I didn't think his IOU solution for founders that either don't take a salary or contribute property made much sense. For that to be fair, you'd have to set a super high interest rate on the loan.
At the same time, I see the difficulty with assigning a concrete value to the shares early on. The angel investment world solves this exact problem using convertible debt. Why not take the same approach with investments-in-kind made by the founders?
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
Yeah I found that part especially wrong too. His article is all about fairness, and it seems especially unfair to me that someone would work and have a huge chunk of compensation deferred with a nontrivial chance the company never pays.
If I work for someone, they need to compensate me right away. This may mean I receive an option grant that is eventually worthless, but at least in that case I would have had an upside to my risk. The IOU has no upside but has the same possibility of worthlessness.
Deferred pay, without equity, is a bad idea. First of all, seasoned people aren't going to work for deferred cash only, knowing that companies rarely pay it back until they're roaring successes. Deferred pay arrangements usually are, "we'll pay you $X when we have the cash on hand" but the problem is that the cash is never truly "on hand"; in a growing business, there's always a better use for the money than paying zero-interest debt to employees. Venture capitalists don't want their infusions to be spent on back salary, and most CEOs want to invest revenues back into the business.
In lieu of equity, deferred pay is a bad deal for the employee: no upside, only downside, and usually on terms that are a lot less creditor-friendly than what banks can negotiate.
A further problem with deferred pay is that when things become difficult, it's not much of a motivator. After a year or two, people assume they're never going to get it back and become resentful. It's better off for them to have equity, where they knew full well they might not be repaid.
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
This is a decent first-order approximation, but for true fairness, the valuation should be set at the time the deferred-payment arrangement is made and should be lower than what is expected from a VC in the future. Because a deal may not happen, the fair valuation when this arrangement is set is lower than the expected VC valuation.
in an ideal world, none of the founds will need the money to pay rent or pay for child care etc, they'd all be young guys with no debt living at home.
The fact that one founder may have bills to pay, and him being the only guy having to cash in very early, will beat the morale out of him: he'll be working as an employee. This is also your guy whose tolerance for risk is the lowest precisely because he's got bills to pay. He might as well quit and go work 9-5 for steady pay in that case.
For that to be fair, you'd have to set a super high interest rate on the loan.
Why? Hypothetically someone could take a standard loan and use that. That would be cumbersome, and sometimes impossible, but it wouldn't require a "super high" interest rate.
They both work as hard and they both share the same risks. If they fail, the IOU still applies. One just happen to have more money stashed away.
Joel's article is pretty good as a starting point, but, I think there is a lot of variation on what the first set of employees get.
I've been a first 10 employee (As an infrastructure contributor, not core engineer) twice in companies that eventually were valued at greater than $1 Billion. The first time I received 0.03% Equity (Before Dilution) - the second time I received 0.1% Equity (Before lots of dilution).
For one of those companies, I know that some of the core engineers received 3-4x what I did, so - extracting to all of the six core engineers in Layer 1, Plus the Administrative crew - comes around 6 * .4% + 3 * .1% = about 2.7% for the first nine employees. We had our series A before anybody came on board, as an employee.
There is probably a different allocation method for teams comprised of "Serial Entrepreneurs" - Your risk in joining that team is much less, so your equity is typically much less. Also, the approach usually goes like the following:
Step 1: Two - Four Founders create a company. Roughly sharing the equity, though, if there is a "Named" founder that will Garner Press/Financing/Customers, they take a bigger chunk.
Step 2: Founders brainstorm for month or two, commit to working together for a minimum of four-five years, and then go pitch their preferred VCs. VCs give them a valuation of $5-$10mm (pre-money) and invest $1mm-$2mm.
Step 3: First 5-10 Employees are hired, with a stock pool of 3%-10% - Sr. Employees with a great track record who currently have great jobs at Google/Facebook/etc.. will require a larger equity share. Out of work contributors who have a solid, if not exceptional track record will receive significantly less. The team now has a clock ticking, and has to demonstrate some traction within six-nine months to get their next round before the money runs out.
I come from perhaps the small subset of a being good friends w/ my co-founder, having a 50/50 split, and being the technical one ....so that sets up context for my thoughts.
I resonate w/ this article a lot because to me, the appearance of fairness trumps everything. The 50/50 split lets me know that I don't have to worry about who does what exactly or who is working harder, but sets it up so we are both "all in". I feel like if you're debating equity split at that stage (provided you're both at the same point, quitting your job, etc) you're already setting up a rocky relationship. Either that or you're not really finding a co-founder, more of a dedicated employee.
I guess I'm just a little unclear on how you can define clearly what a "60/40" workload split looks like when they might not even be the same type of work.
Except the problem with a 50/50 split is that it's rigid and you both need to be contributing equally all the time, which will never, ever be the case.
I guess I'm just a little unclear on how you can define clearly what a "60/40" workload split looks like when they might not even be the same type of work.
That's one of the advantages. It's fluid. 60/40 isn't measurable, but if you know you're providing more value than the other founder, it's going to be close enough unless the other one stops working entirely.
1. Use http://foundrs.com to split equity early on, before your project gets traction. It has vesting built in. And it forces co-founders to have that oh-so-feared discussion early.
2. I respectfully disagree with Joel on certain aspects. He is very unclear about how to split equity among a few founders. He seems to advocate 50/50, which I strongly advise against. Fairness is one thing. But my litmus test is: if you quit, would the project die instantly? Then you are the CEO and you should get more.
I have advised tens of founders on those issues, including convincing some to fire useless co-founders. It's painful, but usually pretty clear when an outsider (like me) listens to all sides.
1. Nitpick: What if all co-founders meet the criterion (i.e. the project would instantly die if he left)? Are all CEO's then?
2. Instant vs. delayed death: Lets say if A leaves, the project instantly dies - and if B leaves, the company will die the next 6 months if no replacement is found who is just as good. Who is more important? What if the skills of B are the leverage you depend on to become successful and stay competitive?
And with 2) you are right in the middle of the discussion you want to avoid: Who is worth how much, who works harder etc., which is just distracting because nobody can tell for sure, and endangering your company because it hurts morale. That's why I agree with Joel to just split equally. And as joeag has pointed out, since it's vested, co-founders that really turn out to be useless won't get a large chunk of the company anyway.
I think the point is you may not know who is "useless" at the outset and rather than create an argument and dissension at that point, you use vesting. Then when you find out (or all agree) that someone is useless, you can get rid of them (which you are going to have to do anyway) and the amount of equity that they started with is essentially irrelevant since most of it never vested.
> But my litmus test is: if you quit, would the project die instantly? Then you are the CEO and you should get more.
I know of several technical startups products where the CEO can be replaced. Those companies would die if key technical people left. Since some of them have replaced CEOs already, their CEOs were not essential.
Are they doing it wrong? Should they have the tech people take on CEO responsibilities in addition to their tech work? What benefit will they get that compensates for the loss of tech productivity that will result from said shift?
A 50/50 split can work for the (very) small subset of cases where two people of comparable skill and commitment start building something from scratch (nothin' but a half-baked idea) together, with no prior investment/work/IP, no domain expertise, no key contacts, no customer channels, nor any major capital infusions. Oh, and both parties have a clear record of making good decisions together and resolve disputes effectively.
But for most other cases in the real world, these two resources offer a more rational and open/honest approach:
I particularly like the pie calculation as it addresses more variables more effectively. I would add that the agreement used (probably an LLC or Limited Partnership rather than a corporation) should provide sufficient flexibility that when things change (and they certainly will) the agreement is ready to help adjust the relationships. Thus, I would, among other things, use the pie chart each year to help adjust the relationships to meet changes that have happened over the year. The prime example is the founder who left after six months to do something else. Or the manager who is brought in after the idea is making money, but not much money.
His answer for "What happens if not all the early employees need to take a salary? " makes sense, but leaves the question of "why don't I get paid now instead of getting paid later if it means I get just as much (or less due to inflation)." Presumably, you'd have an understand co-founder who understands that cash in the company now is a little more important. Failing that, I think it might be fair to add interest to that IOU.
The other problem with the approach is it increases the risk of the guy who goes without salary, without any reward (that theme seems to be a strong justification for compensation in Joel's article, though I'm not sure it is intrinsically fair).
If you go without salary, while the other people don't, and get IOUs, but the company goes bust anyhow, you'll be out of pocket but the other people won't. You're taking more risk; why not have more upside?
But the other side is this notion that reward is necessarily justified by risk. What if the company is motoring along steadily for a couple of years but as a lifestyle business, and then gets a star employee who creates a new product that takes off? Are they necessarily not justified in seeking more compensation - perhaps they have created more value than even the founders? Or are the founders better off with a bigger slice of a smaller pie, and not trying to reward innovation in their employee base?
Good article, but leaves a few points open in my mind. The biggest issue that most people seem to be missing is control. When you have a 50/50 setup, you better make sure that you are comfortable with all the decision-making dynamics that partnership structure will bring.
Consider when you have a technical and a semi or non-technical founder. Let's say the technical founder is the visionary for the product you are building, understands what the customer needs (which means he has some/good business savvy) and give direction to all engineering related activities - from technology stack selection to what features and how they will be built. He/she is the one who will take the lead in defining the product and its -hopefully- many iterations going forward. A quick high profile example that comes to mind is Mr. Zuckerberg - he did the programming and he continues to give direction to the product.
Now you also have the semi/non-technical founder, who is obviously there because he/she is talented, smart and will have large impact going forward in building customer relationships and contribute to higher level discussion on where the products should go. There is a good chance the company won't go anywhere without this guy either.
How would you now do the split? A 50/50 arrangement would mean both parties get the same say/leadership over where the company/technology needs to go. Is that right? This is not about money, as both parties will be in good shape as long as a reasonable arrangement is chosen. It is about what is fair/right/sensible regarding what the company is going to be about and how it is run.
What do you do about disputes in the case of 50-50 ownership? In particular, what do you do if one founder wants to fire the other founder?
I've heard of a so-called "shotgun clause". It's analogous to the problem of fairly cutting a cake. One person cuts, the other person gets to pick a piece. IIRC, in the shotgun clause, one founder can demand that the other founder leave, and names a price for the company. If the other founder wants to stay, he can buy out the first founder for the named price. This sounds reasonable, except that founders might not actually have the money to buy out the other founder.
The investor who puts in $1000 for x% is an investor, not a founder. They have already completed _all_ their obligations.
The founders are "earning equity in return for work". Their obligation is to work for a period of time.
Incidentally int he case you're referring to, his shares would have been diluted in proportion to the "other 50%" - so his 50% then does not equal 50% now.
A lot of comments seem to be squabbling over details, but your startup is almost certainly going to fail, and the longer you haggle over splitting proceeds, the more likely failure is. Just split it and start working already!
If your company is a success, great, but is it really going to matter if you're worth 50 million vs. 60 million in the infinitesimal chance that it pops?
I'm working on starting a small worker co-operative. The advantages are normally considered for a large group (say, to increase buying power for interested consumers) but in the case of a lean startup, the law simplifies these questions. After bills and other fixed costs, you apportion net savings to the members proportionate to their contribution. Additionally, in a small group democratic (maybe even consensus) voting allows everyone to be equally in control of what is a joint partnership. I know Texas has laws covering "cooperative associations," can't speak for other states. Thoughts?
I'm actually planning something similar. I want to start my own business, and when I get to the point of bringing in other people, I want the company to be cooperatively owned.
Each person hired will get an equal share, but I'll probably put in some sort of probationary period (3-6 months), just for safety.
As for governance, it always makes sense to divide up responsibilities instead of making every decision via consensus, but for the big things (taking on a big financial risk, selling the company, etc) the employee-owners are the board, and get to make the decision.
- For ownership, fairness, and the perception of fairness, is the most important because arguments are very likely to kill the company. 50-50 is simple and acceptable.
- For stakes, divide people into layers by risks they take. Taking the biggest risks, founders the first layer should end up with 50% of the company, total. Each of the next layers take 10% respectively, split equally among everyone in the layer.
- Do use vesting to prevent some jerk that quit after two weeks and still think he owns 25% of the company for his two weeks’ work.
My thoughts.
- For founders, ownership can never be calculated accurately. We’re human beings, we can come up with excuses as many as possible to claim our benefits. That’s why 50-50 works in most cases.
- 50-50 is a perception of fairness, is a symbol of “Hey guys, we are equal to each other, we are working for our company, not any of us!”, no matter who brings up the idea, who has more experiences, etc.
- Ownership is a process, not a decision. What determine your cake is risks you took, value you created, how long and hard you got involved, etc. Instead of a meeting, a discussion, or even an email.
Holy good lord, that's a lot of equity for employees.
I can see this causing all kinds of problems. You're not going to allocate an option pool for employee layers one through five all at once, prior to your seed round, because that'd be massively dilutive to you in the event of an early sale. (The unused options go away, but the premoney the VC invested at takes the unused options into account.) But creating such hefty option pools down the road is going to cause issues with your existing investors, who at that point would be diluted.
The conflicting interests of founders and earlier investors (who don't want to be diluted by a large new option pool) and later, new investors (who want to make sure the company has a lot of options to incent new employees) will get you to an 'industry-standard pool' pretty naturally. Unless the market's changed dramatically recently, that standard pool is a hell of a lot smaller than what Joel's suggesting.
IIRC, in "Founders at Work", I think it was Vinod Khosla, who suggested to Excite (@Home) founders to have an unequal split based on a set of criteria, or it'll get ugly later (I'm paraphrasing). And I think it makes sense. Dividing everything equally amongst founders may make sense in the simplistic cases, but more often than not, people of varying capacities/skills come together to form a startup. It's better to not ignore those inequalities and design a split that address that upfront.
Do the founders get the equity in the meantime before the future "stripes" are granted? e.g, let's say after two rounds of 10% employee equity, the company gets acquired, leaving 30% that had been set aside for future rounds of employee equity, but never granted. I'm assuming the founders would split the remaining 30%? Curious if anyone had insight into why this would not be the case.
The general advice I've heard is you don't ever want 50/50 splits because if there are important decisions to be made, you can often end up in deadlock, and no one is truly in charge of making a final call or being responsible. Since I don't have enough karma on onstartups to ask Joel this, I'm curious what his response would be.
One way I've heard of to solve that problem is 45/45 and 10% to a mutually agreed upon third party (a mentor, say) who can (and has what it takes to) break those ties. I'm sure there's a bit more contractual magic to make sure the third party doesn't just sell off their part, and some people may balk at just giving away one tenth of their company. I would argue that if you're worried about 50/50 splits pulling your company apart, it's worth that small number of shares to keep your company going.
I hardly know whether to call my infostripe.com operation a startup or not. I've invested in good scalable hosting with rackspace and act as all dev/ceo/marketing roles.. it's early for us but I guess being a startup is a presence of mind in many ways.
Sounds like reasonable advice. And I'm reminded of how good of a writer Joel is when in peak form. I'm also a fan of Inc. magazine and it's been great to see both him and Jason Fried contributing in print there as well.
[+] [-] agmiklas|15 years ago|reply
At the same time, I see the difficulty with assigning a concrete value to the shares early on. The angel investment world solves this exact problem using convertible debt. Why not take the same approach with investments-in-kind made by the founders?
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
[+] [-] balloot|15 years ago|reply
If I work for someone, they need to compensate me right away. This may mean I receive an option grant that is eventually worthless, but at least in that case I would have had an upside to my risk. The IOU has no upside but has the same possibility of worthlessness.
[+] [-] michaelochurch|15 years ago|reply
In lieu of equity, deferred pay is a bad deal for the employee: no upside, only downside, and usually on terms that are a lot less creditor-friendly than what banks can negotiate.
A further problem with deferred pay is that when things become difficult, it's not much of a motivator. After a year or two, people assume they're never going to get it back and become resentful. It's better off for them to have equity, where they knew full well they might not be repaid.
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
This is a decent first-order approximation, but for true fairness, the valuation should be set at the time the deferred-payment arrangement is made and should be lower than what is expected from a VC in the future. Because a deal may not happen, the fair valuation when this arrangement is set is lower than the expected VC valuation.
[+] [-] Chocobean|15 years ago|reply
The fact that one founder may have bills to pay, and him being the only guy having to cash in very early, will beat the morale out of him: he'll be working as an employee. This is also your guy whose tolerance for risk is the lowest precisely because he's got bills to pay. He might as well quit and go work 9-5 for steady pay in that case.
[+] [-] zyfo|15 years ago|reply
Why? Hypothetically someone could take a standard loan and use that. That would be cumbersome, and sometimes impossible, but it wouldn't require a "super high" interest rate.
They both work as hard and they both share the same risks. If they fail, the IOU still applies. One just happen to have more money stashed away.
[+] [-] ghshephard|15 years ago|reply
I've been a first 10 employee (As an infrastructure contributor, not core engineer) twice in companies that eventually were valued at greater than $1 Billion. The first time I received 0.03% Equity (Before Dilution) - the second time I received 0.1% Equity (Before lots of dilution).
For one of those companies, I know that some of the core engineers received 3-4x what I did, so - extracting to all of the six core engineers in Layer 1, Plus the Administrative crew - comes around 6 * .4% + 3 * .1% = about 2.7% for the first nine employees. We had our series A before anybody came on board, as an employee.
There is probably a different allocation method for teams comprised of "Serial Entrepreneurs" - Your risk in joining that team is much less, so your equity is typically much less. Also, the approach usually goes like the following:
Step 1: Two - Four Founders create a company. Roughly sharing the equity, though, if there is a "Named" founder that will Garner Press/Financing/Customers, they take a bigger chunk.
Step 2: Founders brainstorm for month or two, commit to working together for a minimum of four-five years, and then go pitch their preferred VCs. VCs give them a valuation of $5-$10mm (pre-money) and invest $1mm-$2mm.
Step 3: First 5-10 Employees are hired, with a stock pool of 3%-10% - Sr. Employees with a great track record who currently have great jobs at Google/Facebook/etc.. will require a larger equity share. Out of work contributors who have a solid, if not exceptional track record will receive significantly less. The team now has a clock ticking, and has to demonstrate some traction within six-nine months to get their next round before the money runs out.
[+] [-] ookblah|15 years ago|reply
I resonate w/ this article a lot because to me, the appearance of fairness trumps everything. The 50/50 split lets me know that I don't have to worry about who does what exactly or who is working harder, but sets it up so we are both "all in". I feel like if you're debating equity split at that stage (provided you're both at the same point, quitting your job, etc) you're already setting up a rocky relationship. Either that or you're not really finding a co-founder, more of a dedicated employee.
I guess I'm just a little unclear on how you can define clearly what a "60/40" workload split looks like when they might not even be the same type of work.
[+] [-] bconway|15 years ago|reply
I guess I'm just a little unclear on how you can define clearly what a "60/40" workload split looks like when they might not even be the same type of work.
That's one of the advantages. It's fluid. 60/40 isn't measurable, but if you know you're providing more value than the other founder, it's going to be close enough unless the other one stops working entirely.
[+] [-] alain94040|15 years ago|reply
2. I respectfully disagree with Joel on certain aspects. He is very unclear about how to split equity among a few founders. He seems to advocate 50/50, which I strongly advise against. Fairness is one thing. But my litmus test is: if you quit, would the project die instantly? Then you are the CEO and you should get more.
I have advised tens of founders on those issues, including convincing some to fire useless co-founders. It's painful, but usually pretty clear when an outsider (like me) listens to all sides.
[+] [-] mduerksen|15 years ago|reply
1. Nitpick: What if all co-founders meet the criterion (i.e. the project would instantly die if he left)? Are all CEO's then?
2. Instant vs. delayed death: Lets say if A leaves, the project instantly dies - and if B leaves, the company will die the next 6 months if no replacement is found who is just as good. Who is more important? What if the skills of B are the leverage you depend on to become successful and stay competitive?
And with 2) you are right in the middle of the discussion you want to avoid: Who is worth how much, who works harder etc., which is just distracting because nobody can tell for sure, and endangering your company because it hurts morale. That's why I agree with Joel to just split equally. And as joeag has pointed out, since it's vested, co-founders that really turn out to be useless won't get a large chunk of the company anyway.
[+] [-] joeag|15 years ago|reply
[+] [-] klochner|15 years ago|reply
[+] [-] anamax|15 years ago|reply
I know of several technical startups products where the CEO can be replaced. Those companies would die if key technical people left. Since some of them have replaced CEOs already, their CEOs were not essential.
Are they doing it wrong? Should they have the tech people take on CEO responsibilities in addition to their tech work? What benefit will they get that compensates for the loss of tech productivity that will result from said shift?
[+] [-] StavrosK|15 years ago|reply
[+] [-] limist|15 years ago|reply
But for most other cases in the real world, these two resources offer a more rational and open/honest approach:
http://founderresearch.blogspot.com/2006/01/splitting-pie-fo...
http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...
[+] [-] staunch|15 years ago|reply
I created a poll, so maybe we can get some data: http://news.ycombinator.com/item?id=2445715
[+] [-] markklarich|15 years ago|reply
[+] [-] Chocobean|15 years ago|reply
[+] [-] barrkel|15 years ago|reply
If you go without salary, while the other people don't, and get IOUs, but the company goes bust anyhow, you'll be out of pocket but the other people won't. You're taking more risk; why not have more upside?
But the other side is this notion that reward is necessarily justified by risk. What if the company is motoring along steadily for a couple of years but as a lifestyle business, and then gets a star employee who creates a new product that takes off? Are they necessarily not justified in seeking more compensation - perhaps they have created more value than even the founders? Or are the founders better off with a bigger slice of a smaller pie, and not trying to reward innovation in their employee base?
[+] [-] jerrya|15 years ago|reply
Sure. That is treating that early founder as founder + lender and recognizing that IOU as a debt of the company.
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] ozataman|15 years ago|reply
Consider when you have a technical and a semi or non-technical founder. Let's say the technical founder is the visionary for the product you are building, understands what the customer needs (which means he has some/good business savvy) and give direction to all engineering related activities - from technology stack selection to what features and how they will be built. He/she is the one who will take the lead in defining the product and its -hopefully- many iterations going forward. A quick high profile example that comes to mind is Mr. Zuckerberg - he did the programming and he continues to give direction to the product.
Now you also have the semi/non-technical founder, who is obviously there because he/she is talented, smart and will have large impact going forward in building customer relationships and contribute to higher level discussion on where the products should go. There is a good chance the company won't go anywhere without this guy either.
How would you now do the split? A 50/50 arrangement would mean both parties get the same say/leadership over where the company/technology needs to go. Is that right? This is not about money, as both parties will be in good shape as long as a reasonable arrangement is chosen. It is about what is fair/right/sensible regarding what the company is going to be about and how it is run.
[+] [-] bravura|15 years ago|reply
I've heard of a so-called "shotgun clause". It's analogous to the problem of fairly cutting a cake. One person cuts, the other person gets to pick a piece. IIRC, in the shotgun clause, one founder can demand that the other founder leave, and names a price for the company. If the other founder wants to stay, he can buy out the first founder for the named price. This sounds reasonable, except that founders might not actually have the money to buy out the other founder.
[+] [-] acangiano|15 years ago|reply
Or half the company for a $1000 investment.
[+] [-] bruce511|15 years ago|reply
The investor who puts in $1000 for x% is an investor, not a founder. They have already completed _all_ their obligations.
The founders are "earning equity in return for work". Their obligation is to work for a period of time.
Incidentally int he case you're referring to, his shares would have been diluted in proportion to the "other 50%" - so his 50% then does not equal 50% now.
[+] [-] kchodorow|15 years ago|reply
If your company is a success, great, but is it really going to matter if you're worth 50 million vs. 60 million in the infinitesimal chance that it pops?
[+] [-] Murkin|15 years ago|reply
Anyone has example of a startup that actually did that ?
AFAIK the total employee pool is rarely beyond 15% total. And that number is for a few layers ahead.
[+] [-] gatlin|15 years ago|reply
[+] [-] autarch|15 years ago|reply
Each person hired will get an equal share, but I'll probably put in some sort of probationary period (3-6 months), just for safety.
As for governance, it always makes sense to divide up responsibilities instead of making every decision via consensus, but for the big things (taking on a big financial risk, selling the company, etc) the employee-owners are the board, and get to make the decision.
[+] [-] bradleyjoyce|15 years ago|reply
[+] [-] imwilsonxu|15 years ago|reply
- For ownership, fairness, and the perception of fairness, is the most important because arguments are very likely to kill the company. 50-50 is simple and acceptable.
- For stakes, divide people into layers by risks they take. Taking the biggest risks, founders the first layer should end up with 50% of the company, total. Each of the next layers take 10% respectively, split equally among everyone in the layer.
- Do use vesting to prevent some jerk that quit after two weeks and still think he owns 25% of the company for his two weeks’ work.
My thoughts.
- For founders, ownership can never be calculated accurately. We’re human beings, we can come up with excuses as many as possible to claim our benefits. That’s why 50-50 works in most cases.
- 50-50 is a perception of fairness, is a symbol of “Hey guys, we are equal to each other, we are working for our company, not any of us!”, no matter who brings up the idea, who has more experiences, etc.
- Ownership is a process, not a decision. What determine your cake is risks you took, value you created, how long and hard you got involved, etc. Instead of a meeting, a discussion, or even an email.
[+] [-] earlyresort|15 years ago|reply
I can see this causing all kinds of problems. You're not going to allocate an option pool for employee layers one through five all at once, prior to your seed round, because that'd be massively dilutive to you in the event of an early sale. (The unused options go away, but the premoney the VC invested at takes the unused options into account.) But creating such hefty option pools down the road is going to cause issues with your existing investors, who at that point would be diluted.
The conflicting interests of founders and earlier investors (who don't want to be diluted by a large new option pool) and later, new investors (who want to make sure the company has a lot of options to incent new employees) will get you to an 'industry-standard pool' pretty naturally. Unless the market's changed dramatically recently, that standard pool is a hell of a lot smaller than what Joel's suggesting.
[+] [-] slowpoison|15 years ago|reply
[+] [-] krosaen|15 years ago|reply
[+] [-] ry0ohki|15 years ago|reply
[+] [-] _chap|15 years ago|reply
If the 2 founders can't make a contentious decision as a team, they're not much of a team.
[+] [-] patrickyeon|15 years ago|reply
[+] [-] hxf148|15 years ago|reply
[+] [-] fedd|15 years ago|reply
Zuckerbergs need Sean Parkers so that VC would invest faster
[+] [-] mkramlich|15 years ago|reply
[+] [-] fredwilson|15 years ago|reply
a little humor goes a long way