ownership situation. You could always offer STRONG and ongoing commissions on anything he brings to the table. That makes things really easy.

You can also do a phantom stock arrangement...

He brings in X... X is about 20 percent of the bottom line profitability... He normally gets a 10 percent commission... Company sells for 15 million... The 20 percent he was involved in was worth 3 million... Give him his commission in the form of a phantom stock sale. $300k payout.
@G-Man mentioned that Stacy's Pita Chips did something like this for their founding team. Rather than give equity to founding members, they put a percentage bonus in their contracts that vested when they were acquired. Correct me if I'm wrong, but I think it was something like they were paid 1% of the purchase price of the company by the buyer upon completion of the sale, or something like this.

That might go in line with what you guys are saying. Rather than give up equity/voting rights, still let them reap the rewards by doing a bonus payout.
 

SuccessATX

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Great thread! I haven't contributed much on the forum but am looking forward to assisting in any areas that I can help.

I have founded two companies with a similar non-salary/equity component for non-founders. I also had a stock option plan in place at one of the companies.

TLDR; (Too Long, Didn't Read...for those not familiar with the term)
There is some info on how traditional stock option plans work in my post below. However, it is not likely feasible in your situation. You will likely need to structure the deal with your potential COO differently and will need to ensure that you have some ability to protect yourself.


Although a great tool, I don't think a stock option plan would work in this case for a few reasons. First, they are somewhat expensive to setup and really don't payoff unless you are using them as a recruitment tool for multiple employees. Second, stock option plans are typically leveraged in addition to some level of pay. In many cases, to fill the gap between the salary you can afford to pay the employee and what the "market rate" for the role is. It helps your cash go farther and helps you compete for employees. I am based in Austin, TX. If I wanted to hire a software engineer in Austin, I am competing with Apple, Amazon, Google and a ton of smaller tech companies. If I can't afford the big bucks that Apple will pay, I can lure a candidate for less salary (60 or 80% of market) paired with a good option grant. Lastly, and most importantly, stock option plans are just that, options. If structured correctly, it is an employee retention tool. If you grant 500 shares to an employee on a typical 5 year/1 year cliff vesting plan, the employee will vest the first 100 shares after 12 months of service. If they leave before, they vest nothing. Then after the 12 months, they vest 1/48th of the remaining 400 shares per month. The term vest is important. Even if an employee is fully vested for the 500 shares, they do not own any of the company unless they exercise their options and pay the pre-defined per share price that is outlined in the option grant. Most employees don't have the cash lying around to do this. Therefore, most stock option plans have an accelerated vesting schedule with "cashless" exchange provisions for a change of control (i.e. acquisition or IPO). What this means is that the employee vests everything automatically (even before the 5 year period is over) and get paid the difference of the share price at change of control and the exercise price if your company gets acquired or goes public. So you see, these plans are heavily in favor of the company. Once a good employee is in place and starts to vest, they will likely not leave and give up their stock option grants (since they likely don't have the cash to exercise the options within the allowed period of time after they leave the company). For employees who are poor performers, you can terminate them for cause. They will also not likely have the cash to exercise their shares that have vested so they options they were granted go back into the plan (making them available to grant to someone else). Sorry for the long explanation, but I wanted to provide some insight/education on how stock option plans work for everyone's benefit.

So why won't a traditional stock option plan work in your situation? The COO would NOT be earning anything. He/she would only earn options to purchase stock at a pre-defined price and can be put in a situation where he/she has to come up with the cash to exercise if things didn't work out. If I were in the COO's shoes, that doesn't sound like a good deal and I would walk away. Even if you were to set the exercise price at some very minimal level (e.g. $0.01 per share), I don't think a traditional stock option provides enough protection for the parties involved.

An approach you can take has been touched on previously in this thread. You can setup a stock compensation agreement with your new COO. I did this about 18 months ago with a software company I founded. Hopefully the structure that I setup can give you some ideas on structuring an agreement with your COO.

Similar to you, we had already invested a good amount of money and time building our product and getting our initial customers. We were ready to begin some heavy hitting marketing for our SaaS product and were tossed up between going out to raise funds to pay someone salary or finding someone willing to work for equity only. We were fortunate to find someone who was willing to work for us (nights and weekends) for equity only. I am NOT a fan of people being part-time in an early stage company, but if you have a great person who is willing to work for equity only (especially a relatively small amount) you have to consider it. If we were to take on a full-time person for equity only, we would have lost a lot more of our equity as founders.

It is important to define how the person is earning their equity...very specifically. In our agreement, we had someone that said they could commit 20 hours per week. Rather than quantifying 20 hours per week, we decided to define parameters that needed to be completed in each given month to earn the equity for that month. We decided that 0.5% equity would be earned each month, over a period of 12 months (totaling 6% of the company as a maximum), for the successful completion of certain objectives. Since we were hiring a marketing person for a SaaS company, those objectives were directly tied to building the marketing funnel that were reasonably achievable (e.g. X new site visitors per month, Y lead form captures per month, and Z marketing qualified leads per month). The other component of equity was tied to sales provided our agreement was still in place. Under this structure, we would grant an additional 1% of the company (up to another 6%) for each additional $100,000 of run-rate monthly recurring revenue generated from when the agreement was signed. In the end, we would be giving up a maximum of 12% of our company but knew that if we did, we would be in a MUCH better place.

A key component of the agreement was that either of us could cancel the agreement upon 30 days notice. We also had a repurchase clause where if the agreement was terminated, we could buy back her shares at a pre-defined price. This price was equivalent to 200% of her market hourly rate for 20 hours per week. Since she could earn 0.5% in a month for roughly 80 hours of work (4 weeks x 20 hours = 80 hours) we could buy back each 0.5% of the company from her for $9,600 (80 hours per month * $120 double market hourly rate).

These repurchase rights were very important to us because we didn't want a shareholder who was no longer with our company. It was a tough negotiating point because she felt that she was taking a risk and we could buy her out at any time. This is why we doubled the equivalent hourly rate.

In the end, it worked out wonderfully! After 5 months of signing the agreement with her. We entered into a definitive agreement to sell the company. At that point, she had successfully earned 2.5% for the 5 months of service and an additional 0.5% for passing the $100,000 monthly recurring revenue mark. She made 3% total and the proceeds for her from the sale were worth far more than the equivalent hourly rate that she put into it.

Sorry for the long post...I hope this helps!
 
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Some great takes in this thread, thank you to everyone who responded and will respond thereafter... upgraded to NOTABLE.
Thanks @MJ DeMarco !

I'll make sure to include the results of this decision in the thread, as well as go into as much detail as I can on the legal structure of the deal we reach.

The "idea" of working in your company has very little weight but the actual commitment is large. Saying "I'll give you a quarter of my company over the course of 2 years" sounds okay to him, but you'll get your value from him early on in the process. You'll get his connections and everything will either work or not work within the first few months. You can fire his a$$ after 2 months and lose very little. I wouldn't do it any other way.
I get what you're saying, but maybe I'm interpreting it wrong. I definitely don't want to milk the guy then dump him without paying him. His Rolodex and network are valuable yes, but his experience is more valuable. If I only wanted access to his network, I'd give him advisory shares and let him invest.


The thing with giving away too much equity is that it may cause problems with your future fundraising. Even if it is unvested, future investors may not want to contribute unless your renegotiate the equity percentages down the line. Furthermore, inappropriate amounts of equity can create a weird dynamic, both if he has too much or too little. If possible, try paying him some cash, even $500/week, during a "trial period". Do anything possible to try working with him over a period of time.
I'll need to look into this, but giving equity to founding members of a team is pretty standard practice for funded startups, so I can't imagine investor will be that turned off by the concept. Especially if having him on the founding team will be a vote of confidence.

As far as paying him now, as much as I'd love to, until we get funded we can't. Even with the seed round funding, that's mostly for product and marketing. We talked about this briefly, but the plan is definitely to give him a salary once we raise a Series A and bring on a full team.
 
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A key component of the agreement was that either of us could cancel the agreement upon 30 days notice. We also had a repurchase clause where if the agreement was terminated, we could buy back her shares at a pre-defined price. This price was equivalent to 200% of her market hourly rate for 20 hours per week. Since she could earn 0.5% in a month for roughly 80 hours of work (4 weeks x 20 hours = 80 hours) we could buy back each 0.5% of the company from her for $9,600 (80 hours per month * $120 double market hourly rate).
I wish rep$ was still a thing, because I'd dump some good rep$$ your way.

This bit I quoted is REALLY helpful. It's not something I thought of, but something I will definitely add in moving forward. I've already made it clear to him that if we don't work well together, we will part ways in a way that does not hurt the company. Part of that is the 1 year cliff on equity, but the buy back will be very important.

Thank you for sharing all of this.
 

SuccessATX

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I wish rep$ was still a thing, because I'd dump some good rep$$ your way.

This bit I quoted is REALLY helpful. It's not something I thought of, but something I will definitely add in moving forward. I've already made it clear to him that if we don't work well together, we will part ways in a way that does not hurt the company. Part of that is the 1 year cliff on equity, but the buy back will be very important.

Thank you for sharing all of this.
Happy to help and happy to provide additional input to help you get the terms of the agreement ironed out. Good luck!!!
 
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This guy has the chance to make the company. Up to 25% based on metrics achieved. 75% of 10,000,000 will always be worth more than 100% of 2,000,000. Overnight VC funding with him on board.
That's the hope!
 

G-Man

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This guy has the chance to make the company. Up to 25% based on metrics achieved. 75% of 10,000,000 will always be worth more than 100% of 2,000,000. Overnight VC funding with him on board.
This. Not just operationally, but when you get in front of VC they wanna see an all star management team. At this infant stage the only thing they really have to bet on is product and talent. Now @AgainstAllOdds couls be correct and you just happened to meet this guy before his nightly Saturnalia, which is where the legal profession comes in handy.
 

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