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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)

#31

Post by tptacek »

zeteo wrote: post #30
tptacek wrote: post #28

Earlier quoted context omitted.

No, it does not beg the question, because the question Spolsky is answering is practical, not epistemological. He's describing the best, simplest structure for equity allocation. He didn't give you a magic calculator.

Well, you know, you're working in the kitchen and I'm waiting tables. Last night's tips were $100 and I have a perfectly fair system for dividing them. I get $50, here's $40 for you, and I'll give $10 to the busboy. Or maybe it's $80 for me, $20 for you, and screw the busboy. It doesn't really matter as long as everyone agrees and it makes sense. But my system is really fair, you know.

This would be wittier if dividing tips was anything at all like allocating equity; in reality, the only thing the two problems share is arithmetic operators.

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

#32

Post by diziet »

vitovito wrote: post #6

Can a mod change the date? It's a repost of his original answer from 2011: https://web.archive.org/web/20110416041922/http://answers.on... There's been a lot of discussion since, including https://news.ycombinator.com/item?id=2445447 and https://news.ycombinator.com/item?id=3489719 . Also, at the time, Dan Shapiro argued against it here: http://www.quora.com/What-do-you-think-about-Joel-Spolskys-a... I also think the…

WOTC's share distribution was interesting in the sense that it was terrible for the founder.

What did work out well was Garfield's equity share, etc.

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

#33

Post by tptacek »

vitovito wrote: post #6

Can a mod change the date? It's a repost of his original answer from 2011: https://web.archive.org/web/20110416041922/http://answers.on... There's been a lot of discussion since, including https://news.ycombinator.com/item?id=2445447 and https://news.ycombinator.com/item?id=3489719 . Also, at the time, Dan Shapiro argued against it here: http://www.quora.com/What-do-you-think-about-Joel-Spolskys-a... I also think the…

The "if you're going to argue yourselves to death, do it now" advice seems incomplete to me. It presumes a model where a team is either going to argue itself to death or not; the outcome is predestined, and so it's better to know early. But reality as I've experienced it is that arguments degrade teams (and relationships of all sorts). A team that might have survived can be killed by inviting a pointless argument.

A team has a capacity for arguments that depletes over time as arguments exhaust the team members. Arguments happening in rapid succession set up a vicious cycle, because there's a migraine aura of bad communications surrounding any big argument, and difficult decisions that happen in that aura spark needless new arguments. Lots of arguments also carry a potential for resentment, which creates a longer-term communication problem which sometimes insidiously builds as the company runs.

The "trial arguments" theory that Quora comment suggests seems to me a little like those parents who throw "chicken pox parties". It's probably fine and maybe even pragmatic, but it's a risk.

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

#34

Post by n72 »

tptacek wrote: post #27
chasing wrote: post #19

Earlier quoted context omitted.

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.

You'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…

I'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.

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

#35

Post by zeteo »

tptacek wrote: post #31
zeteo wrote: post #30

Earlier quoted context omitted.

Well, you know, you're working in the kitchen and I'm waiting tables. Last night's tips were $100 and I have a perfectly fair system for dividing them. I get $50, here's $40 for you, and I'll give $10 to the busboy. Or maybe it's $80 for me, $20 for you, and screw the busboy. It doesn't really matter as long as everyone agrees and it makes sense. But my system is really fair, you know.

This would be wittier if dividing tips was anything at all like allocating equity; in reality, the only thing the two problems share is arithmetic operators.

Blunt contradiction does not really make an argument. If you had something more precise to say than "give less equity to people who joined later" - now that would be interesting.

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

#36

Post by tptacek »

zeteo wrote: post #35
tptacek wrote: post #31

Earlier quoted context omitted.

This would be wittier if dividing tips was anything at all like allocating equity; in reality, the only thing the two problems share is arithmetic operators.

Blunt contradiction does not really make an argument. If you had something more precise to say than "give less equity to people who joined later" - now that would be interesting.

Well, in comparing tip splits to equity allocation, I observe that only one of those activities involves predicting the future.

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

#37

Post by n72 »

jamesblonde wrote: post #16

"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…

So, as a founder I quit my lucrative job, max out my credit card, work 18 hour days for a year giving up a social life, vacations etc. Once we're making money and I hire you to do QA where you work 8 hours a day and take no risk. There is no circumstance under which you should get even close to what I as founder get.

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

#38

Post by tptacek »

n72 wrote: post #34
tptacek wrote: post #27

Earlier quoted context omitted.

You'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…

I'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 m…

If the upside of investing 50% of your pay was significant, the upside from your allocation as a cofounder should have been far more significant in a successful exit. To me, the delta between a paid off IOU and a return on equity purchased with a pay cut sounds like cheap insurance. But I don't know enough about your situation to say.

Reasonable people can disagree; I'm invested only in the idea of giving 50/50+IOU its fullest, fairest hearing.

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

#39

Post by midas007 »

TL;DR equal shares in the same layers and vesting are the big points.

For the top layer: the real nature of a person comes out when they have a perceived opportunity to win big at someone's expense... hence good friends can make good cofounders. Failing that, find someone that plays well with others and considers the long-game of their actions. (You're gonna stick together for the next venture if this app doesn't work out, right?)

For the second layer: should be people you'd like to work with that may be founders in the future or people that have been recommended.

Third layer are more/less startup employees. So not regular corporate like employees that need to be thought for or are super niche, but T-shaped folks that can take initiative and worry a little more about details.

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

#40

Post by msandford »

tptacek wrote: post #27
chasing wrote: post #19

Earlier quoted context omitted.

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.

You'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…

Cashflow is cashflow is cashflow, it doesn't matter if it's more cash in or less cash out. They're mathematically equivalent.

When pursuing a startup cashflow is the biggest problem of all, you're bleeding out and trying to staunch the flow. Someone plugging a hole is just as valuable as someone providing a pint.

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