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Seth's Blog: Advice on equity

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Re: Seth's Blog: Advice on equity

#21

Post by ispivey »

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.

Re: Seth's Blog: Advice on equity

#22

Post by herval »

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...

Re: Seth's Blog: Advice on equity

#23

Post by jon_dahl »

ivankirigin wrote: post #12

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

I think this depends on how you implement it. I've been a part of several startups that have issued shares to founders on Day 1, and every single time issues have arisen down the road.

* The partners were equal at the beginning, but down the road, their value and contributions weren't equal

* Passive partners were given the same share as active partners

* People were brought on out of loyalty, not because of their value going forward

All three of these problems can lead to instability and conflict.

Partnering is serious business, and it's important to do it right. If people are bringing money to the table, it's relatively simple - value the company and issue shares. But when a company has no value, or if you aren't even sure where the company will go, it's important to vest ownership progressively, based on contribution. Not to say that this is easy, but it's better than just issuing everyone 1,000,000 shares at the concept/seed stage.

Re: Seth's Blog: Advice on equity

#24

Post by kjw »

ispivey wrote: post #21

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…

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.

Re: Seth's Blog: Advice on equity

#25

Post by medianama »

mattjung wrote: post #20
medianama wrote: post #8

Earlier quoted context omitted.

The problem with same equity is that there is no boss. I am not sure if democracy works too well in start ups.

But I am sure that dictatorship will lead directly to failure ;) Conflicts between founders must be resolved by good arguments not by outvoting...

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

Re: Seth's Blog: Advice on equity

#26

Post by alain94040 »

abstractbill wrote: post #14
ivankirigin wrote: post #12

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

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.

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)

Re: Seth's Blog: Advice on equity

#27

Post by alain94040 »

Alex3917 wrote: post #9
nikblack wrote: post #6

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.

"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…

I tried to write a convincing argument why vesting is a must for all startups, bootstrapped or VC-backed: http://blog.fairsoftware.net/2009/02/11/reward-performance-w...

I have enough stories to tell and frankly, as a founder, I want to have vesting in place for myself and everyone else. It's the fair thing to do and it will eliminate a lot of headhaches down the road. You know that startups never turn out the way they were planned.

Re: Seth's Blog: Advice on equity

#28

Post by nikblack »

coglethorpe wrote: post #16
nikblack wrote: post #10

Earlier quoted context omitted.

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).…

So who "owns" the stock that's in the pool? Suppose a company is purchased before everyone is vested, who get's the cash?

within vesting agreements there are change of control conditions. For outright sales, it usually works out that those who are over the cliff have their vesting accelerated. In a merger (which a lot of acquisitions technically are), the acquiring entity will usually lock the employees down with a new agreement that includes the requirement to further vest out.

In other words, it depends. The best thing to do is to find a good law firm, pref in the valley and pref a firm that works with startups. Get a fixed price (or fixed price + options - some firms do that) for incorporation docs and establishing the pool and agreements etc. Setup a decent employee pool plus some for advisors and board members down the road. If you do eventually get funding, the VC will have a hard time arguing that you should wipe the slate clean if everything is already setup. VC's use pools and allocations to squeeze you further on a deal, usually without the founders noticing.

Don't use off-the-shelf agreements that you find online, do it properly. It should cost you $1-3k all up for the lot.

I am not sure what YC do as part of their foundation docs, I would be interested to know.

Re: Seth's Blog: Advice on equity

#30

Post by nikblack »

mkuhn wrote: post #13
nikblack wrote: post #10

Earlier quoted context omitted.

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).…

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.

that is essentially what vesting does - except it is more legally sound.
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