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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)

#61

Post by ojosilva »

peterjancelis wrote: post #59
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?

It's a product business bootstrapped with consulting.

If we were not profitable, we would not be able to hire them or pay salaries etc. so most of them would probably leave or sue. The resillient ones that stay behind would be given IOUs. I don't see much risk taking, unless you're really working for future pay that may never come, which may be the case for employee 1, 2, 3, but I doubt that's the case for layers and layers of new hires.

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

#62

Post by colinbartlett »

gatehouse wrote: post #11
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.

Your second point is something I hadn't thought of, thanks!

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

#64

Post by reality_czech »

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…

Personally, I don't think being a pre-VC employee is any less risky than being a founder. In both cases, if the company fails, you're going to put "worked on no-name startup that you've never heard of" on your resume and go on your merry way.

But most people don't have the connections, money, and drive to become founders. So those who do pay themselves well, relatively speaking. It's really just that simple.

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

#65

Post by reality_czech »

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?

Yes, investors _hate_ IOUs and often demand that they get wiped out before they invest. This is one of the reasons why Spolsky's advice is bad (in my opinion.)

If a founder can't live with a slightly unequal share distribution, he is probably going to be the kind of guy who measures office sizes with a ruler. You're doomed anyway.

It's probably good to avoid a hugely skewed share distribution, but if you really have to pay people different amounts of cash, the loser in that deal ought to get shares.

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

#66

Post by g42gregory »

gdubs wrote: post #63

50/50 splits can be a terrible idea. If you're stuck with an unreasonable partner, the company can be deadlocked at every decision.

If you're stuck with an unreasonable partner, the company will fail anyway, so I don't think deadlock will be a problem here. :-)

Also, the moment you have investors, the person's shares go below 50% and deadlock goes away.

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

#67

Post by msandford »

tptacek wrote: post #42
msandford wrote: post #40

Earlier quoted context omitted.

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.

All sorts of things cofounders do for each other have value. The best measure of a cofounder relationship is the tacit assumption that they have each others' back. Again, the issues here are simple: dragging valuation into day-to-day operational discussions turns those discussions into negotiations, which I think isn't good for cohesion. Reasonable people can disagree.

I completely agree that dragging valuation into day-to-day operations is a very bad idea. You're quite right about that.

Let's say that you and I go in together for some startup. Neither of us has the $50k in the bank to pitch in immediately so that we're equal investors in the company as well as equal cofounders. But let's say that due to a book you published some time ago you're bringing in $4k/mo in royalties which is enough to pay the bills. And because I don't have the option to go without a salary, we get some seed funding to the tune of $100k so we can pay me a small salary and afford whatever mundane things we need to get going.

I would argue that as long as we agree to both pay ourselves $4k/mo until things really get going, and you just happen to be able to pay yourself that $4k/mo for the next year out of your royalties that is a $48k (or perhaps a bit more due to interest) investment. Sure it's not all delivered at the time of the seed round but it's all pledged by that time. So long as you don't start demanding a salary before the year is up (i.e. you make good on your investment) I think it makes sense for you to get some additional equity as a result.

If you disagree I'd really like to hear the particulars. You've written before that one shouldn't mix up the day-to-day with valuation, but if it's a one-time thing at the beginning it seems more like an investment and less of an ongoing negotiation.

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