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> I think the way it works in most startups is that you agree to an equity split, and if one founder leaves, the company dies or you buy him out and that's that

> I think the way it works in most startups is that you agree to an equity split, and if one founder leaves, the company dies or you buy him out and that's that. It is increasingly common for founders to have vesting schedules to prevent this exact issue. If the founders have a four year vesting schedule and one founder bails after year one, then they forfeit the un-vested equity. >Now, each time they go out for another round of funding, their old investors are diluted by the new shares created to sell to new investors. Yes and no. It depends on the valuation. A previous investor's absolute ownership percentage may decrease in subsequent funding rounds. But, if the valuation increase outpaces the rate of dilution the previous investor winds up ahead. For example, Peter Thiel's ownership in Facebook has been diluted in subsequent funding rounds but the value of his investment has increased many times over based off of the increased valuations. >My thought is that every 6-12 months or so, we simulate another round of funding. This sounds overly complicated. Rather than the equity gymnastics, why not implement a profit sharing program for your employees? This seems more appropriate anyway since it sounds like you are focused on running this as a lifestyle business for the long haul. If you are set on providing equity, then why not just create a standard employee option pool (i.e. carve out 10-20% of shares outstanding to allocate employees)? With four year vesting you take very little risk.

lsc 16y ago
>It is increasingly common for founders to have vesting schedules to prevent this exact issue. First, the likelihood of anyone besides me being here for four years is pretty small... and next, well, then I've only pushed the problem out a few years. Granted, someone having 50% of the company after four years is certainly more fair than having 50% of the company after one year, but it's still very likely a company death, if someone with 50% of the company leaves. >This sounds overly complicated. Rather than the equity gymnastics, why not implement a profit sharing program for your employees? Do you have a link where I can read up on what profit sharing means and how that differs from equity? I do not know these things. >If you are set on providing equity, then why not just create a standard employee option pool (i.e. carve out 10-20% of shares outstanding to allocate employees)? With four year vesting you take very little risk. Because 10% of my company right now is maybe twenty to thirty grand. If you could get a job on the open market that paid $130K in salary and benefits, would you instead work for some crazy guy for $30K cash plus another twenty grand in equity?
- answerly 16y ago
  >First, the likelihood of anyone besides me being here for four years is pretty small... That is the point. If your employee leaves before they have vested their shares they don't get to keep them. >but it's still very likely a company death, if someone with 50% of the company leaves. No, not necessarily. Founders of successful companies leave after several years of service all the time (happened recently with Xobni, for example). >Do you have a link where I can read up on what profit sharing means and how that differs from equity? I do not know these things. There are lots of resources if you just do a quick Google search. The basic idea is that your employees would get a % of profits you generate in a given year rather than equity. >If you could get a job on the open market that paid $130K in salary and benefits, would you instead work for some crazy guy for $30K cash plus another twenty grand in equity? No. Not because I wouldn't want to work for equity (I have done that before) but because there doesn't be a clear path to liquidity of those options. You've described this as a lifestyle business which typical means no imminent source of liquidity for shareholders. This is why I suggested exploring a profit sharing structure. If you are saying that this is a business that can't support livable compensation for employees for the foreseeable future, then I think there are bigger issues though. Sorry if I am not fully understanding what you are getting at.
  - lsc 16y ago
    >No. Not because I wouldn't want to work for equity (I have done that before) but because there doesn't be a clear path to liquidity of those options. You've described this as a lifestyle business which typical means no imminent source of liquidity for shareholders. Assuming the liquidity issue was solved to your satisfaction, would you work for equity in a company where the valuation of the percentage of the company you were earning plus the salary you were earning was 1/3rd of your fair market value?
    - answerly 16y ago
      All things being equal between this theoretical opportunity and another with a more attractive compensation structure, no. If I believed that there was a longer term value to the equity that could make up for the shortfall in cash compensation, maybe. But, the specific case you've laid out leads me to believe that there isn't significant growth potential in this business. Am I interpreting that wrong?

lsc 16y ago

>It is increasingly common for founders to have vesting schedules to prevent this exact issue. First, the likelihood of anyone besides me being here for four years is pretty small... and next, well, then I've only pushed the problem out a few years. Granted, someone having 50% of the company after four years is certainly more fair than having 50% of the company after one year, but it's still very likely a company death, if someone with 50% of the company leaves. >This sounds overly complicated. Rather than the equity gymnastics, why not implement a profit sharing program for your employees? Do you have a link where I can read up on what profit sharing means and how that differs from equity? I do not know these things. >If you are set on providing equity, then why not just create a standard employee option pool (i.e. carve out 10-20% of shares outstanding to allocate employees)? With four year vesting you take very little risk. Because 10% of my company right now is maybe twenty to thirty grand. If you could get a job on the open market that paid $130K in salary and benefits, would you instead work for some crazy guy for $30K cash plus another twenty grand in equity?

answerly 16y ago
>First, the likelihood of anyone besides me being here for four years is pretty small... That is the point. If your employee leaves before they have vested their shares they don't get to keep them. >but it's still very likely a company death, if someone with 50% of the company leaves. No, not necessarily. Founders of successful companies leave after several years of service all the time (happened recently with Xobni, for example). >Do you have a link where I can read up on what profit sharing means and how that differs from equity? I do not know these things. There are lots of resources if you just do a quick Google search. The basic idea is that your employees would get a % of profits you generate in a given year rather than equity. >If you could get a job on the open market that paid $130K in salary and benefits, would you instead work for some crazy guy for $30K cash plus another twenty grand in equity? No. Not because I wouldn't want to work for equity (I have done that before) but because there doesn't be a clear path to liquidity of those options. You've described this as a lifestyle business which typical means no imminent source of liquidity for shareholders. This is why I suggested exploring a profit sharing structure. If you are saying that this is a business that can't support livable compensation for employees for the foreseeable future, then I think there are bigger issues though. Sorry if I am not fully understanding what you are getting at.
- lsc 16y ago
  >No. Not because I wouldn't want to work for equity (I have done that before) but because there doesn't be a clear path to liquidity of those options. You've described this as a lifestyle business which typical means no imminent source of liquidity for shareholders. Assuming the liquidity issue was solved to your satisfaction, would you work for equity in a company where the valuation of the percentage of the company you were earning plus the salary you were earning was 1/3rd of your fair market value?
  - answerly 16y ago
    All things being equal between this theoretical opportunity and another with a more attractive compensation structure, no. If I believed that there was a longer term value to the equity that could make up for the shortfall in cash compensation, maybe. But, the specific case you've laid out leads me to believe that there isn't significant growth potential in this business. Am I interpreting that wrong?