As a co-founder who got screwed on a large acquisition, it makes me happy to see that Snapchat finally settled. However, a settlement doesn't change the fact that Evan Spiegel really went out of his way to intentionally screw the guy that actually invented Snapchat's model - and seemed to enjoy doing it. He's definitely not someone I'd ever do business with.
What's more frightening to me is how many VCs and other investors who went along with the charade and did not care that this criminal was a representative of them.
A few friends of mine saw Evan speak at Stanford this past spring. He was in a room with Eric Schmidt and Sam Altman (IIRC) and his attitude towards them was nothing short of smug. I don't remember the specifics of what he said but my friends said he basically "told Eric, Sam and other prominent VCs on the panel off because he thought he was more successful than them".
I wonder how such things become possible. As co-founders shouldn't you have a written (and lawyer checked) agreement on how the company is shared amongst you?
How can one betray the other besides of letting him/her unknowingly sign an unfortunate contract?
I was going to link to the mandatory reading of Joel Spolsky's canonical answer on splitting shares in startups between founders and beyond. But as Stack Exchange's policy of shuttering less popular subsites that is now lost in its original form :( It was originally here http://answers.onstartups.com/questions/6949/forming-a-new-s... Is there a good reproduction elsewhere?
This is such a common question here and elsewhere that I will attempt to write the world’s most canonical answer to this question. Hopefully in the future when someone on answers.onstartups asks how to split up the ownership of their new company, you can simply point to this answer.
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc. That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because “it was my idea,” or because “I was more experienced” or anything else. Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, “to heck with it, we can NEVER figure out what the correct split is, so let’s just be pals and go 50-50,” you’ll stay friends and the company will survive.
Thus, I present you with Joel’s Totally Fair Method to Divide Up The Ownership of Any Startup.
For simplicity sake, I’m going to start by assuming that you are not going to raise venture capital and you are not going to have outside investors. Later, I’ll explain how to deal with venture capital, but for now assume no investors.
Also for simplicity sake, let’s temporarily assume that the founders all quit their jobs and start working on the new company full time at the same time. Later, I’ll explain how to deal with founders who do not start at the same time.
Here’s the principle. As your company grows, you tend to add people in “layers”.
The top layer is the first founder or founders. There may be 1, 2, 3, or more of you, but you all start working about the same time, and you all take the same risk… quitting your jobs to go work for a new and unproven company.
The second layer is the first real employees. By the time you hire this layer, you’ve got cash coming in from somewhere (investors or customers–doesn’t matter). These people didn’t take as much risk because they got a salary from day one, and honestly, they didn’t start the company, they joined it as a job.
The third layer are later employees. By the time they joined the company, it was going pretty well.
For many companies, each “layer” will be approximately one year long. By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. There might be two founders, five early employees in layer 2, 25 employees in layer 3, and 200 employees in layer 4. The later layers took less risk.
OK, now here’s how you use that information:
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.
Example:
Two founders start the company. They each take 2500 shares. There are 5000 shares outstanding, so each founder owns half.
They hire four employees in year one. These four employees each take 250 shares. There are 6000 shares outstanding.
They hire another 20 employees in year two. Each one takes 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we’re giving each layer 1000 shares to divide up.
By the time the company has six layers, you have given out 10,000 shares. Each founder ends up owning 25%. Each employee layer owns 10% collectively. The earliest employees who took the most risk own the most shares.
Make sense? You don’t have to follow this exact formula but the basic idea is that you set up “stripes” of seniority, where the top stripe took the most risk and the bottom stripe took the least, and each “stripe” shares an equal number of shares, which magically gives employees more shares for joining early.
A slightly different way to use the stripes is for seniority. Your top stripe is the founders, below that you reserve a whole stripe for the fancy CEO that you recruited who insisted on owning 10%, the stripe below that is for the early employees and also the top managers, etc. However you organize the stripes, it should be simple and clear and easy to understand and not prone to arguments.
Now that we have a fair system set out, there is one important principle. You must have vesting.Preferably 4 or 5 years. Nobody earns their shares until they’ve stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it’s terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there’s some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Now, let me clear up some little things that often complicate the picture.
What happens if you raise an investment? The investment can come from anywhere… an angel, a VC, or someone’s dad. Basically, the answer is simple: the investment just dilutes everyone.
Using the example from above… we’re two founders, we gave ourselves 2500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2500 shares. So you make another 2500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That’s all there is to it.
What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money saved up, so she decides to go without a salary for a while, while the other founder, who needs the money, takes a salary. It is tempting just to give the founder who went without pay more shares to make up for it. The trouble is that you can never figure out the right amount of shares to give. This is just going to cause conflicts. Don’t resolve these problems with shares.Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU. Later, when you have money, you’ll pay them back in cash. In a few years when the money comes rolling in, or even after the first VC investment, you can pay back each founder so that each founder has taken exactly the same amount of salary from the company.
Shouldn’t I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to pay someone in equity for an idea. If one of you had the idea but you both quit your jobs and started working at the same time, you should both get the same amount of equity. Working on the company is what causes value, not thinking up some crazy invention in the shower.
What if one of the founders doesn’t work full time on the company? Then they’re not a founder. In my book nobody who is not working full time counts as a founder. Anyone who holds on to their day job gets a salary or IOUs, but not equity. If they hang onto that day job until the VC puts in funding and then comes to work for the company full time, they didn’t take nearly as much risk and they deserve to receive equity along with the first layer of employees.
What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in cash or IOUs, not shares. Figure out the right price for that computer they brought with them, or their clever word-processing patent, and give them an IOU to be paid off when you’re doing well. Trying to buy things with equity at this early stage just creates inequality, arguments, and unfairness.
How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end up owning more than 50%, the founders are going to feel like sharecroppers and lose motivation, so good investors don’t get greedy that way. If the company can bootstrap without investors, the founders and employees might end up owning 100% of the company. Interestingly enough, the pressure is pretty strong to keep things balanced between investors and founders/employees; an old rule of thumb was that at IPO time (when you had hired all the employees and raised as much money as you were going to raise) the investors would have 50% and the founders/employees would have 50%, but with hot Internet companies in 2011, investors may end up owning a lot less than 50%.
Conclusion
There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, straightforward, and, above-all, fair, will make your company much more likely to be successful.
Money. Greed. It destroys more friendships (and marriages) than anything else.
So what's the lesson here? Don't be careless. I don't care what the idea (startup) is - get the details on paper. True, 99% of startups fail, but you don't want to be in that 1% that's making the lawyers rich.
>> Money. Greed. It destroys more friendships (and marriages) than anything else.
This a thousand time.
My first hard earned rule of thumb? Don't do business with your friends. Lost relationships, bitterness, and great financial loss is never worth it. I got burned really bad and spent the better part of four years trying to get my money back.
I think the other lesson here is to consciously know when you cross the line away from an amount of money you're willing to walk away from to save the friendship, and be sure that's what you want.
After the 3rd mention of Apple before the story intro was completed, in an article that (by all appearances) isn't actually about Apple at all, I decided that this just isn't a news source worth reading.
The value of the company is already so high that much of the upside is removed. You really have to believe in the company as a whole to make that commitment.
depends on what you want out of the job.. Are you looking to establish yourself as a good engineer?
Hoping to make big money?
Looking for a good salary, perks etc?
Back in the day, I was a co-founder in a company, started by my advisor's wife. She called us (me and a colleague) to their house, and promised the two of us 20% ownership (and the remaining 60% she kept).
I worked like a dog for about 1.5 years, spending nights and weekends getting it off the ground (the business was website creation and other backend stuff). We managed to get the ear of one of the largest grocery chains in the country, and their VP came over to talk to us. My ideas were the core of the presentation. As soon as it looked like it might take off, she started cutting me out. Then one day, the locks were changed in the office!
As her husband was still my advisor, I couldn't do anything but grumble and continue working on my dissertation.
A few years later, the company was sold for $30MM.
We all do. I've got several -- one involving me and two more involving others -- that are so weird I'd have to tone them down quite a bit to make them believable.
Not Apple's fault per se, just the Silicon Valley equivalent of a "Friday Night News Dump" that's common in industry and government.[1] It happened to be Apple this time, but it could have just as easily been a Google acquisition, some new Amazon product, basically anything guaranteed to get most of the attention and press.
It's interesting the news on Tinder and Snap Chat came around the same time of Apple’s new iPhones and iWatch release. In fact, it's no coincidence they must have been trying to hide behind the noise.
Seems a bit comical that the article claims this to be the first disappearing photo app. I created and launched one myself a year before Snapchat started...
The normal way for start founders to receive equity, is only from one or more of these 3 things:
- For hours worked, based on the vesting and usually the hours must be beyond the cliff or you get nothing.
- If you built a crucial part of the IP that the company needs to buy from you with equity.
- Cash invested up front - less common.
He fulfilled none of those. Not even close to being a cofounder. Ideas aren't included among those.
You're right, of course, but if young and stupid entrepreneurs say something like "We'll split the company evenly between us" and any semblance of work happens then there will eventually come a day when they'd told that the law does not treat that statement as a code comment. Triply so if they are just smart enough to cut themselves and memorialize their agreement on paper.
While I might agree that contributing a simple idea to a startup isn't generally worth a stake in it, driving that startup with a broad, complex vision over its development certainly is.
Unfortunately, I've met founders that equate the latter with the former, and think it's fine to steal off with "ideas" that people have worked on for years because "well, ideas have no value, only implementation does." If the "idea" is several paragraphs (or even pages) long, and includes comprehensive implementation details, it has value. No question.
Now, SnapChat, I agree, there isn't really much going on there beyond a one-sentence pitch. But not all ideas are that simple, and the complex ones are given inherent value by their complexity.
I don't think it really matters at all what exactly you did if there was an agreement that you get a third of the equity.
Reggie's mistake was not getting it in contractual form. However, clearly the law still takes clearly communicated pacts between friends somewhat seriously, as it forced Snapchat to settle.
Its true that it's not the idea but the execution that matters for any startup. However in this case, snapchats virality was in the idea(even if it has been done before). The execution side, vs photo apps like Instagram, was simpler and less complicated. Moreover, he was involved in the initial development of the app. He deserved better.
[+] [-] downandout|11 years ago|reply
http://www.businessinsider.com/snapchat-lawsuit-video-deposi...
[+] [-] gsibble|11 years ago|reply
[+] [-] mbesto|11 years ago|reply
Take that for what it's worth.
[+] [-] stigi|11 years ago|reply
How can one betray the other besides of letting him/her unknowingly sign an unfortunate contract?
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] nailer|11 years ago|reply
Nothing unique (disappearing photo apps existed before, see the rest of the thread).
No programming expertise, he didn't make anything.
[+] [-] flurdy|11 years ago|reply
[+] [-] dvdhsu|11 years ago|reply
"""
This is such a common question here and elsewhere that I will attempt to write the world’s most canonical answer to this question. Hopefully in the future when someone on answers.onstartups asks how to split up the ownership of their new company, you can simply point to this answer.
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc. That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because “it was my idea,” or because “I was more experienced” or anything else. Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, “to heck with it, we can NEVER figure out what the correct split is, so let’s just be pals and go 50-50,” you’ll stay friends and the company will survive.
Thus, I present you with Joel’s Totally Fair Method to Divide Up The Ownership of Any Startup.
For simplicity sake, I’m going to start by assuming that you are not going to raise venture capital and you are not going to have outside investors. Later, I’ll explain how to deal with venture capital, but for now assume no investors.
Also for simplicity sake, let’s temporarily assume that the founders all quit their jobs and start working on the new company full time at the same time. Later, I’ll explain how to deal with founders who do not start at the same time.
Here’s the principle. As your company grows, you tend to add people in “layers”.
The top layer is the first founder or founders. There may be 1, 2, 3, or more of you, but you all start working about the same time, and you all take the same risk… quitting your jobs to go work for a new and unproven company. The second layer is the first real employees. By the time you hire this layer, you’ve got cash coming in from somewhere (investors or customers–doesn’t matter). These people didn’t take as much risk because they got a salary from day one, and honestly, they didn’t start the company, they joined it as a job. The third layer are later employees. By the time they joined the company, it was going pretty well. For many companies, each “layer” will be approximately one year long. By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. There might be two founders, five early employees in layer 2, 25 employees in layer 3, and 200 employees in layer 4. The later layers took less risk.
OK, now here’s how you use that information:
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.
Example:
Two founders start the company. They each take 2500 shares. There are 5000 shares outstanding, so each founder owns half. They hire four employees in year one. These four employees each take 250 shares. There are 6000 shares outstanding. They hire another 20 employees in year two. Each one takes 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we’re giving each layer 1000 shares to divide up. By the time the company has six layers, you have given out 10,000 shares. Each founder ends up owning 25%. Each employee layer owns 10% collectively. The earliest employees who took the most risk own the most shares. Make sense? You don’t have to follow this exact formula but the basic idea is that you set up “stripes” of seniority, where the top stripe took the most risk and the bottom stripe took the least, and each “stripe” shares an equal number of shares, which magically gives employees more shares for joining early.
A slightly different way to use the stripes is for seniority. Your top stripe is the founders, below that you reserve a whole stripe for the fancy CEO that you recruited who insisted on owning 10%, the stripe below that is for the early employees and also the top managers, etc. However you organize the stripes, it should be simple and clear and easy to understand and not prone to arguments.
Now that we have a fair system set out, there is one important principle. You must have vesting.Preferably 4 or 5 years. Nobody earns their shares until they’ve stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it’s terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there’s some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Now, let me clear up some little things that often complicate the picture.
What happens if you raise an investment? The investment can come from anywhere… an angel, a VC, or someone’s dad. Basically, the answer is simple: the investment just dilutes everyone.
Using the example from above… we’re two founders, we gave ourselves 2500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2500 shares. So you make another 2500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That’s all there is to it.
What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money saved up, so she decides to go without a salary for a while, while the other founder, who needs the money, takes a salary. It is tempting just to give the founder who went without pay more shares to make up for it. The trouble is that you can never figure out the right amount of shares to give. This is just going to cause conflicts. Don’t resolve these problems with shares.Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU. Later, when you have money, you’ll pay them back in cash. In a few years when the money comes rolling in, or even after the first VC investment, you can pay back each founder so that each founder has taken exactly the same amount of salary from the company.
Shouldn’t I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to pay someone in equity for an idea. If one of you had the idea but you both quit your jobs and started working at the same time, you should both get the same amount of equity. Working on the company is what causes value, not thinking up some crazy invention in the shower.
What if one of the founders doesn’t work full time on the company? Then they’re not a founder. In my book nobody who is not working full time counts as a founder. Anyone who holds on to their day job gets a salary or IOUs, but not equity. If they hang onto that day job until the VC puts in funding and then comes to work for the company full time, they didn’t take nearly as much risk and they deserve to receive equity along with the first layer of employees.
What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in cash or IOUs, not shares. Figure out the right price for that computer they brought with them, or their clever word-processing patent, and give them an IOU to be paid off when you’re doing well. Trying to buy things with equity at this early stage just creates inequality, arguments, and unfairness.
How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end up owning more than 50%, the founders are going to feel like sharecroppers and lose motivation, so good investors don’t get greedy that way. If the company can bootstrap without investors, the founders and employees might end up owning 100% of the company. Interestingly enough, the pressure is pretty strong to keep things balanced between investors and founders/employees; an old rule of thumb was that at IPO time (when you had hired all the employees and raised as much money as you were going to raise) the investors would have 50% and the founders/employees would have 50%, but with hot Internet companies in 2011, investors may end up owning a lot less than 50%.
Conclusion
There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, straightforward, and, above-all, fair, will make your company much more likely to be successful.
"""
[+] [-] jlukanta|11 years ago|reply
[+] [-] Karunamon|11 years ago|reply
[+] [-] crag|11 years ago|reply
So what's the lesson here? Don't be careless. I don't care what the idea (startup) is - get the details on paper. True, 99% of startups fail, but you don't want to be in that 1% that's making the lawyers rich.
[+] [-] at-fates-hands|11 years ago|reply
This a thousand time.
My first hard earned rule of thumb? Don't do business with your friends. Lost relationships, bitterness, and great financial loss is never worth it. I got burned really bad and spent the better part of four years trying to get my money back.
Since then, it's just something I live by.
[+] [-] TallGuyShort|11 years ago|reply
[+] [-] at-fates-hands|11 years ago|reply
Now she finally wins her case and its like a blip on the radar? Pretty sad if you ask me.
[+] [-] tomp|11 years ago|reply
[+] [-] maxbrown|11 years ago|reply
[+] [-] dreamweapon|11 years ago|reply
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] snoman|11 years ago|reply
[+] [-] curiousDog|11 years ago|reply
[+] [-] dkfmn|11 years ago|reply
[+] [-] jacquesm|11 years ago|reply
[+] [-] sunievl|11 years ago|reply
[+] [-] autism_hurts|11 years ago|reply
I have an experience...
[+] [-] discardorama|11 years ago|reply
I think we all do! ;-)
Back in the day, I was a co-founder in a company, started by my advisor's wife. She called us (me and a colleague) to their house, and promised the two of us 20% ownership (and the remaining 60% she kept).
I worked like a dog for about 1.5 years, spending nights and weekends getting it off the ground (the business was website creation and other backend stuff). We managed to get the ear of one of the largest grocery chains in the country, and their VP came over to talk to us. My ideas were the core of the presentation. As soon as it looked like it might take off, she started cutting me out. Then one day, the locks were changed in the office!
As her husband was still my advisor, I couldn't do anything but grumble and continue working on my dissertation.
A few years later, the company was sold for $30MM.
[+] [-] api|11 years ago|reply
[+] [-] ma2rten|11 years ago|reply
[+] [-] notastartup|11 years ago|reply
[+] [-] don_right|11 years ago|reply
[deleted]
[+] [-] jedanbik|11 years ago|reply
[+] [-] mikeyouse|11 years ago|reply
[1] - http://www.rff.org/Publications/Pages/PublicationDetails.asp...
[+] [-] serge2k|11 years ago|reply
[+] [-] TaoloModisi|11 years ago|reply
[+] [-] nl|11 years ago|reply
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] compare|11 years ago|reply
The normal way for start founders to receive equity, is only from one or more of these 3 things:
- For hours worked, based on the vesting and usually the hours must be beyond the cliff or you get nothing.
- If you built a crucial part of the IP that the company needs to buy from you with equity.
- Cash invested up front - less common.
He fulfilled none of those. Not even close to being a cofounder. Ideas aren't included among those.
[+] [-] jacquesm|11 years ago|reply
I wrote a longish answer to your comment here:
https://news.ycombinator.com/item?id=8295469
[+] [-] patio11|11 years ago|reply
[+] [-] empressplay|11 years ago|reply
Unfortunately, I've met founders that equate the latter with the former, and think it's fine to steal off with "ideas" that people have worked on for years because "well, ideas have no value, only implementation does." If the "idea" is several paragraphs (or even pages) long, and includes comprehensive implementation details, it has value. No question.
Now, SnapChat, I agree, there isn't really much going on there beyond a one-sentence pitch. But not all ideas are that simple, and the complex ones are given inherent value by their complexity.
[+] [-] nilkn|11 years ago|reply
Reggie's mistake was not getting it in contractual form. However, clearly the law still takes clearly communicated pacts between friends somewhat seriously, as it forced Snapchat to settle.
[+] [-] truncate|11 years ago|reply
[+] [-] bmurali|11 years ago|reply
[+] [-] mrjatx|11 years ago|reply