Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
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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)
#2Can 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 investors want to use that money even faster than your last round.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#3I really like the fairness and simplicity of this system.
The resolution for not taking a salary could be made fairer by adding interest to the IOU (eg: 5%).
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#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 an investment in the company which can be measured in terms of dollars. In the case of the employee he is only getting an IOU, but in the case of the investor, he is getting shares. I don't see any reason why these should be treated differently.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#5Can 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…
I think risk can be defined in many cases as taking less money than you could get with an established company. Basically, this discrepancy has to be made up and the one way to do that is via shares.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#6Can 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 share distribution Wizards of the Coast (Pokemon, Magic the Gathering) accidentally used was interesting: founders had no shares, and worked their way up into the single digits, which supported small, individual investors, but it's probably not recommended if you're planning for traditional investment: http://www.peteradkison.com/blog-entry-2-wizards-of-the-coas... and http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas...
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#7Can 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…
It's based on survival. If you have survived two years, there's a much better chance you will survive for the next two years, than the chance of two additional years of survival after only the first 6 months.
The longer you have survived, the more mature you likely have become. This means you go from a demo, to a prototype, to a working product, to having a pilot customer, to have paying customers.
It's certainly true that some companies get tons of money without really being a mature company (especially in these days). The investors backing them are really pushing for a moonshot, so they invest tons of money and expect to spend the money quickly. Those are cases of less mature companies basically playing the lottery, and I'd agree it's pretty risky.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#8Can 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…
Because as bad as it is for early employees, it's even worse for founders. Founders may expect for themselves to work without pay, if times get tough. Employees should either get paid or the company is done.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#9Umm 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.
Re: Joel Sposky's Take On Equity Allocation In A New Software Startup (2011)
#10"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…
So don't use a dollar-for-dollar IOU. You can pay interest.
What you're trying to avoid is bringing company valuation into totally mundane cash flow problems like "who pays for plane tickets to first customer meeting".
It's a sign of very bad founding team cohesion when the founders look at each other as negotiating adversaries. Founders should prefer solutions that have a quick and intuitive sense of fairness over technical solutions that attempt to ensure fairness.