4 ms·

I've been considering this... now, I've been pouring all my personal resources into my company for five years now, so this is something of a special case. The

by lsc 16y ago

I've been considering this... now, I've been pouring all my personal resources into my company for five years now, so this is something of a special case. The thing is, other people want to get involved, people who have skills worth more than I can pay in cash. I know that I have more dedication than they do. If we are where we are now a year from now, I'll still be plugging away at it. No other rational person would feel the same way. So, my thought is that every year or so, we simulate another round of funding. We dilute all current stock by the amount of money we'd need to pay everyone market rate, and distribute the new shares based on the difference between a person's market value and the cash they actually got paid. This would be pretty similar to the effect we'd get if we did everything in cash, and got a new round of funding every year to pay salaries. What I like about it is that if you worked for me three years ago but then lost interest, your equity stake would slowly shrink as I kept pouring in another $80K/year worth of unpaid labour into the thing. Of course my case is a special case. most of the time the idea is that if one founder loses interest, the company goes under and that's that.

staunch 16y ago
It sounds like you just need to setup an option pool (with 4 year vesting) and hand out equity to some senior level employees. Why do anything more complicated than that?
- lsc 16y ago
  so, if you don't stick around for four years, you get squat? or you get 25% of that a year? the former sounds a bit too draconian. I mean, I don't expect anyone (save for myself) to stick around that long. the latter would stick me with the same problem I have now... the thing is, every year that goes on, I'm investing what amounts to a pretty large chunk of cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon, my ongoing contributions should mean something, too. My point is that without dilution, as time goes on and I accumulate more (no longer working) people with percentage ownership in the company, my motivation to continue to invest decreases. If the company increases in value fast enough (and if my free-market value doesn't increase dramatically) that the percentage of the company I still own is worth the investment, we don't have a problem. But if I become more valuable or if the value of the company stagnates, my motivation for continuing to invest will decrease with my percentage ownership. I'll be thinking more about how to buy out those who are no longer with me rather than using those resources to move the company forward. I could issue a new options pool (that dilutes existing shares) every year, but I don't really see the difference between that and what I proposed, other than it's options rather than equity.
  - staunch 16y ago
    Normally the vesting would be quarterly over 4 years with a 1 year "cliff". So 0% until 1 year (then 25%) then every quarter they'd get the next chunk. The equity they get should be a reward for work they've done, not work they're going to do. So if they work their ass off for years they should get their equity and you shouldn't feel negatively about it. Their piece should be quite small relative to yours. If you gave out 15% in an option pool only 7% of it might have been vested and exercised. That's not very much if it meant you got to have really great people work their ass off for you over years. If you do it right you will not regret them owning a small piece of your company because they should have contributed to moving it forward in a big way. You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it."
    - lsc 16y ago
      >You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it." Now, admittedly, I'm somewhat irrational about my company. For the first four years, I think only an irrational person would have stuck around. But it still seems like it would be very easy to get into a situation where I've spent away the company. For example, say the company is worth $200K. (It's worth a little more than that, but in this industry, you are talking around a year revenue plus the value of your equipment, so valuations are really low compared to, say, social networks.) so I hire someone worth $130K and I pay them $30K, because I can afford that and they need to make rent. To make things fair, I need to give them half the company for a years work, right? Yeah, after that first year, I'd feel fine about it. they put in a bunch of good work and improved the company. But, say they quit because I am an idiot and I overestimated the value of the product we built, so the company is now only worth, say $300K and still can't pay anyone reasonable salaries. So, would I work another year? this time needing to grow the company twice as fast to feel the same effects? maybe. but the year after that? yeah I'm pretty sure I'd decide it's time to close up shop and start a new company or to get a real job.
      - staunch 16y ago

by lsc 16y ago

staunch 16y ago

It sounds like you just need to setup an option pool (with 4 year vesting) and hand out equity to some senior level employees. Why do anything more complicated than that?

lsc 16y ago
so, if you don't stick around for four years, you get squat? or you get 25% of that a year? the former sounds a bit too draconian. I mean, I don't expect anyone (save for myself) to stick around that long. the latter would stick me with the same problem I have now... the thing is, every year that goes on, I'm investing what amounts to a pretty large chunk of cash into the company. If you earned 10% 5 years ago, that's fine, but c'mon, my ongoing contributions should mean something, too. My point is that without dilution, as time goes on and I accumulate more (no longer working) people with percentage ownership in the company, my motivation to continue to invest decreases. If the company increases in value fast enough (and if my free-market value doesn't increase dramatically) that the percentage of the company I still own is worth the investment, we don't have a problem. But if I become more valuable or if the value of the company stagnates, my motivation for continuing to invest will decrease with my percentage ownership. I'll be thinking more about how to buy out those who are no longer with me rather than using those resources to move the company forward. I could issue a new options pool (that dilutes existing shares) every year, but I don't really see the difference between that and what I proposed, other than it's options rather than equity.
- staunch 16y ago
  Normally the vesting would be quarterly over 4 years with a 1 year "cliff". So 0% until 1 year (then 25%) then every quarter they'd get the next chunk. The equity they get should be a reward for work they've done, not work they're going to do. So if they work their ass off for years they should get their equity and you shouldn't feel negatively about it. Their piece should be quite small relative to yours. If you gave out 15% in an option pool only 7% of it might have been vested and exercised. That's not very much if it meant you got to have really great people work their ass off for you over years. If you do it right you will not regret them owning a small piece of your company because they should have contributed to moving it forward in a big way. You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it."
  - lsc 16y ago
    >You should be thinking "Bob quit and owns 1.25% but he did do X and that helped us grow so quickly and smoothly it was totally worth it." Now, admittedly, I'm somewhat irrational about my company. For the first four years, I think only an irrational person would have stuck around. But it still seems like it would be very easy to get into a situation where I've spent away the company. For example, say the company is worth $200K. (It's worth a little more than that, but in this industry, you are talking around a year revenue plus the value of your equipment, so valuations are really low compared to, say, social networks.) so I hire someone worth $130K and I pay them $30K, because I can afford that and they need to make rent. To make things fair, I need to give them half the company for a years work, right? Yeah, after that first year, I'd feel fine about it. they put in a bunch of good work and improved the company. But, say they quit because I am an idiot and I overestimated the value of the product we built, so the company is now only worth, say $300K and still can't pay anyone reasonable salaries. So, would I work another year? this time needing to grow the company twice as fast to feel the same effects? maybe. but the year after that? yeah I'm pretty sure I'd decide it's time to close up shop and start a new company or to get a real job.
    - staunch 16y ago