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"Don't resolve these problems with shares. Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them
by n72 12y ago
"Don't resolve these problems with shares. Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU."
The IOU solution is not a good one:
1. Not taking salary when a startup starts is basically a very risky loan. An IOU simply doesn't take into account the risk involved.
2. This is not symmetrical to how investors are treated. In both cases there is an investment in the company which can be measured in terms of dollars. In the case of the employee he is only getting an IOU, but in the case of the investor, he is getting shares. I don't see any reason why these should be treated differently.
- tptacek 12y agoSo don't use a dollar-for-dollar IOU. You can pay interest. What you're trying to avoid is bringing company valuation into totally mundane cash flow problems like "who pays for plane tickets to first customer meeting". It's a sign of very bad founding team cohesion when the founders look at each other as negotiating adversaries. Founders should prefer solutions that have a quick and intuitive sense of fairness over technical solutions that attempt to ensure fairness.
- pan69 12y agoHonest question, what happens to IOU's when the company fails? E.g. in the described scenario, one founder takes a salary and the other takes IOU's (+ 5% interest). The founder with the salary took less risk but still received 50% of the shares (even though they are worth zero when the company failed).
- chasing 12y agoI've heard advice that giving up salary like this should be considered equivalent to investing seed money. If you get $50k for your first year with the company and I get no money, treat that as if I gave the company $50k and work things out like that. This is probably a bit more complicated in practice, but seems fair on the face. Curious what other folks think.
- tptacek 12y agoYou're mixing valuation into mundane cash-flow problems, and also letting arbitrary circumstance help determine equity allocation; however you chop it up when the cofounder ponies up for plane tickets or whatnot, it'll seem fair at the time and a lot less fair after every member of the team has broken their backs getting the business off the ground. Reasonable people can disagree on this point, but one thing that YC has said for years now that rings perfectly true to me: cofounder disputes can kill a company more abruptly than almost anything else. Rig your startup to minimize the possibility of resentment; you'll need all the unimpeded communications capacity you can get to resolve the problems that will arise intrinsically from your business.
- n72 12y agoI'm curious what you would recommend to the me of five years ago (this sounds like a challenge, but it really isn't — I'm genuinely interested in your take.) I started with three other guys on day 1 of a startup. They had money to put into the startup from a previous venture. I didn't but took 50% pay cut to lengthen the runway, as it were. After 9 months the company was almost out of money. I worked for free for 3 months after which we got the product off the ground. (They paid themselves during this time from the little money the company had left.) Two years later we had a very successful exit. For the fact that I worked at 50% paycut and worked for free, I demanded equity. Had I taken an IOU I would have missed out on a significant payday. The money which I didn't take from the company was just as important as they money they put in: without either one we would never have had time to release the product.
- tptacek 12y ago
- 1stop 12y agoBut your company has no value, so how many shares does your 100k salary buy? Do you compare that with other investors? What if you have no other investors? If it were me, I'd force the founder to take the salary before I gave them more equity.