6 ms·

I found myself saying to the reporter over and over, "This may seem obvious, but..." and it's true that many of ideas don't seem like anything new. But because

by jl 12y ago

I found myself saying to the reporter over and over, "This may seem obvious, but..." and it's true that many of ideas don't seem like anything new. But because I see them happen over and over again, I thought they were important to highlight for anyone starting a startup.

technotony 12y ago
Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and raised a significant Kickstarter funding before my co-founder committed 100%. Could you comment more on issues you see this brings down the line and how this plays out? Also, does this conflict a little with your next point about clear leadership?
- hga 12y ago
  Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years? Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....
  - technotony 12y ago
    Obviously want to optimize for success. What I'd really like to know is what are the pitfalls that non-even equity split can bring, so that I can watch to see if that's happening and potentially mitigate.
    - hga 12y ago
      "Obviously want to optimize for success." No, you're optimizing for "fairness" as you see it, for yourself. This split will do nothing good going forward ... unless, of course, you will internally burn at the idea of your cofounder getting more than what you view as his fair share. Which should tell you something, and brings me to: The pitfalls are inside people's heads and hearts, so I think you'll find that strategy to be particularly difficult to execute. The cofounder should be obvious; others who, especially down the road when the starting details are lost in time, will ideally see you two working just as hard as each other, and wonder why the split is so uneven. I don't see anything good that can come from that.
      - technotony 12y ago
        This data somewhat contradicts that however, as it says unequal shares are correlated with higher initial funding valuations (obviously that's not a perfect metric) http://siepr.stanford.edu/system/files/shared/pubs/hellmann%20and%20wasserman%20-%20nber%20working%20paper%20-%20'first%20deal'.pdf http://siepr.stanford.edu/system/files/shared/pubs/hellmann%... I'd really like to see the data which suggests equal shares lead to better success outcomes (maybe YC has this?).
        tptacek 12y ago
        My guess is that the numbers would swing sharply in the other direction if the study accounted for survivorship bias.
    - tptacek 12y ago
      Unequal splits are an invitation to resentment and the degraded communication and problem solving that comes with resentment. If you've done a bunch of startups, you've probably had the experience of having a harrowing argument with cofounders, and the realization of how easily your company can disintegrate based on nothing more than silly interpersonal conflicts. Some people, myself included, take from this the lesson that you should rig your startup to minimize these issues as much as possible. Another reason to avoid unequal splits is that they often presume you can see into the future. Who's to say that whatever you did to "earn" an extra 10% of the company isn't going to be more than offset by something your cofounder does later?
- johnrob 12y ago
  I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.
  - tptacek 12y ago
    5% is an enormous amount of equity to grant for anything. Recruited executives might get 5%. First technical hire often gets that.
    - 7Figures2Commas 12y ago
      > 5% is an enormous amount of equity to grant for anything. No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation. The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation. In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%. Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
      - tptacek 12y ago
        5% is a gigantic grant for an employee. I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".
- jl 12y ago
  This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)
  - orky56 12y ago
    Should the majority equity holder be the "clear leader" who is the final decision maker?
- golergka 12y ago
  There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.
mbesto 12y ago
Totally, thanks jl! re: even equity split - I'm interested to understand a little better how this is a killer? I understand the rationale that is posed in the article, but it seems to be a pretty blanket statement not applicable to all situations. Either way, I've had lawyers (in SV specifically) suggest a slightly uneven split (i.e. 51/49), because there is nothing worse than hitting a stalemate on founder decision making. Additionally, I've yet to see a recent tech S-1 filing where founding members have had a complete 50:50 ratio. (Twitter, Facebook, Trulia, Box are just some that come to mind)
- alain94040 12y ago
  You can try out my co-founder equity calculator (http://foundrs.com http://foundrs.com). While it's not biased, I hope it never gives a 50/50 split. There are many reasons why 50/50 is bad. The obvious one is that it kills decision-making. One day, the two co-founders will disagree, but since no one can overrule the other one, the company will drift and possibly die. But there is a much more interesting problem (that they don't teach you in you MBA class): founders going for 50/50 is a sign that the company doesn't have a real leader. Rather than have a very unpleasant conversation about why you, the alpha CEO, should be the ultimate boss, no one feels comfortable having that discussion. You sit one evening around the table discussing how to incorporate, you sort of shyly say "what about 50/50", your co-founder stares at the floor and nods. Done. You have a 50/50 split, and a huge red warning sign of future company failure. Source: I wrote the calculator below and had detailed discussions with 100+ founders about how to split their equity with their co-founders.
  - tptacek 12y ago
    They don't teach you that in "MBA class" because it isn't true. Equity allocation and executive authority are mostly orthogonal concerns. Smart teams of equal cofounders manage to pick leaders all the time. Controversial decisions at early-stage companies don't get decided based on equity; by the time the equity card gets played, your company is dead anyways. Your calculator appears to, among other things, allocate equity based on who paid for business cards. I don't think anyone's done a better job of explaining how to handle equity than Joel Spolsky. Here's his answer to this question: https://gist.github.com/isaacsanders/1653078 https://gist.github.com/isaacsanders/1653078 He even addresses the "paying for business cards" question! (FWIW: Matasano is an "equal split among founders" company; we elected to make Dave our President and Decider.)
scobar 12y ago
In the essay, "The 18 Mistakes That Kill Startups" at http://www.paulgraham.com/startupmistakes.html http://www.paulgraham.com/startupmistakes.html , PG mentions single founder as #1 in the list. I am searching for a co-founder for two main reasons; startups are a lot of work for a single founder, and a brainstorming partner can provide a different perspective or tell me when I'm wrong. My devotion to my family, and a promise I made to my late father will keep me trying to move forward no matter what. I've been through the highs and lows of the emotional rollercoaster of entrepreneurship, and I understand the willpower necessary to keep moving forward during those lows. I'm very reluctant to choose a co-founder I wouldn't be willing to join in a fox hole. In your opinion, what is the most important reason that a single founder has such a disadvantage, when it relieves the company of facing other startup-killing issues you mentioned in the interview?
- robomartin 12y ago
  I am going to go out on a limb and say that a lot of what PG and the like say is far more applicable to 20-something non-entrepreneurs who fresh out of school (while still in school) want to start a company. I don't mean to diminish PG or his always-valuable advise. I am merely pointing out that a lot of these points are far more applicable to a certain class of entrepreneur. If you take a single 18 to 25 year old "kids" with no business experience whatsoever and a life experience mostly devoid of struggle I'd be the probability of failure is absolutely huge. Entrepreneurship can test you in incredible ways. It can take you to the deepest and darkest moments of your life. And, if you are alone and are not "built" for it you will crumble. Anyone with a good amount of business experience has a far greater probability of success if only because they've done it before and understand the game. You can hire people for the other functions that need to be performed. I guess my point is that a co-founder is not some kind of a magic pill that will auto-magically make things better. Teaming up with someone with limited or no business experience and you hardly know is a formula for disaster. If both of you are newbies and you have some external coaching (YC) then, yes, things could be better. I had a situation with someone who wanted to partner-up for a mobile app. I flat-out refused to partner (in the sense of company co-ownership). We put together a revenue-sharing agreement (50-50 was fine for this case). Control and all business decisions remained with me. I would eventually learn this was a great decision when this person went off the rails half-way through development. It sounds like you have solid business experience. Don't buy into the SCV mantra of having to have a co-founder. Do it your way. Now, if you have to play on their turf then it's their rules. Outside that, there's no reason you couldn't be successful. Not one. BTW, I don't buy YC/SCV statistics because they do not include the millions of solo-founder businesses that are launched every year. There's everything from lunch truck operators to restaurants, web design shops and tech companies. I am going to go out on a limb and say that if you looked at that data you might see that solo founders have a far greater probability of success than the SCV crowd mantra paints. Again, if you are taking business virgins out of college to start businesses, yes, absolutely, get two, four or six of them because they are very likely to commit business seppuku if on their own. Also, VC's need insurance if they are going to make an investment. Multiple green founders is safer than one green founder. Here's an example of what I am talking about (and it looks like no VC money): http://www.forbes.com/sites/hollieslade/2014/01/24/after-her-first-startup-blew-up-this-ceo-went-on-to-build-a-100m-company/ http://www.forbes.com/sites/hollieslade/2014/01/24/after-her...

by jl 12y ago

technotony 12y ago

Thanks for the really great advice. I'm interested in the unequal equity. We have a 60-40 split which seemed fair as I'd worked full time on the company and raised a significant Kickstarter funding before my co-founder committed 100%. Could you comment more on issues you see this brings down the line and how this plays out? Also, does this conflict a little with your next point about clear leadership?

hga 12y ago
Are you interested in some abstract concept of "fairness", or in your company being successful over the next handful of years? Unless your co-founder is strongly in the direction of a saint, there's a good chance you can choose only one. In the scheme of things, if your venture is successful over the coming years, the details of the original starting positions of the two of you isn't all that big since you're now both 100%; you say so yourself, 60-40....
- technotony 12y ago
  Obviously want to optimize for success. What I'd really like to know is what are the pitfalls that non-even equity split can bring, so that I can watch to see if that's happening and potentially mitigate.
  - hga 12y ago
    "Obviously want to optimize for success." No, you're optimizing for "fairness" as you see it, for yourself. This split will do nothing good going forward ... unless, of course, you will internally burn at the idea of your cofounder getting more than what you view as his fair share. Which should tell you something, and brings me to: The pitfalls are inside people's heads and hearts, so I think you'll find that strategy to be particularly difficult to execute. The cofounder should be obvious; others who, especially down the road when the starting details are lost in time, will ideally see you two working just as hard as each other, and wonder why the split is so uneven. I don't see anything good that can come from that.
    - technotony 12y ago
      This data somewhat contradicts that however, as it says unequal shares are correlated with higher initial funding valuations (obviously that's not a perfect metric) http://siepr.stanford.edu/system/files/shared/pubs/hellmann%20and%20wasserman%20-%20nber%20working%20paper%20-%20'first%20deal'.pdf http://siepr.stanford.edu/system/files/shared/pubs/hellmann%... I'd really like to see the data which suggests equal shares lead to better success outcomes (maybe YC has this?).
      - tptacek 12y ago
        My guess is that the numbers would swing sharply in the other direction if the study accounted for survivorship bias.
  - tptacek 12y ago
    Unequal splits are an invitation to resentment and the degraded communication and problem solving that comes with resentment. If you've done a bunch of startups, you've probably had the experience of having a harrowing argument with cofounders, and the realization of how easily your company can disintegrate based on nothing more than silly interpersonal conflicts. Some people, myself included, take from this the lesson that you should rig your startup to minimize these issues as much as possible. Another reason to avoid unequal splits is that they often presume you can see into the future. Who's to say that whatever you did to "earn" an extra 10% of the company isn't going to be more than offset by something your cofounder does later?
johnrob 12y ago
I'd give yourself a gift for getting the company off the ground. 5% seems right, but I suppose 10% is not out of the question. Then split the remainder with your co-founder. This process would lead to 52.5/47.5 and 55/45 splits respectively. 60/40 is a 20% gift; I think that's a little high but it could be justified if significant progress has been made. Also, your vesting should of course have an earlier start date.
- tptacek 12y ago
  5% is an enormous amount of equity to grant for anything. Recruited executives might get 5%. First technical hire often gets that.
  - 7Figures2Commas 12y ago
    > 5% is an enormous amount of equity to grant for anything. No, it isn't. At a company that has raised capital or generates revenue, 5% might be enormous, or it might not be. It all depends on the company's valuation. The fundamental problem many early-stage startups run in to is that they haven't raised capital, don't have revenue and they try to use equity as an alternative to monetary compensation. In these situations, "sweat equity" is almost always a poor alternative because the math rarely makes sense for the recipient. For instance, if you're an experienced developer who can make $125,000/year and a friend wants you to become a co-founder of his business, forgoing salary until some future date or event, how much equity in a business worth $0 today do you need to make up for your salary? It's a trick question, and the answer is not 5%. Equity can be a very complex matter, but it's also very simple when someone suggests that it be used as a substitute for cash. If somebody wants to pay you for your services using equity, forget percentages. Determine what it's reasonably worth in dollars, if anything, today. If you are willing to accept less than the dollar value of your services, you're being generous to the company, not the other way around.
    - tptacek 12y ago
      5% is a gigantic grant for an employee. I don't actually disagree with you about employees asked to work on equity-only and deferred salary. It's just that I call those people "cofounders".
jl 12y ago
This article was of course a distilled version of a much longer conversation. The uneven equity split that causes problems is usually along the lines of 75% vs. 25%-- or worse, when one founder gets 10% or less. We see this happen quite often (and advise against it if we're not too late). The founder with 10% often becomes resentful and doesn't feel properly incentivized when he/she is working just as hard as the founder with 85%. A startup is so much about execution-- usually over a long period of time that the argument of "it was my idea" isn't very compelling. (60/40 is usually totally reasonable though, especially in a situation like yours.)
- orky56 12y ago
  Should the majority equity holder be the "clear leader" who is the final decision maker?
golergka 12y ago
There's no such thing as an "objective" fairness, and if it would exist, it wouldn't matter anyway. It only matters if your partner sincerely thinks if it's fair or not, and whether he will think so in the future.

mbesto 12y ago

Totally, thanks jl! re: even equity split - I'm interested to understand a little better how this is a killer? I understand the rationale that is posed in the article, but it seems to be a pretty blanket statement not applicable to all situations. Either way, I've had lawyers (in SV specifically) suggest a slightly uneven split (i.e. 51/49), because there is nothing worse than hitting a stalemate on founder decision making. Additionally, I've yet to see a recent tech S-1 filing where founding members have had a complete 50:50 ratio. (Twitter, Facebook, Trulia, Box are just some that come to mind)

alain94040 12y ago
You can try out my co-founder equity calculator (http://foundrs.com http://foundrs.com). While it's not biased, I hope it never gives a 50/50 split. There are many reasons why 50/50 is bad. The obvious one is that it kills decision-making. One day, the two co-founders will disagree, but since no one can overrule the other one, the company will drift and possibly die. But there is a much more interesting problem (that they don't teach you in you MBA class): founders going for 50/50 is a sign that the company doesn't have a real leader. Rather than have a very unpleasant conversation about why you, the alpha CEO, should be the ultimate boss, no one feels comfortable having that discussion. You sit one evening around the table discussing how to incorporate, you sort of shyly say "what about 50/50", your co-founder stares at the floor and nods. Done. You have a 50/50 split, and a huge red warning sign of future company failure. Source: I wrote the calculator below and had detailed discussions with 100+ founders about how to split their equity with their co-founders.
- tptacek 12y ago
  They don't teach you that in "MBA class" because it isn't true. Equity allocation and executive authority are mostly orthogonal concerns. Smart teams of equal cofounders manage to pick leaders all the time. Controversial decisions at early-stage companies don't get decided based on equity; by the time the equity card gets played, your company is dead anyways. Your calculator appears to, among other things, allocate equity based on who paid for business cards. I don't think anyone's done a better job of explaining how to handle equity than Joel Spolsky. Here's his answer to this question: https://gist.github.com/isaacsanders/1653078 https://gist.github.com/isaacsanders/1653078 He even addresses the "paying for business cards" question! (FWIW: Matasano is an "equal split among founders" company; we elected to make Dave our President and Decider.)

scobar 12y ago

In the essay, "The 18 Mistakes That Kill Startups" at http://www.paulgraham.com/startupmistakes.html http://www.paulgraham.com/startupmistakes.html , PG mentions single founder as #1 in the list. I am searching for a co-founder for two main reasons; startups are a lot of work for a single founder, and a brainstorming partner can provide a different perspective or tell me when I'm wrong. My devotion to my family, and a promise I made to my late father will keep me trying to move forward no matter what. I've been through the highs and lows of the emotional rollercoaster of entrepreneurship, and I understand the willpower necessary to keep moving forward during those lows. I'm very reluctant to choose a co-founder I wouldn't be willing to join in a fox hole. In your opinion, what is the most important reason that a single founder has such a disadvantage, when it relieves the company of facing other startup-killing issues you mentioned in the interview?

robomartin 12y ago
I am going to go out on a limb and say that a lot of what PG and the like say is far more applicable to 20-something non-entrepreneurs who fresh out of school (while still in school) want to start a company. I don't mean to diminish PG or his always-valuable advise. I am merely pointing out that a lot of these points are far more applicable to a certain class of entrepreneur. If you take a single 18 to 25 year old "kids" with no business experience whatsoever and a life experience mostly devoid of struggle I'd be the probability of failure is absolutely huge. Entrepreneurship can test you in incredible ways. It can take you to the deepest and darkest moments of your life. And, if you are alone and are not "built" for it you will crumble. Anyone with a good amount of business experience has a far greater probability of success if only because they've done it before and understand the game. You can hire people for the other functions that need to be performed. I guess my point is that a co-founder is not some kind of a magic pill that will auto-magically make things better. Teaming up with someone with limited or no business experience and you hardly know is a formula for disaster. If both of you are newbies and you have some external coaching (YC) then, yes, things could be better. I had a situation with someone who wanted to partner-up for a mobile app. I flat-out refused to partner (in the sense of company co-ownership). We put together a revenue-sharing agreement (50-50 was fine for this case). Control and all business decisions remained with me. I would eventually learn this was a great decision when this person went off the rails half-way through development. It sounds like you have solid business experience. Don't buy into the SCV mantra of having to have a co-founder. Do it your way. Now, if you have to play on their turf then it's their rules. Outside that, there's no reason you couldn't be successful. Not one. BTW, I don't buy YC/SCV statistics because they do not include the millions of solo-founder businesses that are launched every year. There's everything from lunch truck operators to restaurants, web design shops and tech companies. I am going to go out on a limb and say that if you looked at that data you might see that solo founders have a far greater probability of success than the SCV crowd mantra paints. Again, if you are taking business virgins out of college to start businesses, yes, absolutely, get two, four or six of them because they are very likely to commit business seppuku if on their own. Also, VC's need insurance if they are going to make an investment. Multiple green founders is safer than one green founder. Here's an example of what I am talking about (and it looks like no VC money): http://www.forbes.com/sites/hollieslade/2014/01/24/after-her-first-startup-blew-up-this-ceo-went-on-to-build-a-100m-company/ http://www.forbes.com/sites/hollieslade/2014/01/24/after-her...