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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)

#51

Post by Taek »

ojosilva wrote: post #47

My startup does not fit well with Joel's model of employee layered risk. I've bootstrapped early and every layer the last 3 years got payed a normal, market salary, and on time every month. We also payed bonuses and the CTO even drives a company car from day one. Almost everyone was hired either straight out of college or was unemployed, although that was not intentional but probably my subconscious deflecting the ex…

I think it really depends on your agreement with your employees, more than the risk. Do they feel like they are being treated fairly?

For me personally, I want my employees to feel vested in the company. They are helping to build it, they are helping to mold it and shape it into something that will hopefully be very great. I want them to have equity because it gives them responsibility. (We don't have any employees at the moment, so it's easy for me to say this now).

Most importantly, I want the employee to feel like they are in an arrangement that they are comfortable with. If they are doing it as just a job, working exactly 40 hours per week, then a salary without equity makes sense.

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

#52

Post by stackthatcode »

Open question: how do you look at the equity where one of the co-founders (Founder A) does not have to work for X number of years, since they've cashed out of another company. They have the capacity to work full time, whereas the other "co-founder" (Founder B) is only able to work part-time. Founder A has the means to not work for a lengthy period of time. While they're taking on an opportunity cost, is their risk viewed the same as some other guy that quits his job (kills his income) and maxes out his credit cards?

EDIT: According to Spolsky in his hypothetical situation, Founder B was not a co-founder because he kept his job. Founder A, OTOH was essentially unemployed and took on all the risk, and therefore was a "legitimate" founder.

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

#53

Post by 1stop »

tptacek wrote: post #33
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…

Off topic: Given the existence of a chicken pox vaccine. A chicken pox party is not even pragmatic. :)

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

#54

Post by 1stop »

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…

But 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.

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

#55

Post by 1stop »

greggman wrote: post #46
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 why you see these 2 things as different. Situation #1. 2 founders, one investor. 2 founders quit their jobs, have no money in the back. Investor invests $1 million. Money is used to buy equipment, rent office space, play living wages, hire contractors. Situation #2. 2 founders, one has $1 million, the other has nothing. Money is used similarly. It seems like the founder contributing $1 million in the 2nd…

If one founder bank rolls the entire enterprise, then they are the only founder, as the is no "risk" to the others (i.e they are getting paid from a known source of income).

I thought this discussion revolved around forgoing a salary, not bringing in initial investment. They are distinctly different.

founders should be distinct from investors in my opinion, I realise beggers can't be choosers, but it feels like you are going to argue a lot over how much that initial investment is worth vs how much the initial effort was worth, and probably fail because of it.

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

#56

Post by brudgers »

greggman wrote: post #46
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 why you see these 2 things as different. Situation #1. 2 founders, one investor. 2 founders quit their jobs, have no money in the back. Investor invests $1 million. Money is used to buy equipment, rent office space, play living wages, hire contractors. Situation #2. 2 founders, one has $1 million, the other has nothing. Money is used similarly. It seems like the founder contributing $1 million in the 2nd…

Suppose Ben has $1,000,000 to invest in a startup and Patrick has zero dollars to invest.

If Ben goes it alone, he believes he stands a 40% chance of a $3,000,000 exit.

If Ben cofounds with Patrick he believes he stands a 10% chance of a $50,000,000 exit.

Why is Ben better off economically just giving Patrick half the equity despite his lack of cash?

Forget the math, if one founder takes issue with another founder's getting rich off the company, then there's a problem that may be deep enough to prevent both of you from becoming rich.

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

#57

Post by tptacek »

brudgers wrote: post #56
greggman wrote: post #46

Earlier quoted context omitted.

I'm curious why you see these 2 things as different. Situation #1. 2 founders, one investor. 2 founders quit their jobs, have no money in the back. Investor invests $1 million. Money is used to buy equipment, rent office space, play living wages, hire contractors. Situation #2. 2 founders, one has $1 million, the other has nothing. Money is used similarly. It seems like the founder contributing $1 million in the 2nd…

Suppose Ben has $1,000,000 to invest in a startup and Patrick has zero dollars to invest. If Ben goes it alone, he believes he stands a 40% chance of a $3,000,000 exit. If Ben cofounds with Patrick he believes he stands a 10% chance of a $50,000,000 exit. Why is Ben better off economically just giving Patrick half the equity despite his lack of cash? Forget the math, if one founder takes issue with another founder's…

The nightmare of having to first value 1MM worth of shares on day one of a company, and then have to value Patrick's immediately intangible contribution to the company, both of which involve absurdly difficult predictions, is why you're better off not trying to resolve things between founders with shares. Or, at any rate, this is I think the point Joel Spolsky is trying to make. Reasonable people can &c &c &c.

The $1MM in vs. $0 in situation sounds like a nightmare all its own, though. Has anyone here been in a situation like that? How did it work out?

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

#58

Post by brudgers »

tptacek wrote: post #57
brudgers wrote: post #56

Earlier quoted context omitted.

Suppose Ben has $1,000,000 to invest in a startup and Patrick has zero dollars to invest. If Ben goes it alone, he believes he stands a 40% chance of a $3,000,000 exit. If Ben cofounds with Patrick he believes he stands a 10% chance of a $50,000,000 exit. Why is Ben better off economically just giving Patrick half the equity despite his lack of cash? Forget the math, if one founder takes issue with another founder's…

The nightmare of having to first value 1MM worth of shares on day one of a company, and then have to value Patrick's immediately intangible contribution to the company, both of which involve absurdly difficult predictions, is why you're better off not trying to resolve things between founders with shares. Or, at any rate, this is I think the point Joel Spolsky is trying to make. Reasonable people can &c &c &c. The $1…

Wasn't there a significant disparity in capital investment between Clark and Andreessen at NetScape?

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

#59

Post by peterjancelis »

ojosilva wrote: post #47

My startup does not fit well with Joel's model of employee layered risk. I've bootstrapped early and every layer the last 3 years got payed a normal, market salary, and on time every month. We also payed bonuses and the CTO even drives a company car from day one. Almost everyone was hired either straight out of college or was unemployed, although that was not intentional but probably my subconscious deflecting the ex…

If you were profitable when paying that company car and those salaries, and your cash flow was secure in that you either had a lot of clients or long terms contracts, then yeah I agree your employees did take on zero risk.

If you were profitable from day one, I assume you run a services business?

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

#60

Post by danshapiro »

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…

"at the time Dan Shapiro argued against it" -> and still do. :) To summarize the key points, I think:

- Joel confuses "easy" (50/50) with "fair" (working out the right number)

- It is better to argue yourselves to death early, when nobody else is affected, than later, when people are depending on you

- The expected value of an IOU is negligible because investors usually force you to waive them as a precondition of investing and they go to zero if the company fails

But perhaps I'm wrong. I'm expecting a round of innovation in equity allocation as companies heed sama's advice and try new things. I'm very curious to see how it works out!

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