4 ms·

Seth's Blog: Advice on equity

62 points by mattjung 18y ago

mattjung 18y ago
I disagree with Seth. Any discussion about who contributed what and who more may absorb a lot of energy from the startup. Founders starting together should have the same equity because they can expect from each other to give their maximum to drive the success of their company. And they will have the same motivation and interest to give their maximum.
- swombat 18y ago
  That's a nice idea in theory but it ignores the practical fact that contributions will be different, people's commitment will vary over time, and people's expectations will clash.
  - mattjung 18y ago
    There is a study that suggests that equal equity among founders leads to more stable and successful startups: http://founderresearch.blogspot.com/2006/12/equity-split-results-part-2.html http://founderresearch.blogspot.com/2006/12/equity-split-res...
- medianama 18y ago
  The problem with same equity is that there is no boss. I am not sure if democracy works too well in start ups.
  - mattjung 18y ago
    But I am sure that dictatorship will lead directly to failure ;) Conflicts between founders must be resolved by good arguments not by outvoting...
    - medianama 18y ago
      No doubt about that. But there has to be one guy whose word prevails... trying to do everything by consensus wastes a lot of time and doesn't always lead to best decision
redhex 18y ago
Equity equates to liability if the company folds and incurred debt. Hence all the shares must be defined at the point in time and not only 5% now and then another 5% when X is done.
- sokoloff 18y ago
  I think that's wrong on two accounts: 1. True corporate debt dies when the company dies, just as personal debt dies with the person. If someone has signed a personal guarantee on "corporate" debt, that's not the case, of course, but in that event, the shareholders of the company are not obligated to dip into their pocket to satisfy what amounts to personal debt of someone else. 2. If 90% of the shares remain with the company as treasury shares and you and I, as co-founders, each has 5% of the company vested, then our 5% stakes ALSO have a beneficial interest in the proportional share of the treasury shares. In a valueless company, of course that's irrelevant.
aneesh 18y ago
> "Today, right now, your contribution is worth 5% of the company and my creation of the company is worth 5%. The other 90% is based on what each of us does over the next 18 months. Here's a list of what has to get done, and what we agree it's worth..." Otherwise known as vesting (essentially).
CWuestefeld 18y ago
I just say Geddy and Alex of Rush on "That Metal Show". They attributed part of the reason that the band has survived so long to having skipped any nonsense about "who contributed what and its relative value" to simply splitting everything evenly, three ways.
- tptacek 18y ago
  This would be a compelling story if Neil Peart's predecessor John Rutsey was getting an equal share of revenues from albums after '74, or if you believed that Neil Peart would happily concede his share of future Rush revenue to any drummer that replaced him. Companies are more complicated than bands, but even this story is too oversimplified; Peart is a world-famous drummer and has massively contributed to the Rush brand --- you think his hypothetical replacement would deserve a full share for filling his shoes? (Disclaimer: though I know a bit about Rush, I do not listen to Rush, and hope to exit this thread with my indie cred intact. Go buy the new Neko Case album.)
nikblack 18y ago
or in other words a vesting schedule, which is how almost all funded startups are structured SG is over-rated, but lets leave that discussion for another time.
- Alex3917 18y ago
  "or in other words a vesting schedule, which is how almost all funded startups are structured" FWIW Seth is actually talking about a bootstrapped company and not a venture backed startup. As it stands the software is already complete, and there are maybe ten thousand potential firms who are well-suited to buy licenses. They don't want to grow in any way, so at any given time there are only two things the founders can do that would create value: sell a license, or add a feature / improve UI. Because of this I think some variant of Seth's suggestion actually makes sense in this case, albeit choosing a split upfront and then vesting is normally a much more sensible way to go.
  - nikblack 18y ago
    Even if you don't intend to seek funding you should still adopt the same model - there are very good reasons why it is used. Doing an even-split stock grant amongst founders at the formation of a new company is absolutely the worst thing you can do. Almost all company classes allow you to create a stock pool - even if there are only 100 shares. You can then setup vesting schedules for everybody (including employees). I wouldn't even grant a single share to any founder. I'm speaking from experience - first two companies I was involved with had co-founders that faded quickly and it took forever to work out the allocations after they eventually left. If you grant somebody stock, it is very hard to get it back. If you started a thread here on HN about horror stories with stock allocations you would probably hear a thousand stories. Almost every startup has one, even the companies that go on to IPO or big acquisitions.
    - mkuhn 18y ago
      To solve your problem you could agree that a person has to give back his/her shares if he leaves the company before a certain time has passed (a few years) or if she/he doesn't live up to the expected level of commitment.
ivankirigin 18y ago
This doesn't sound like vesting, but a list of milestones to reach before granting the stock. That is a horrible idea.
- abstractbill 18y ago
  Any list of milestones you draw up when you start a company is likely to contain things you mistakenly thought would be important, and omit things that turned out to actually be important. Doesn't sound very workable to me, agreed.
  - ivankirigin 18y ago
    Even if things are important, and the person executes well, and that business unit could get crushed by something unforeseen. To align interests, employees should have the whole company in mind, not just their personal goals to get equity.
  - alain94040 18y ago
    Precisely. So the right solution is vesting, which is a way to say: a) today we both accomplished only 5% of all the work that needs to be done (that's Seth's point of view) b) there are many things that still need to be done (still in line with the article) c) we can't predict what else will be important, but we'll work on whatever needs to be done (that's where vesting beats Seth's proposal)
  - jbarciauskas 18y ago
    This is why I find corporate HR "goal-setting" to be such nonsense. You set a bunch of goals, but then you have real work that needs to get done, that is probably completely different from what you thought it would be. At the end of the quarter/half/year, you look back at your goals and say wow, I didn't accomplish any of that! But you were still productive, in completely unexpected ways. The future is funny like that.
- mrtron 18y ago
  It does sound like a bees nest of problems. I much prefer just splitting 50/50 and having both founders kick as much ass as possible. This does force you to be able to rely on your cofounder, but that is probably is a good idea (and unavoidable) anyways.
sanj 18y ago
Stop arguing about the value of something that doesn't exist and go build it.
ispivey 18y ago
That strikes me as a terrible idea. His plan would have the founders constantly second-guessing each other over reaching milestones, and would take ordinary disputes ("You never start work before 11AM"; "The design work is taking 3x as long as the development, you're a bottleneck") and turn them into knock-down drag-out brawls over equity every few months. I'm a fan of splitting things up at the beginning, attaching a vesting schedule, and having everyone work as hard as possible. You also shouldn't have this conversation until everyone's committed to working full-time on a business. Trying to give equity to someone who has a day job and promises to leave "when the new business is really underway" is a disaster in the making.
- kjw 18y ago
  Agreed. As many have said, Seth's post sounds like a terrible idea. Although there's no simple solution, an up-front equity split will have fewer potential problems down the road. Whereas vesting is just linked with the passage of time, putting in milestones is very dangerous. It can lead to all sorts of erratic behavior, all in the name of achieving milestones, which may or may not be relevant. You can't just look into the future and know what the right goals will be. VCs definitely include vesting schedules but tend to avoid milestones.
herval 18y ago
don't you have to assign 100% of ownership when you open a company in US? I mean, in my country, the company contract has to sum the shares up to 100%... there can't be a '90% floating', it's not legal...
run4yourlives 18y ago
I don't get this. Dividing equity is easy in the beginning, just like slicing a pie: equal shares. The idea of 70/30 or other offset splits only suggests that one partner is more valuable than the other, hence by definition they aren't partners - they are superior and subordinate. You're already creating a situation where the person with lower equity isn't as motivated as the one with more. That has failure written all over it. I think if you're talking about taking a business from piece of paper to something real, and you have partners involved, the only way you can ensure any measure of success is to divide things equally. If the share isn't equal, I don't think partnership is what you should be discussing at all.
- tptacek 18y ago
  I don't think you read the article carefully. He's advocating equal shares; 5% each. He's then advocating that further equity grants be structured around milestones, which is an alternative to vesting.
  - run4yourlives 18y ago
    But what's the point of leaving all that out there to argue about later on? He's not solving the issue, he's deferring it.
    - tptacek 18y ago
      Because people who try to "solve" this issue up front always get it wrong, because there isn't enough information to make decisions like this.
      - run4yourlives 18y ago
        Which is why I'm suggesting to split equally and get on with it as an alternative. (Admittedly this is going further than my experience allows)
        tptacek 18y ago

62 points by mattjung 18y ago

I disagree with Seth. Any discussion about who contributed what and who more may absorb a lot of energy from the startup. Founders starting together should have the same equity because they can expect from each other to give their maximum to drive the success of their company. And they will have the same motivation and interest to give their maximum.

swombat 18y ago
That's a nice idea in theory but it ignores the practical fact that contributions will be different, people's commitment will vary over time, and people's expectations will clash.
- mattjung 18y ago
  There is a study that suggests that equal equity among founders leads to more stable and successful startups: http://founderresearch.blogspot.com/2006/12/equity-split-results-part-2.html http://founderresearch.blogspot.com/2006/12/equity-split-res...
medianama 18y ago
The problem with same equity is that there is no boss. I am not sure if democracy works too well in start ups.
- mattjung 18y ago
  But I am sure that dictatorship will lead directly to failure ;) Conflicts between founders must be resolved by good arguments not by outvoting...
  - medianama 18y ago
    No doubt about that. But there has to be one guy whose word prevails... trying to do everything by consensus wastes a lot of time and doesn't always lead to best decision

redhex 18y ago

Equity equates to liability if the company folds and incurred debt. Hence all the shares must be defined at the point in time and not only 5% now and then another 5% when X is done.

sokoloff 18y ago
I think that's wrong on two accounts: 1. True corporate debt dies when the company dies, just as personal debt dies with the person. If someone has signed a personal guarantee on "corporate" debt, that's not the case, of course, but in that event, the shareholders of the company are not obligated to dip into their pocket to satisfy what amounts to personal debt of someone else. 2. If 90% of the shares remain with the company as treasury shares and you and I, as co-founders, each has 5% of the company vested, then our 5% stakes ALSO have a beneficial interest in the proportional share of the treasury shares. In a valueless company, of course that's irrelevant.

aneesh 18y ago

> "Today, right now, your contribution is worth 5% of the company and my creation of the company is worth 5%. The other 90% is based on what each of us does over the next 18 months. Here's a list of what has to get done, and what we agree it's worth..." Otherwise known as vesting (essentially).

CWuestefeld 18y ago

I just say Geddy and Alex of Rush on "That Metal Show". They attributed part of the reason that the band has survived so long to having skipped any nonsense about "who contributed what and its relative value" to simply splitting everything evenly, three ways.

tptacek 18y ago
This would be a compelling story if Neil Peart's predecessor John Rutsey was getting an equal share of revenues from albums after '74, or if you believed that Neil Peart would happily concede his share of future Rush revenue to any drummer that replaced him. Companies are more complicated than bands, but even this story is too oversimplified; Peart is a world-famous drummer and has massively contributed to the Rush brand --- you think his hypothetical replacement would deserve a full share for filling his shoes? (Disclaimer: though I know a bit about Rush, I do not listen to Rush, and hope to exit this thread with my indie cred intact. Go buy the new Neko Case album.)

nikblack 18y ago

or in other words a vesting schedule, which is how almost all funded startups are structured SG is over-rated, but lets leave that discussion for another time.

Alex3917 18y ago
"or in other words a vesting schedule, which is how almost all funded startups are structured" FWIW Seth is actually talking about a bootstrapped company and not a venture backed startup. As it stands the software is already complete, and there are maybe ten thousand potential firms who are well-suited to buy licenses. They don't want to grow in any way, so at any given time there are only two things the founders can do that would create value: sell a license, or add a feature / improve UI. Because of this I think some variant of Seth's suggestion actually makes sense in this case, albeit choosing a split upfront and then vesting is normally a much more sensible way to go.
- nikblack 18y ago
  Even if you don't intend to seek funding you should still adopt the same model - there are very good reasons why it is used. Doing an even-split stock grant amongst founders at the formation of a new company is absolutely the worst thing you can do. Almost all company classes allow you to create a stock pool - even if there are only 100 shares. You can then setup vesting schedules for everybody (including employees). I wouldn't even grant a single share to any founder. I'm speaking from experience - first two companies I was involved with had co-founders that faded quickly and it took forever to work out the allocations after they eventually left. If you grant somebody stock, it is very hard to get it back. If you started a thread here on HN about horror stories with stock allocations you would probably hear a thousand stories. Almost every startup has one, even the companies that go on to IPO or big acquisitions.
  - mkuhn 18y ago
    To solve your problem you could agree that a person has to give back his/her shares if he leaves the company before a certain time has passed (a few years) or if she/he doesn't live up to the expected level of commitment.

ivankirigin 18y ago

This doesn't sound like vesting, but a list of milestones to reach before granting the stock. That is a horrible idea.

abstractbill 18y ago
Any list of milestones you draw up when you start a company is likely to contain things you mistakenly thought would be important, and omit things that turned out to actually be important. Doesn't sound very workable to me, agreed.
- ivankirigin 18y ago
  Even if things are important, and the person executes well, and that business unit could get crushed by something unforeseen. To align interests, employees should have the whole company in mind, not just their personal goals to get equity.
- alain94040 18y ago
  Precisely. So the right solution is vesting, which is a way to say: a) today we both accomplished only 5% of all the work that needs to be done (that's Seth's point of view) b) there are many things that still need to be done (still in line with the article) c) we can't predict what else will be important, but we'll work on whatever needs to be done (that's where vesting beats Seth's proposal)
- jbarciauskas 18y ago
  This is why I find corporate HR "goal-setting" to be such nonsense. You set a bunch of goals, but then you have real work that needs to get done, that is probably completely different from what you thought it would be. At the end of the quarter/half/year, you look back at your goals and say wow, I didn't accomplish any of that! But you were still productive, in completely unexpected ways. The future is funny like that.
mrtron 18y ago
It does sound like a bees nest of problems. I much prefer just splitting 50/50 and having both founders kick as much ass as possible. This does force you to be able to rely on your cofounder, but that is probably is a good idea (and unavoidable) anyways.

sanj 18y ago

Stop arguing about the value of something that doesn't exist and go build it.

ispivey 18y ago

That strikes me as a terrible idea. His plan would have the founders constantly second-guessing each other over reaching milestones, and would take ordinary disputes ("You never start work before 11AM"; "The design work is taking 3x as long as the development, you're a bottleneck") and turn them into knock-down drag-out brawls over equity every few months. I'm a fan of splitting things up at the beginning, attaching a vesting schedule, and having everyone work as hard as possible. You also shouldn't have this conversation until everyone's committed to working full-time on a business. Trying to give equity to someone who has a day job and promises to leave "when the new business is really underway" is a disaster in the making.

kjw 18y ago
Agreed. As many have said, Seth's post sounds like a terrible idea. Although there's no simple solution, an up-front equity split will have fewer potential problems down the road. Whereas vesting is just linked with the passage of time, putting in milestones is very dangerous. It can lead to all sorts of erratic behavior, all in the name of achieving milestones, which may or may not be relevant. You can't just look into the future and know what the right goals will be. VCs definitely include vesting schedules but tend to avoid milestones.

herval 18y ago

don't you have to assign 100% of ownership when you open a company in US? I mean, in my country, the company contract has to sum the shares up to 100%... there can't be a '90% floating', it's not legal...

run4yourlives 18y ago

I don't get this. Dividing equity is easy in the beginning, just like slicing a pie: equal shares. The idea of 70/30 or other offset splits only suggests that one partner is more valuable than the other, hence by definition they aren't partners - they are superior and subordinate. You're already creating a situation where the person with lower equity isn't as motivated as the one with more. That has failure written all over it. I think if you're talking about taking a business from piece of paper to something real, and you have partners involved, the only way you can ensure any measure of success is to divide things equally. If the share isn't equal, I don't think partnership is what you should be discussing at all.

tptacek 18y ago
I don't think you read the article carefully. He's advocating equal shares; 5% each. He's then advocating that further equity grants be structured around milestones, which is an alternative to vesting.
- run4yourlives 18y ago
  But what's the point of leaving all that out there to argue about later on? He's not solving the issue, he's deferring it.
  - tptacek 18y ago
    Because people who try to "solve" this issue up front always get it wrong, because there isn't enough information to make decisions like this.
    - run4yourlives 18y ago
      Which is why I'm suggesting to split equally and get on with it as an alternative. (Admittedly this is going further than my experience allows)
      - tptacek 18y ago