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I'd like to read about first-hand experiences founding startups with equal or unequal equity splits. 30+ year old company, started with equal split (5 ways, 1
by e40 8y ago
I'd like to read about first-hand experiences founding startups with equal or unequal equity splits.
30+ year old company, started with equal split (5 ways, 1 founder bought out early).
We are not hugely successful, though I have a nice house in a nice & expensive city because of it. It is my belief the company would not exist if the CEO had gotten control early on. The equal equity was a check & balance on his power. However, there are really two possibilities:
1. The check on his power prevented us from being wildly successful because there was too much consensus needed for risky, but potentially rewarding, decisions.
2. The check on his power prevented him from screwing over everyone else.
On #2. About 7 years after starting, my CEO intimated to me that he made a huge mistake with the initial equity split, and when I asked why, he said he would be cash cowing the business for his own personal gain and he would be much wealthier. Now, he didn't phrase it just like that, but that's what he meant.
The truth is, once you have control of the shares, you can do anything to anyone.
I won't give the name (let's call him Mr. X), but an early investor in the company was serially successful at startups and making a lot of money. Two related facts about him:
* One of X's co-founders once told our CEO that he made almost nothing from the startup that X had made many millions from. His initial stock had been diluted to nothing, because X controlled the majority of shares and the board.
* In the 90s the SEC went after X for dubious sales practices (selling hardware and buying it back under the table to inflate company value... yes, they were public). He paid a large fine and agreed not to be an officer of a corporation for 10 years, but he died before that expired.
After these two events, I started to look at successful people in an entirely different light. Nothing I've learned in the 20 years since has changed the view that 99.9% of successful people, aside from being smart and hard working, are either in the right place at the right time or use ethically dubious methods to get ahead. There are exceptions, but they are exceedingly rare.
Sorry for the rant.
- tasuki 8y ago> in the right place at the right time This is clearly the key. (I wonder how much of it is luck, and how much a myriad of other factors.) > or use ethically dubious methods to get ahead Some do, but without being in the right place at the right time, it won't lead to success.
- e40 8y agoThere are degrees of success, though. That's what I was trying to convey. There are many times over the last 30+ years that I've thought if I did X, I would have a lot more money (personally) than I do now, but I never even considered X because I wouldn't have been able to sleep at night. My Mr. X clearly had no such restriction.
- technologia 8y agoI relate with the latter part of your story. A company I helped found had an uneven equity split. I was focused on building our platform out and didn't really care about the equity after we set the initial split; Because I was so naive and had a co-founder like your Mr.X, only my equity share was diluted each time we hired someone. Eventually I noticed but it was far too late for me to do anything about it; Years later I carry this lesson with me to constantly pay attention. [edit]: Forgot to mention my Mr.X drove the company into the ground after I left.
- jerguismi 8y agoWhen doing business, you have to look after yourself. In this case you could have been follwing what the co-founder was doing, and you should have brought up that you don't consider it fair. Things are simpler when there is some simple measure of "fairness", such as salary. With equity it is always more complex, since equity also relates to the risk position, is hard to assign value to, etc.
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- jiveturkey 8y ago> 1. The check on [CEO's] power prevented us from being wildly successful because there was too much consensus needed for risky, but potentially rewarding, decisions. Wait, so equity share dictates consensus? In my 20 years of working in startups, I haven't seen a relationship between share ownership and board control (other than chairman) and the company executives. The CEO dictates what happens, period. He can either be a consensus builder -- to his benefit or detriment as the case may be -- or a dictator ala Jobs. Just because everyone has an equal share doesn't mean the CEO needs to build consensus. And he doesn't need a check & balance on power. He is in the position of CEO because the rest of the folks trust his leadership, not because he has 1/5 + 1 shares. It sounds like you had poor corporate governance, unrelated to equity sharing. EDIT: TFA states this directly, as well. > Unequal co-founder relationships are a way to dampen future co-founder issues. By making it clear how decisions are made and who is in charge early, you decrease the likelihood of a founder blow up. This is separate from how you divide equity ...
- optimuspaul 8y agoI'm sure there is a lot more nuance to the power dynamics and psychological barriers when one is essentially a minority shareholder yet in control. But overall I tend to agree with your response.
- e40 8y agoWait, so equity share dictates consensus? In my 20 years of working in startups, I haven't seen a relationship between share ownership and board control (other than chairman) and the company executives. If all the shareholders are employees and the CEO has a minority share and the other employees have a majority, then they can force the CEO out fairly easily. That kept things civil, in our case. Just because everyone has an equal share doesn't mean the CEO needs to build consensus. Again, you are right, to a degree, but even if all employee founders were fired, they could band together, in the situation being discussed, and toss the CEO. That changes the psychology of the situation.
- sonnyblarney 8y ago"Just because everyone has an equal share doesn't mean the CEO needs to build consensus." If they other co-founders own more than 50% of the equity that's a very legit thing and they can call a board meeting instantly and make mega changes including getting rid of the CEO. Moreover - in the early stages among founders there has to be at least basic consensus or you're dead. Otherwise there is literally no team. The CEO should be given more leeway, but it's not always so clear either. There's a reason the others are 'co-founders' and not 'first employees'.
- deleted 8y ago[deleted]