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Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

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Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#11

Post by gatehouse »

colinbartlett wrote: post #2

Can someone explain to me why being hired in a later round of hiring is really that much less risk? It sounds right on the surface, but is that really the case in practice? Not in my experience. I've never known startups to be steady long-term job providers. Seems like most live on the edge, always with not more than 3 months cash in the bank. Even when you get a big round of funding and hire more people, the investo…

1. Investors see it that way when they participate in later rounds at higher valuations. When you disconnect from "market" it creates serious problems.

2. Skills risk, being at the top of your profession globally requires constant focus and professional support. The atmosphere at a very small company is hostile to this level of focus by necessity. It has a dulling effect.

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#12

Post by tptacek »

colinbartlett wrote: post #2

Can someone explain to me why being hired in a later round of hiring is really that much less risk? It sounds right on the surface, but is that really the case in practice? Not in my experience. I've never known startups to be steady long-term job providers. Seems like most live on the edge, always with not more than 3 months cash in the bank. Even when you get a big round of funding and hire more people, the investo…

Risk accumulates as the company operates. A risk faced by a layer 3 employee is also faced by layer 2 equity holders, even if they've left the firm.

Founder equity also compensates the founders for more than the risk that the company will fail and zero out their contributions; it also implicitly covers the upside risk of the founders, which upside was demonstrated by the fact that the founders created a company and presumably could have created others (or done something comparably lucrative) instead.

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#14

Post by geebee »

Interesting bit about diluting shares when new investment comes in. Joel's answer is very simple and seems extremely fair.

How common is this straightforward approach, where everyone is diluted in the same ratio of existing shares to new shares? I'd be interested in hearing about experience/knowledge other people may have had here.

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#15

Post by tptacek »

zeteo wrote: post #9

Umm that's a whole bunch of pulling numbers out of thin air. The 50-10-10-10-10-10 progression is proportionate to what exactly? The article would sound just the same if he recommended 75-5-5-5-5-5 or 40-30-20-10 instead.

This would be a trenchant criticism if Spolsky hadn't addressed it directly: 75-5-5-5-5-5-5 or 77-3-1-4-1-5-9, it doesn't matter as long as everyone agrees that it makes sense.

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#16

Post by jamesblonde »

"Now that we have a fair system set out," I had to laugh at that line. Our IT startup model is the poster child for the inequality that defines our age. Founders own 50%, everyone else should be happy on the crumbs.... There's got to be a better way. Hang on, there is. It's called the partnership model, from the Law Industry. If you work really hard, you can become a joint owner (no matter when you start), and share in the profits. When you leave, you get nothing. That model is fair!

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#17

Post by jamesblonde »

"Now that we have a fair system set out," I had to laugh at that line. Our IT startup model is the poster child for the inequality that defines our age. Founders own 50%, everyone else should be happy on the crumbs.... There's got to be a better way. Hang on, there is. It's called the partnership model, from the Law Industry. If you work really hard, you can become a joint owner (no matter when you start), and share in the profits. When you leave, you get nothing. That model is fair!

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#18

Post by thedufer »

zeteo wrote: post #9

Umm that's a whole bunch of pulling numbers out of thin air. The 50-10-10-10-10-10 progression is proportionate to what exactly? The article would sound just the same if he recommended 75-5-5-5-5-5 or 40-30-20-10 instead.

"You don't have to follow this exact formula but the basic idea is that you set up "stripes" of seniority"

He makes it pretty clear that that's an example and might not work for everyone (for example, if your hiring doesn't accelerate like that you might end up giving stripe 1 and stripe 2 hires the same number of shares with the suggested distribution, in which case you'd obviously want to move towards something more like your suggested 40-30-20-10).

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#19

Post by chasing »

n72 wrote: post #4

"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 a…

I'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.

Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)

#20

Post by tptacek »

acgourley wrote: post #13

Honest question - wouldn't a large stack of IOUs (say, 200k) tend to cause problems in the next investment deal? Wouldn't most investors demand to wipe that out before they are putting money in?

Maybe (I've had friends who tried to negotiated deferred salary into A-rounds). But there's also no rule saying that the IOU has to be paid back at the A-around.
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