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Joel Spolsky's Totally Fair Method to Divide Up The Ownership of Any Startup.

335 points by hartleybrody 15y ago

logn 15y ago
so are these numbers accurate? is he saying employee 50 should get .7%?
johngalt 15y ago
Try to avoid getting bogged down in 'fairness'. If your startup makes a nice exit, chances are that someone will get more money than they 'deserve' (hardly ever you), and someone will get less money than they 'deserve' (almost always you). Alternatively you could spend all your time fighting to make it 'fair', and end up with a fair slice of zero because your startup failed. Keep this in mind when choosing co-founders as well. If your college roomate says he doesn't want to share the electric bill equally because his lights are off more often than yours; what will he be like when there is real money on the table? Go ahead and negotiate equity with the goal of maximizing your absolute monetary return. If fighting over $100k in equity costs you $200k of lost opportunities, you are not winning.
- tikhonj 15y ago
  I think that is actually similar to Joel's point: it's not the fairness that's important, it's the appearance of fairness. As long as everybody is happy with it--and will probably stay happy--then it's a great system.
jean_valjean 15y ago
I disagree with his assessment that it's fair for some founders to take cash now and others to receive only IOUs payable later. The second group face not only a time value of money problem, but they're also accepting the risk of default (which is fairly likely in startups). They deserve substantial additional compensation for their willingness to leave capital in the company during early growth. One potentially fair way to do this would be to give them convertible notes with the same terms as whatever your first external angels get. After all, leaving $100,000 in the startup's bank account has the same net effect as drawing the salary, then investing $100,000 in the startup.
- bradleyland 15y ago
  We literally lost two founders over the "time value of money" argument. Some founders fell in the "cash is king" camp, while others felt that they were providing great value for the investment. The best advice I can give is to make sure you have agreement on the terms up front. If someone seems uneasy, don't move ahead. Find a way to agree. In our case, one of the founders who exited: * Continually brought up the fact that he had loaned the company money as a leverage point * After some time (over a year) decided to make an issue over the terms he agreed to We managed to negotiate an amicable exit, but boy was it tough.
  - amirmc 15y ago
    Thanks for sharing. I'm not sure what the lesson here is though. You suggest having an agreement on terms upfront but that the person who exited made an issue over the terms later on. On balance do you think you (all) did the right thing at the time (for the company) or could you have done something different earlier on? Also, had you worked with this person before?
    - brudgers 15y ago
      Agreement to the terms does not mean that one perceives them as fair or will continue to do so under stress in the future. The problem with negotiating little details of ownership early is that anyone who believes they did not negotiate well is likely to feel taken advantage of.
    - bradleyland 15y ago
      Happy to share. I'll enumerate some of my views (which I'm sure not everyone will agree with), as well as some direct answers to your questions. An uneasy consensus is not a consensus. When founding a company, consensus is critical in matters of finance. I think we could have done something different, but I'm not sure I'd trade our current circumstances on an unknown. I think that ultimately, losing those two founders was the right thing. They probably shouldn't have been a part of the company to begin with. Maybe I should revise my statement of "find a way to agree" to "find a way to agree completely, or don't move ahead". Finding the line between uneasy and unworkable is something you learn with experience. I worked with the person before, but only in terms of work. My working contractual relationship was with his employer, with me acting as a third-party contractor. I found myself positioned as a moderate between two extreme fiscal viewpoints, one that placed a high value on the time value of money, and one that placed hardly any value there. I did not recognize at the time that this is a "founder smell" (vis-à-vis, a code smell). I thought that the two fiscally conservative members could bring discipline to the group. What I later realized is that the behavior of a group is not equivalent to an average of the individual members' personalities. This seems obvious, but you'd be amazed how often people act on this very premise.
Jun8 15y ago
"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." This point, which I fully agree, seems to generate a lot of comments. When he landed on Gibraltar in 71, Tariq ibn Ziyad (http://en.wikipedia.org/wiki/Tariq_ibn_Ziyad http://en.wikipedia.org/wiki/Tariq_ibn_Ziyad) immediately burned his ships and gave a speech to his men starting with: "Oh my warriors, whither would you flee? Behind you is the sea, before you, the enemy. You have left now only the hope of your courage and your constancy." The point is, if you don't have this sort of desperate courage, most probably your startup won't succeed. And you cannot do that while holding on to your day job and salary.
- JGailor 15y ago
  There are plenty of examples to counter your argument in the startup community. FriendFeed is an easy one. It was built while each of its founders had day jobs until they had a viable product to shop around. I take issue with these kind of quotes because, to be quite frank, they are completely out of context and make no sense in the myriad of ways people try to make them apply to unrelated contexts. It sounds like nothing more than marketing hype, as opposed to a message of substance.
  - donw 15y ago
    This isn't a counter-example if the FriendFeed guys all worked part-time on the startup. The point isn't that only full-timers can be founders, but rather that all founders should share a roughly equal level of commitment. If some of the founders are full-time, and some are part-time, then you've got a really severe imbalance in terms of contributions to the company, not to mention risk. This will cause huge bitterness later on, so it's totally reasonable to say "We're all going in full-time, so if you want to be a founder, you are too. If not, that's fine, and we'll make you hire number one when we can afford to pay you a salary, plus back-pay for hours worked as an IOU."
    - dhimes 15y ago
      I think the counter-example was to the idea that you have to "burn the ships" in order to motivate people to succeed.
biot 15y ago
Previous discussion: http://news.ycombinator.com/item?id=2445447 http://news.ycombinator.com/item?id=2445447
Tichy 15y ago
What is an IOU?
- ggchappell 15y ago
  "IOU" is an informal term for a promise to make some specified payment at a later (perhaps unspecified) time. In other words, it is an acknowledgment of a debt. The name comes from "I owe you".
- Nate75Sanders 15y ago
  pronounce the letters just as an American would, but treat them as _words_ instead of letters "I owe you" it just says that I'm indebted to you in some way
- brudgers 15y ago
  A promise to pay, e.g. a promissory note.
alphadogg 15y ago
My one exception is the idea that there should be an even split across founders. Personally, I've used a couple of "calculators" that all work around the idea of a matrix where you have founders as columns and 4 to 7 top-level accountabilities as rows. Overall, if everyone is shouldering similar burdens, they come out even, but if there is disparity it is transparent to all and fair too.
xarien 15y ago
Here's my totally fair method of dividing up the ownership. Talk it out with your co-founders. Whichever cut is chosen at that discussion is fair. Why? Because it was discussed and not proposed..... Furthermore, because it was agreed upon.
brador 15y ago
Solution I personally use and has yet to fail: Auction system trading monthly wage packet vs. unit equity. It just works, and by it's very nature is fair, everyones happy.
- fan 15y ago
  This is exactly what we do. And the point is to give wages to those who value it more, and equity to those who value that more. It's creative and win/win generally for the team. I've yet to have anyone be upset at this. I encourage those considering it to take a closer look.
- djb_hackernews 15y ago
  That's a joke right? You have your employees bid on either getting paid or taking equity every month?
  - brador 15y ago
    It's a one time negotiation at founding. It's not like we run it every month. Also, it's founders, never employees. Employees get cash+bonus, never equity.
    - mjwalshe 15y ago
      Realy good luck getting any one good to work for you after going public like this.
      - brador 15y ago
        Not sure why you have the veiled threat in there, but we're not exactly hurting for talent right now and the staff we do have are more than happy with the arrangement.
      - bri3d 15y ago
        I don't know why this would prevent people from working for them. I'd see such a complicated scheme to split compensation amongst founders as perhaps a slight minus , but I know plenty of people who want to work for cash+bonus. I'd much rather get a competitive (with real businesses, not Valley startups), sizable cash bonus than equity in almost any startup.
deleted 15y ago
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radikalus 15y ago
I think it's totally reasonable that, if one founder is putting a significant amount of capital at risk, he should hold a higher share of the company going forward. I would think that dividing things equally really only makes sense for pretty lean startups. I'm not sure I really see the point in obsessing over how "fair" the deal you're getting is -- it's not like there's a basket of equivalent startups you're deciding between. Ultimately, your opinion of the EV of the particular business seems likely to trump obsessing over a few hundred basis points of ownership. (At least that's how I justify to myself not being an "equal" partner)
autarch 15y ago
Here's the thing about each layer after the founders owning 10%. In his example, layer 2 (first employees) consists of 5 people, each of whom own 2%. Those employees probably took a pretty significant pay cut to work at this startup. Let's say a programmer who could make $120,000 a year joins the startup at a $70,000 salary. The next year it gets bumped up to $85,000, and then the year after $95,000. After three years that programmer has now forgone $110,000 in income. If the company sells the programmer has to earn at least that much back (and we're ignoring lost opportunities from not having the money). So the company has to sell for $5.5 million dollars. And of course, the programmer may have worked way more hours than she would have at that $120,000 hour job. Let's assume she average 50 hours a week. In any sane world she would earn 25% more for that amount of work. So if we value her time based on her possible $120k salary, the sale needs to deliver $200,000 to her to be worthwhile. Now we're looking at a $10 million dollar sale. Oh, and that's assuming that the company doesn't have investors with preferred shares who will take a 3x return. So maybe the sale really needs to be $15 million just to get that $200,000 back. And of course many sales are not all in cash, so maybe she just gets stock in some other company, and that stock may not even be liquid. All of this assumes that there is an exit as opposed to a bankruptcy. She's gambling on an amazing exit (not necessarily Google, but something like VMWare buying Zimbra for $100 million. That happens, but it's pretty damn rare. All of this is compounded by the fact that for the founders, a smallish ($5-20 million exit) is entirely worthwhile. They walk away with a few million dollars each. Early startup employees get completely and utterly screwed. I'd never consider being one of these employees again unless I was offered a lot more than 2%. I think a fairer number might %10. But really, if you're willing to take that much risk, you might as well just be a founder. That's where the real rewards are.
- ChuckMcM 15y ago
  "Early startup employees get completely and utterly screwed." Except that early Google employees all had stock worth over a million dollars. Same with all early Sun employees, all early eBay employees, all early Amazon employees, all early Yahoo employees (basically anyone with an employee # < 100 was in darn good shape at all of these companies. The generalization that all employees get screwed, is based on your experience. and I understand that pain, my first startup I was employee #9 and my stock at the time it was acquired [1] was worthless. But it is just that, a generalization. And it is perfectly reasonable to say "My threshold for risk is lower than the risk of working at a startup." And by telling a startup you won't work for less than 10% equity or even going in with that thought is one way of saying that. I interviewed a guy for the second startup I did, FreeGate, who told me basically he had 'done his homework' and he needed 4 million (about 5% of the outstanding at the time) shares and a competitive salary (which during the boom was insane) and while I loved his skills I wasn't comfortable risking that much equity on this guy who might or might not work out. So we passed. He eventually went to work for Oracle because no startup he talked to would (or perhaps even could) hire him based on his risk tolerance. In that case I think the market did the right thing, he didn't work at a startup. Now had he come to work for me at the 'standard' offer during that period, he would have done OK, better than 4 years of Oracle salary + their option, but not the multiple millions he was dreaming about. I always recommend that people who absolutely have to be employed for the next 'n' years, avoid start-ups. Too much existence stress. That being said, I like Joel's approach. The only wrench I see in it is that there often comes a time when you need 'that guy' (or 'that gal') who will take the company to the next level. Could be a VP of sales, or a Manufacturing, or some other part of the company that it needs to do, but nobody in the company is experienced or ready to take the company to the scale it needs. That is a person who comes late but you end up doling out lots of equity to. The return is that everyone's equity value will go way up. Sometimes this person is the difference between continued climb and spiraling death. So in that regard their 'impact' is as much as a founder who got the company to this point. When that situation comes up, it's always got its own wrinkles to deal with, but generally it comes up because you are doing well, not you're shopping yourself around to try to exit with a positive spin. [1] http://www.linksv.com/compSummary/2172/GolfWeb http://www.linksv.com/compSummary/2172/GolfWeb
raganwald 15y ago
As he points out, most people feel that being treated fairly is the most important thing (this has more to do with not being demotivated by an unfair split than being motivated by the equity itself). The beauty of this kind of post is that once it achieves a certain level of notoriety, it automatically becomes “fair” in everyone’s mind. For example a new employee comes on board. You explain, “We use the Joel method for allocating and vesting equity.” Oh! Great! That’s fair...
- sethg 15y ago
  I used to work for a startup, Kenan Systems, that was 100% owned by one of the founders. In 1999, Lucent bought Kenan Systems for over <dr-evil>one billion dollars</dr-evil>. Obviously, all the Kenan employees had understood from the time they were hired that they were not getting stock options, but there was still some grumbling about how they didn’t share in the jackpot. (Well, after the acquisition, we did get stock options... Lucent stock options... which, like the Kursk, went underwater and never resurfaced.)
plumber12 15y ago
There is a company in India which has not taken any outside funding and doing great business so far. There are many employees who has been toiling there for 10-15 years with expectations that they will become rich sooner as company started doing really well with all hardwork. Recently, one fine day "the founder" in his internal memo says that you can call me the super rich. All shares has been distributed to himself and his family members and now all employees are monkeys with hand full of peanuts. Wake up with shattered dreams. Guess who is this company? Yes, you are right, its ZOHO. Period.
- deleted 15y ago
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- nrao123 15y ago
  I can guarantee you that Vembu would not have said it the way you are suggesting & the timing of the "memo". See this link http://www.sramanamitra.com/2007/07/16/happily-bootstrapping-zoho-ceo-sridhar-vembu-part-7/ http://www.sramanamitra.com/2007/07/16/happily-bootstrapping... where he was categorical that he is not going to be giving options and there was no expectations. I think the real issue is not about sharing wealth since it can be shared through other mechanisms for the core team - faster promotions, more cash comp, better work environment... Its really about whether you want to keep it private. If you want to keep it private, then what is the value of the options if there is no exit? I presume this is the same thinking that James Goodnight at SAS (http://en.wikipedia.org/wiki/SAS_Institute#Company_and_software http://en.wikipedia.org/wiki/SAS_Institute#Company_and_softw...) & Mike Bloomberg would have gone through to try and keep the company private.
  - plumber12 15y ago
    Mr.Rao, I don't know about your interest in Zoho. There is no lie in what I had said. You will not understand the feelings until you are one among them or gone through the same. This has affected the morale and overall performance. I agree that there are other means to share the wealth, has it really happened at Zoho?, you need to understand that the compensation at Zoho is at par or less with other technology companies in India. In fact services companies has better perks and onsite opportunities to make quick money and they too have stock options. People at CTS or Infosys with 10+ exp. are millionaires. Facebook has 24% for employees. You need to understand that for any organisation for long term success and to be world class, one need to have people who has enthusiasm, hope and imagination to live a prosperous life and can do anything for his/her leader and not those who just stick around because they are forced for survival with shattered dreams. People needs to have immense faith (it was thus far) in its leader for any organisation for long term successes. We live in a capitalistic world and money plays a important role in every way, you understand it and so Mr.vembu. And I am really doubtful, if monkeys can bring all successes which Zoho can but happy people do.
fady 15y ago
good post, but most cannot afford to pay them out-of-pocket for their time (nor do they expect that), and we're all approaching this as a project we'll do on our nights and weekends, right? isn't "vesting" traditionally determined as "in service" with the company, ie: full-time employment? side projects are a flake factory. everybody is "busy." you split 50-50 w/ some guy and then he disappears for 6 months. you're pretty pissed.
Timothee 15y ago
I know it's a back-of-the-envelop affair, but one thing I'm a bit unclear is that hiring is not done in batch in January. So, how do you separate your stripes? In his example, employee #4 gets 250 shares, while employee #5 gets 50. But in reality, you won't hire the 4 employees at the exact same time, and the next 20 a year later. It will be spread out over time. I'm sure it's possible to think up a more continuous function for spreading the shares with a similar approach. (but I'm wondering if that's not what already happens somewhat naturally with offer negotiations…)
- scott_w 15y ago
  That's a good point. I suppose one way is to decide on the equity %, as opposed to the share e.g. first 5 employees get 2% each, next 10 get 1% each.
- abecedarius 15y ago
  Yes, this is what makes me suspect the method hasn't been tested. What companies have tried Joel's advice? How'd it work out?
- kgo 15y ago
  "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." As usual, Joel proposes you use some common sense, instead of trying to come up with some perfect function. The important thing isn't if employee 4 was hired on Dec 31st and Employee 5 was hired on Jan 1st. If Employee 4 was working in your living room and working off his own laptop, and Employee 5 joins when you have a tiny office, provide him with a computer, have comprehensive health insurance, they're in different bands.
  - Timothee 15y ago
    I understand that, but the thing is that you don't know in advance when you'll go from your living-room to an office, so what do you do when you hire your first employee? You know she'll be in the first stripe, but since you don't know how many you'll put in that stripe, you can't use the nice formula 10%/n. What I'm saying is that it sounds very nice and fair to engineer-type people. But it also sounds like it only works after the fact. And again, I understand it's not really to be read as a strict formula, but more as something to give you a gross idea of what you're trying to accomplish. But in that case, it's not much different to what's already happening naturally: founders and employees know that the equity offered should reflect how early they arrive in the mix and what they bring to the table. I'm sure you can go in many startups and find the stripes that naturally formed and get something close to that "formula".
alain94040 15y ago
Mandatory link: the co-founder equity calculator http://foundrs.com/calculator http://foundrs.com/calculator Because I don't always agree with Joel on this. By the way, the recommended way to use this calculator is that each co-founder tries it separately. Then compare notes.
- tptacek 15y ago
  I ran this calculator with two founders, one of which "had the original idea and told the others", the other "the developer who would end up leading all the developers when a team was hired". All else equal. The calculator gave a multiple percentage point bump to the founder with the idea. So, grain of salt.
  - alain94040 15y ago
    Thanks for the feedback. If you could send me the details, I'll check that they make sense. The key part is "everything else being equal". The everything else actually influences how important the idea is and how much the developer would get...
    - tptacek 15y ago
      2-3% is an entire team lead role; it's what you'd give to an amazing VP/Marketing, or one of your best developers 9 months in. There may be ideas worth an equity bump, but I think Spolsky is dead-on about the common case: the idea doesn't mean anything. Sure, you can take your idea and work it with another team --- but your prospective team can take their ability to execute and work it on another idea. Moreover, in many many companies, the key idea that enables the business comes long after the team starts on the first idea; maybe it's a pivot, maybe it's a refinement, but either way, the core intellectual kernel that "makes" the business isn't predictable. When it comes, most teams don't suddenly grant the person who generated it another 3% of the company. It's destructive to suggest that, in the common case, an idea is worth multiple percentage points. Just zero that line out in your calculator. You can't calculate the uncommon cases, so what's useful is a shared understanding of what "usual" is. Personally --- again, this is just me --- if you all start at the same time, and you all quit your jobs, and you all get the same kind of income (steady salary, quarterly distro, nothing, &c), you split the thing up evenly. Not even worth discussing. 33/33/33 and vest.
wjessup 15y ago
Two points: 1. It's not always about the salary for employees. Some people just don't have the DNA to work at the type of company who gives the 120k salary ( assuming large-co ). They like small companies, being empowered, and all of the other benefits of being part of a team building something. They expect to get 70k and not recoup the difference because they consciously "buy" the lifestyle with the difference in pay. They are driven by the passion of the founder and want to be involved in building "something big". They can't miss the chance to get this experience that would take years in a big company. This type of employee sees equity in two parts: First as an emotional connection that they're working on something they "own" and second as the dream of a potential payout that gives them the vision / hope of a great future. Both are important emotional motivators that enable the team to gather round a vision and kick-ass nights and weekends to make something valuable. A startup employee who says, "4%, so you need to sell at 15m or i'm out of here…" is the same person who says they should pay less for electricity because they didn't use as many lights as you. That employee shouldn't be choosing to work at startup A because they offered offered 5k more salary and 1% more equity than startup B. Which one are they passionate about? Where do they want to spend their life for the next few years? The equity is just gambling. 2. Not all founders will share the risk equally even if they all work full-time, quit their jobs, etc. Scenario A: Founder A is a serial entrepreneur with a few M in the bank while Founder B is an engineer who needs a paycheck. Does Founder A give B 50% or does he just pay him for his work as employee #1? Scenario B: Founder A doesn't take salary from the company but has a consulting gig that pays 10k/month and takes ~4/hrs a week. Founder B is wealthy and doesn't take salary but doesn't need to spend 4-8 hours a week doing "other obligations" and says Founder A isn't dedicated. Things get more complex once people become serial entrepreneurs.
bri3d 15y ago
I especially like this because it flattens series / preference. There's no "Series FF"-style shenanigans where founders can convert and cash out in later rounds while their VCs hold out for a fanciful exit, leaving employees high and dry, and there's no opportunity for broken preferred/common conversion that lets VCs exit with a much better deal than their founders or employees get - everyone owns the same shares. Sadly, because it actually aligns VCs, founders, and employees in the same pool, I don't see this being accepted by very many investors.
johnkchow 15y ago
At my startup, we have talked about this issue several times about how we can fairly compensate employees for their contributions to the company. Our company is a bit different in that we have a lot of young employees who are eager to learn and believe in the vision rather than people who maximizes reward and minimizes risk. Because of our employee makeup, we're adopting a revenue sharing plan. In my eyes, that's as fair as you can get: getting a ton of experience with the latest technologies for a temporary cut in pay. As a lot of commenters have said, it really depends on your situation, but I believe the reward is potentially great if you're a young engineer who's seeking a long-term reputation as a good programmer. (And for those of you who think I am mad, my company is great in that it's fun, the work is extremely challenging yet exciting, and the vision aligns with my own personal vision. It's my dream job.)
deleted 15y ago
[deleted]

335 points by hartleybrody 15y ago

logn 15y ago

so are these numbers accurate? is he saying employee 50 should get .7%?

Try to avoid getting bogged down in 'fairness'. If your startup makes a nice exit, chances are that someone will get more money than they 'deserve' (hardly ever you), and someone will get less money than they 'deserve' (almost always you). Alternatively you could spend all your time fighting to make it 'fair', and end up with a fair slice of zero because your startup failed. Keep this in mind when choosing co-founders as well. If your college roomate says he doesn't want to share the electric bill equally because his lights are off more often than yours; what will he be like when there is real money on the table? Go ahead and negotiate equity with the goal of maximizing your absolute monetary return. If fighting over $100k in equity costs you $200k of lost opportunities, you are not winning.

tikhonj 15y ago
I think that is actually similar to Joel's point: it's not the fairness that's important, it's the appearance of fairness. As long as everybody is happy with it--and will probably stay happy--then it's a great system.

jean_valjean 15y ago

I disagree with his assessment that it's fair for some founders to take cash now and others to receive only IOUs payable later. The second group face not only a time value of money problem, but they're also accepting the risk of default (which is fairly likely in startups). They deserve substantial additional compensation for their willingness to leave capital in the company during early growth. One potentially fair way to do this would be to give them convertible notes with the same terms as whatever your first external angels get. After all, leaving $100,000 in the startup's bank account has the same net effect as drawing the salary, then investing $100,000 in the startup.

bradleyland 15y ago
We literally lost two founders over the "time value of money" argument. Some founders fell in the "cash is king" camp, while others felt that they were providing great value for the investment. The best advice I can give is to make sure you have agreement on the terms up front. If someone seems uneasy, don't move ahead. Find a way to agree. In our case, one of the founders who exited: * Continually brought up the fact that he had loaned the company money as a leverage point * After some time (over a year) decided to make an issue over the terms he agreed to We managed to negotiate an amicable exit, but boy was it tough.
- amirmc 15y ago
  Thanks for sharing. I'm not sure what the lesson here is though. You suggest having an agreement on terms upfront but that the person who exited made an issue over the terms later on. On balance do you think you (all) did the right thing at the time (for the company) or could you have done something different earlier on? Also, had you worked with this person before?
  - brudgers 15y ago
    Agreement to the terms does not mean that one perceives them as fair or will continue to do so under stress in the future. The problem with negotiating little details of ownership early is that anyone who believes they did not negotiate well is likely to feel taken advantage of.
  - bradleyland 15y ago
    Happy to share. I'll enumerate some of my views (which I'm sure not everyone will agree with), as well as some direct answers to your questions. An uneasy consensus is not a consensus. When founding a company, consensus is critical in matters of finance. I think we could have done something different, but I'm not sure I'd trade our current circumstances on an unknown. I think that ultimately, losing those two founders was the right thing. They probably shouldn't have been a part of the company to begin with. Maybe I should revise my statement of "find a way to agree" to "find a way to agree completely, or don't move ahead". Finding the line between uneasy and unworkable is something you learn with experience. I worked with the person before, but only in terms of work. My working contractual relationship was with his employer, with me acting as a third-party contractor. I found myself positioned as a moderate between two extreme fiscal viewpoints, one that placed a high value on the time value of money, and one that placed hardly any value there. I did not recognize at the time that this is a "founder smell" (vis-à-vis, a code smell). I thought that the two fiscally conservative members could bring discipline to the group. What I later realized is that the behavior of a group is not equivalent to an average of the individual members' personalities. This seems obvious, but you'd be amazed how often people act on this very premise.

Jun8 15y ago

"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." This point, which I fully agree, seems to generate a lot of comments. When he landed on Gibraltar in 71, Tariq ibn Ziyad (http://en.wikipedia.org/wiki/Tariq_ibn_Ziyad http://en.wikipedia.org/wiki/Tariq_ibn_Ziyad) immediately burned his ships and gave a speech to his men starting with: "Oh my warriors, whither would you flee? Behind you is the sea, before you, the enemy. You have left now only the hope of your courage and your constancy." The point is, if you don't have this sort of desperate courage, most probably your startup won't succeed. And you cannot do that while holding on to your day job and salary.

JGailor 15y ago
There are plenty of examples to counter your argument in the startup community. FriendFeed is an easy one. It was built while each of its founders had day jobs until they had a viable product to shop around. I take issue with these kind of quotes because, to be quite frank, they are completely out of context and make no sense in the myriad of ways people try to make them apply to unrelated contexts. It sounds like nothing more than marketing hype, as opposed to a message of substance.
- donw 15y ago
  This isn't a counter-example if the FriendFeed guys all worked part-time on the startup. The point isn't that only full-timers can be founders, but rather that all founders should share a roughly equal level of commitment. If some of the founders are full-time, and some are part-time, then you've got a really severe imbalance in terms of contributions to the company, not to mention risk. This will cause huge bitterness later on, so it's totally reasonable to say "We're all going in full-time, so if you want to be a founder, you are too. If not, that's fine, and we'll make you hire number one when we can afford to pay you a salary, plus back-pay for hours worked as an IOU."
  - dhimes 15y ago
    I think the counter-example was to the idea that you have to "burn the ships" in order to motivate people to succeed.

biot 15y ago

Previous discussion: http://news.ycombinator.com/item?id=2445447 http://news.ycombinator.com/item?id=2445447

Tichy 15y ago

What is an IOU?

ggchappell 15y ago
"IOU" is an informal term for a promise to make some specified payment at a later (perhaps unspecified) time. In other words, it is an acknowledgment of a debt. The name comes from "I owe you".
Nate75Sanders 15y ago
pronounce the letters just as an American would, but treat them as _words_ instead of letters "I owe you" it just says that I'm indebted to you in some way
brudgers 15y ago
A promise to pay, e.g. a promissory note.

alphadogg 15y ago

My one exception is the idea that there should be an even split across founders. Personally, I've used a couple of "calculators" that all work around the idea of a matrix where you have founders as columns and 4 to 7 top-level accountabilities as rows. Overall, if everyone is shouldering similar burdens, they come out even, but if there is disparity it is transparent to all and fair too.

xarien 15y ago

Here's my totally fair method of dividing up the ownership. Talk it out with your co-founders. Whichever cut is chosen at that discussion is fair. Why? Because it was discussed and not proposed..... Furthermore, because it was agreed upon.

brador 15y ago

Solution I personally use and has yet to fail: Auction system trading monthly wage packet vs. unit equity. It just works, and by it's very nature is fair, everyones happy.

fan 15y ago
This is exactly what we do. And the point is to give wages to those who value it more, and equity to those who value that more. It's creative and win/win generally for the team. I've yet to have anyone be upset at this. I encourage those considering it to take a closer look.
djb_hackernews 15y ago
That's a joke right? You have your employees bid on either getting paid or taking equity every month?
- brador 15y ago
  It's a one time negotiation at founding. It's not like we run it every month. Also, it's founders, never employees. Employees get cash+bonus, never equity.
  - mjwalshe 15y ago
    Realy good luck getting any one good to work for you after going public like this.
    - brador 15y ago
      Not sure why you have the veiled threat in there, but we're not exactly hurting for talent right now and the staff we do have are more than happy with the arrangement.
    - bri3d 15y ago
      I don't know why this would prevent people from working for them. I'd see such a complicated scheme to split compensation amongst founders as perhaps a slight minus , but I know plenty of people who want to work for cash+bonus. I'd much rather get a competitive (with real businesses, not Valley startups), sizable cash bonus than equity in almost any startup.

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radikalus 15y ago

I think it's totally reasonable that, if one founder is putting a significant amount of capital at risk, he should hold a higher share of the company going forward. I would think that dividing things equally really only makes sense for pretty lean startups. I'm not sure I really see the point in obsessing over how "fair" the deal you're getting is -- it's not like there's a basket of equivalent startups you're deciding between. Ultimately, your opinion of the EV of the particular business seems likely to trump obsessing over a few hundred basis points of ownership. (At least that's how I justify to myself not being an "equal" partner)

autarch 15y ago

Here's the thing about each layer after the founders owning 10%. In his example, layer 2 (first employees) consists of 5 people, each of whom own 2%. Those employees probably took a pretty significant pay cut to work at this startup. Let's say a programmer who could make $120,000 a year joins the startup at a $70,000 salary. The next year it gets bumped up to $85,000, and then the year after $95,000. After three years that programmer has now forgone $110,000 in income. If the company sells the programmer has to earn at least that much back (and we're ignoring lost opportunities from not having the money). So the company has to sell for $5.5 million dollars. And of course, the programmer may have worked way more hours than she would have at that $120,000 hour job. Let's assume she average 50 hours a week. In any sane world she would earn 25% more for that amount of work. So if we value her time based on her possible $120k salary, the sale needs to deliver $200,000 to her to be worthwhile. Now we're looking at a $10 million dollar sale. Oh, and that's assuming that the company doesn't have investors with preferred shares who will take a 3x return. So maybe the sale really needs to be $15 million just to get that $200,000 back. And of course many sales are not all in cash, so maybe she just gets stock in some other company, and that stock may not even be liquid. All of this assumes that there is an exit as opposed to a bankruptcy. She's gambling on an amazing exit (not necessarily Google, but something like VMWare buying Zimbra for $100 million. That happens, but it's pretty damn rare. All of this is compounded by the fact that for the founders, a smallish ($5-20 million exit) is entirely worthwhile. They walk away with a few million dollars each. Early startup employees get completely and utterly screwed. I'd never consider being one of these employees again unless I was offered a lot more than 2%. I think a fairer number might %10. But really, if you're willing to take that much risk, you might as well just be a founder. That's where the real rewards are.

ChuckMcM 15y ago
"Early startup employees get completely and utterly screwed." Except that early Google employees all had stock worth over a million dollars. Same with all early Sun employees, all early eBay employees, all early Amazon employees, all early Yahoo employees (basically anyone with an employee # < 100 was in darn good shape at all of these companies. The generalization that all employees get screwed, is based on your experience. and I understand that pain, my first startup I was employee #9 and my stock at the time it was acquired [1] was worthless. But it is just that, a generalization. And it is perfectly reasonable to say "My threshold for risk is lower than the risk of working at a startup." And by telling a startup you won't work for less than 10% equity or even going in with that thought is one way of saying that. I interviewed a guy for the second startup I did, FreeGate, who told me basically he had 'done his homework' and he needed 4 million (about 5% of the outstanding at the time) shares and a competitive salary (which during the boom was insane) and while I loved his skills I wasn't comfortable risking that much equity on this guy who might or might not work out. So we passed. He eventually went to work for Oracle because no startup he talked to would (or perhaps even could) hire him based on his risk tolerance. In that case I think the market did the right thing, he didn't work at a startup. Now had he come to work for me at the 'standard' offer during that period, he would have done OK, better than 4 years of Oracle salary + their option, but not the multiple millions he was dreaming about. I always recommend that people who absolutely have to be employed for the next 'n' years, avoid start-ups. Too much existence stress. That being said, I like Joel's approach. The only wrench I see in it is that there often comes a time when you need 'that guy' (or 'that gal') who will take the company to the next level. Could be a VP of sales, or a Manufacturing, or some other part of the company that it needs to do, but nobody in the company is experienced or ready to take the company to the scale it needs. That is a person who comes late but you end up doling out lots of equity to. The return is that everyone's equity value will go way up. Sometimes this person is the difference between continued climb and spiraling death. So in that regard their 'impact' is as much as a founder who got the company to this point. When that situation comes up, it's always got its own wrinkles to deal with, but generally it comes up because you are doing well, not you're shopping yourself around to try to exit with a positive spin. [1] http://www.linksv.com/compSummary/2172/GolfWeb http://www.linksv.com/compSummary/2172/GolfWeb

raganwald 15y ago

As he points out, most people feel that being treated fairly is the most important thing (this has more to do with not being demotivated by an unfair split than being motivated by the equity itself). The beauty of this kind of post is that once it achieves a certain level of notoriety, it automatically becomes “fair” in everyone’s mind. For example a new employee comes on board. You explain, “We use the Joel method for allocating and vesting equity.” Oh! Great! That’s fair...

sethg 15y ago
I used to work for a startup, Kenan Systems, that was 100% owned by one of the founders. In 1999, Lucent bought Kenan Systems for over <dr-evil>one billion dollars</dr-evil>. Obviously, all the Kenan employees had understood from the time they were hired that they were not getting stock options, but there was still some grumbling about how they didn’t share in the jackpot. (Well, after the acquisition, we did get stock options... Lucent stock options... which, like the Kursk, went underwater and never resurfaced.)

plumber12 15y ago

There is a company in India which has not taken any outside funding and doing great business so far. There are many employees who has been toiling there for 10-15 years with expectations that they will become rich sooner as company started doing really well with all hardwork. Recently, one fine day "the founder" in his internal memo says that you can call me the super rich. All shares has been distributed to himself and his family members and now all employees are monkeys with hand full of peanuts. Wake up with shattered dreams. Guess who is this company? Yes, you are right, its ZOHO. Period.

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nrao123 15y ago
I can guarantee you that Vembu would not have said it the way you are suggesting & the timing of the "memo". See this link http://www.sramanamitra.com/2007/07/16/happily-bootstrapping-zoho-ceo-sridhar-vembu-part-7/ http://www.sramanamitra.com/2007/07/16/happily-bootstrapping... where he was categorical that he is not going to be giving options and there was no expectations. I think the real issue is not about sharing wealth since it can be shared through other mechanisms for the core team - faster promotions, more cash comp, better work environment... Its really about whether you want to keep it private. If you want to keep it private, then what is the value of the options if there is no exit? I presume this is the same thinking that James Goodnight at SAS (http://en.wikipedia.org/wiki/SAS_Institute#Company_and_software http://en.wikipedia.org/wiki/SAS_Institute#Company_and_softw...) & Mike Bloomberg would have gone through to try and keep the company private.
- plumber12 15y ago
  Mr.Rao, I don't know about your interest in Zoho. There is no lie in what I had said. You will not understand the feelings until you are one among them or gone through the same. This has affected the morale and overall performance. I agree that there are other means to share the wealth, has it really happened at Zoho?, you need to understand that the compensation at Zoho is at par or less with other technology companies in India. In fact services companies has better perks and onsite opportunities to make quick money and they too have stock options. People at CTS or Infosys with 10+ exp. are millionaires. Facebook has 24% for employees. You need to understand that for any organisation for long term success and to be world class, one need to have people who has enthusiasm, hope and imagination to live a prosperous life and can do anything for his/her leader and not those who just stick around because they are forced for survival with shattered dreams. People needs to have immense faith (it was thus far) in its leader for any organisation for long term successes. We live in a capitalistic world and money plays a important role in every way, you understand it and so Mr.vembu. And I am really doubtful, if monkeys can bring all successes which Zoho can but happy people do.

fady 15y ago

good post, but most cannot afford to pay them out-of-pocket for their time (nor do they expect that), and we're all approaching this as a project we'll do on our nights and weekends, right? isn't "vesting" traditionally determined as "in service" with the company, ie: full-time employment? side projects are a flake factory. everybody is "busy." you split 50-50 w/ some guy and then he disappears for 6 months. you're pretty pissed.

Timothee 15y ago

I know it's a back-of-the-envelop affair, but one thing I'm a bit unclear is that hiring is not done in batch in January. So, how do you separate your stripes? In his example, employee #4 gets 250 shares, while employee #5 gets 50. But in reality, you won't hire the 4 employees at the exact same time, and the next 20 a year later. It will be spread out over time. I'm sure it's possible to think up a more continuous function for spreading the shares with a similar approach. (but I'm wondering if that's not what already happens somewhat naturally with offer negotiations…)

scott_w 15y ago
That's a good point. I suppose one way is to decide on the equity %, as opposed to the share e.g. first 5 employees get 2% each, next 10 get 1% each.
abecedarius 15y ago
Yes, this is what makes me suspect the method hasn't been tested. What companies have tried Joel's advice? How'd it work out?
kgo 15y ago
"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." As usual, Joel proposes you use some common sense, instead of trying to come up with some perfect function. The important thing isn't if employee 4 was hired on Dec 31st and Employee 5 was hired on Jan 1st. If Employee 4 was working in your living room and working off his own laptop, and Employee 5 joins when you have a tiny office, provide him with a computer, have comprehensive health insurance, they're in different bands.
- Timothee 15y ago
  I understand that, but the thing is that you don't know in advance when you'll go from your living-room to an office, so what do you do when you hire your first employee? You know she'll be in the first stripe, but since you don't know how many you'll put in that stripe, you can't use the nice formula 10%/n. What I'm saying is that it sounds very nice and fair to engineer-type people. But it also sounds like it only works after the fact. And again, I understand it's not really to be read as a strict formula, but more as something to give you a gross idea of what you're trying to accomplish. But in that case, it's not much different to what's already happening naturally: founders and employees know that the equity offered should reflect how early they arrive in the mix and what they bring to the table. I'm sure you can go in many startups and find the stripes that naturally formed and get something close to that "formula".

alain94040 15y ago

Mandatory link: the co-founder equity calculator http://foundrs.com/calculator http://foundrs.com/calculator Because I don't always agree with Joel on this. By the way, the recommended way to use this calculator is that each co-founder tries it separately. Then compare notes.

tptacek 15y ago
I ran this calculator with two founders, one of which "had the original idea and told the others", the other "the developer who would end up leading all the developers when a team was hired". All else equal. The calculator gave a multiple percentage point bump to the founder with the idea. So, grain of salt.
- alain94040 15y ago
  Thanks for the feedback. If you could send me the details, I'll check that they make sense. The key part is "everything else being equal". The everything else actually influences how important the idea is and how much the developer would get...
  - tptacek 15y ago
    2-3% is an entire team lead role; it's what you'd give to an amazing VP/Marketing, or one of your best developers 9 months in. There may be ideas worth an equity bump, but I think Spolsky is dead-on about the common case: the idea doesn't mean anything. Sure, you can take your idea and work it with another team --- but your prospective team can take their ability to execute and work it on another idea. Moreover, in many many companies, the key idea that enables the business comes long after the team starts on the first idea; maybe it's a pivot, maybe it's a refinement, but either way, the core intellectual kernel that "makes" the business isn't predictable. When it comes, most teams don't suddenly grant the person who generated it another 3% of the company. It's destructive to suggest that, in the common case, an idea is worth multiple percentage points. Just zero that line out in your calculator. You can't calculate the uncommon cases, so what's useful is a shared understanding of what "usual" is. Personally --- again, this is just me --- if you all start at the same time, and you all quit your jobs, and you all get the same kind of income (steady salary, quarterly distro, nothing, &c), you split the thing up evenly. Not even worth discussing. 33/33/33 and vest.

wjessup 15y ago

Two points: 1. It's not always about the salary for employees. Some people just don't have the DNA to work at the type of company who gives the 120k salary ( assuming large-co ). They like small companies, being empowered, and all of the other benefits of being part of a team building something. They expect to get 70k and not recoup the difference because they consciously "buy" the lifestyle with the difference in pay. They are driven by the passion of the founder and want to be involved in building "something big". They can't miss the chance to get this experience that would take years in a big company. This type of employee sees equity in two parts: First as an emotional connection that they're working on something they "own" and second as the dream of a potential payout that gives them the vision / hope of a great future. Both are important emotional motivators that enable the team to gather round a vision and kick-ass nights and weekends to make something valuable. A startup employee who says, "4%, so you need to sell at 15m or i'm out of here…" is the same person who says they should pay less for electricity because they didn't use as many lights as you. That employee shouldn't be choosing to work at startup A because they offered offered 5k more salary and 1% more equity than startup B. Which one are they passionate about? Where do they want to spend their life for the next few years? The equity is just gambling. 2. Not all founders will share the risk equally even if they all work full-time, quit their jobs, etc. Scenario A: Founder A is a serial entrepreneur with a few M in the bank while Founder B is an engineer who needs a paycheck. Does Founder A give B 50% or does he just pay him for his work as employee #1? Scenario B: Founder A doesn't take salary from the company but has a consulting gig that pays 10k/month and takes ~4/hrs a week. Founder B is wealthy and doesn't take salary but doesn't need to spend 4-8 hours a week doing "other obligations" and says Founder A isn't dedicated. Things get more complex once people become serial entrepreneurs.

bri3d 15y ago

I especially like this because it flattens series / preference. There's no "Series FF"-style shenanigans where founders can convert and cash out in later rounds while their VCs hold out for a fanciful exit, leaving employees high and dry, and there's no opportunity for broken preferred/common conversion that lets VCs exit with a much better deal than their founders or employees get - everyone owns the same shares. Sadly, because it actually aligns VCs, founders, and employees in the same pool, I don't see this being accepted by very many investors.

johnkchow 15y ago

At my startup, we have talked about this issue several times about how we can fairly compensate employees for their contributions to the company. Our company is a bit different in that we have a lot of young employees who are eager to learn and believe in the vision rather than people who maximizes reward and minimizes risk. Because of our employee makeup, we're adopting a revenue sharing plan. In my eyes, that's as fair as you can get: getting a ton of experience with the latest technologies for a temporary cut in pay. As a lot of commenters have said, it really depends on your situation, but I believe the reward is potentially great if you're a young engineer who's seeking a long-term reputation as a good programmer. (And for those of you who think I am mad, my company is great in that it's fun, the work is extremely challenging yet exciting, and the vision aligns with my own personal vision. It's my dream job.)

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