
Joel Spolsky's Totally Fair Method to Divide Up The Ownership of Any Startup. - hartleybrody
http://answers.onstartups.com/a/23326/8362
======
autarch
Here's the thing about each layer after the founders owning 10%. In his
example, layer 2 (first employees) consists of 5 people, each of whom own 2%.
Those employees probably took a pretty significant pay cut to work at this
startup.

Let's say a programmer who could make $120,000 a year joins the startup at a
$70,000 salary. The next year it gets bumped up to $85,000, and then the year
after $95,000.

After three years that programmer has now forgone $110,000 in income. If the
company sells the programmer has to earn at least that much back (and we're
ignoring lost opportunities from not having the money). So the company has to
sell for $5.5 million dollars.

And of course, the programmer may have worked _way_ more hours than she would
have at that $120,000 hour job. Let's assume she average 50 hours a week. In
any sane world she would earn 25% more for that amount of work. So if we value
her time based on her possible $120k salary, the sale needs to deliver
$200,000 to her to be worthwhile.

Now we're looking at a $10 million dollar sale.

Oh, and that's assuming that the company doesn't have investors with preferred
shares who will take a 3x return. So maybe the sale really needs to be $15
million just to get that $200,000 back. And of course many sales are not all
in cash, so maybe she just gets stock in some other company, and that stock
may not even be liquid.

All of this assumes that there is an exit as opposed to a bankruptcy.

She's gambling on an amazing exit (not necessarily Google, but something like
VMWare buying Zimbra for $100 million. That happens, but it's pretty damn
rare.

All of this is compounded by the fact that for the founders, a smallish ($5-20
million exit) is entirely worthwhile. They walk away with a few million
dollars each.

Early startup employees get completely and utterly screwed. I'd never consider
being one of these employees again unless I was offered a lot more than 2%. I
think a fairer number might %10. But really, if you're willing to take that
much risk, you might as well just be a founder. That's where the real rewards
are.

~~~
biobot
Interesting! But I think $70k salary for early employees is not realistic.
They will probably take $10k-$20k less than market price for significant
shares.

~~~
vidarh
If even that. As I've pointed out elsehwere, when I've joined startups as a
regular employee, I've demanded raises and gotten them.

If those tiny differences would make and break the company, it's underfunded
and I won't have anything to do with it, or it's too early for them to start
hiring and they should offer substantially more equity and involve me as a co-
founder.

------
raganwald
As he points out, most people feel that being treated fairly is the most
important thing (this has more to do with not being demotivated by an unfair
split than being motivated by the equity itself). The beauty of this kind of
post is that once it achieves a certain level of notoriety, it automatically
becomes “fair” in everyone’s mind.

For example a new employee comes on board. You explain, “We use the Joel
method for allocating and vesting equity.” Oh! Great! That’s fair...

~~~
sethg
I used to work for a startup, Kenan Systems, that was 100% owned by one of the
founders. In 1999, Lucent bought Kenan Systems for over <dr-evil>one billion
dollars</dr-evil>. Obviously, all the Kenan employees had understood from the
time they were hired that they were not getting stock options, but there was
still some grumbling about how they didn’t share in the jackpot.

(Well, after the acquisition, we did get stock options... _Lucent_ stock
options... which, like the _Kursk_ , went underwater and never resurfaced.)

------
johngalt
Try to avoid getting bogged down in 'fairness'. If your startup makes a nice
exit, chances are that someone will get more money than they 'deserve' (hardly
ever you), and someone will get less money than they 'deserve' (almost always
you). Alternatively you could spend all your time fighting to make it 'fair',
and end up with a fair slice of zero because your startup failed. Keep this in
mind when choosing co-founders as well. If your college roomate says he
doesn't want to share the electric bill equally because his lights are off
more often than yours; what will he be like when there is _real money_ on the
table?

Go ahead and negotiate equity with the goal of maximizing your absolute
monetary return. If fighting over $100k in equity costs you $200k of lost
opportunities, you are not winning.

~~~
tikhonj
I think that is actually similar to Joel's point: it's not the fairness that's
important, it's the appearance of fairness. As long as everybody is happy with
it--and will probably _stay_ happy--then it's a great system.

------
biot
Previous discussion: <http://news.ycombinator.com/item?id=2445447>

------
brador
Solution I personally use and has yet to fail: Auction system trading monthly
wage packet vs. unit equity.

It just works, and by it's very nature is fair, everyones happy.

~~~
djb_hackernews
That's a joke right?

You have your employees bid on either getting paid or taking equity every
month?

~~~
brador
It's a one time negotiation at founding. It's not like we run it every month.

Also, it's founders, never employees. Employees get cash+bonus, never equity.

~~~
mjwalshe
Realy good luck getting any one good to work for you after going public like
this.

~~~
bri3d
I don't know why this would prevent people from working for them. I'd see such
a complicated scheme to split compensation amongst founders as perhaps a
slight minus , but I know plenty of people who want to work for cash+bonus.
I'd much rather get a competitive (with real businesses, not Valley startups),
sizable cash bonus than equity in almost any startup.

------
alain94040
Mandatory link: the co-founder equity calculator
<http://foundrs.com/calculator>

Because I don't always agree with Joel on this. By the way, the recommended
way to use this calculator is that each co-founder tries it separately. Then
compare notes.

~~~
tptacek
I ran this calculator with two founders, one of which "had the original idea
and told the others", the other "the developer who would end up leading all
the developers when a team was hired". All else equal.

The calculator gave a multiple percentage point bump to the founder with the
idea.

So, grain of salt.

~~~
alain94040
Thanks for the feedback. If you could send me the details, I'll check that
they make sense. The key part is "everything else being equal". The everything
else actually influences how important the idea is and how much the developer
would get...

~~~
tptacek
2-3% is an entire team lead role; it's what you'd give to an amazing
VP/Marketing, or one of your best developers 9 months in.

There may be ideas worth an equity bump, but I think Spolsky is dead-on about
the common case: the idea doesn't mean anything. Sure, you can take your idea
and work it with another team --- but your prospective team can take their
ability to execute and work it on another idea.

Moreover, in many _many_ companies, the key idea that enables the business
comes long after the team starts on the first idea; maybe it's a pivot, maybe
it's a refinement, but either way, the core intellectual kernel that "makes"
the business isn't predictable. When it comes, most teams don't suddenly grant
the person who generated it another 3% of the company.

It's destructive to suggest that, in the common case, an idea is worth
multiple percentage points. Just zero that line out in your calculator. You
can't calculate the uncommon cases, so what's useful is a shared understanding
of what "usual" is.

Personally --- again, this is just me --- if you all start at the same time,
and you all quit your jobs, and you all get the same kind of income (steady
salary, quarterly distro, nothing, &c), you split the thing up evenly. Not
even worth discussing. 33/33/33 and vest.

------
Timothee
I know it's a back-of-the-envelop affair, but one thing I'm a bit unclear is
that hiring is not done in batch in January.

So, how do you separate your stripes?

In his example, employee #4 gets 250 shares, while employee #5 gets 50. But in
reality, you won't hire the 4 employees at the exact same time, and the next
20 a year later. It will be spread out over time.

I'm sure it's possible to think up a more continuous function for spreading
the shares with a similar approach. (but I'm wondering if that's not what
already happens somewhat naturally with offer negotiations…)

~~~
kgo
"You don't have to follow this exact formula but the basic idea is that you
set up "stripes" of seniority, where the top stripe took the most risk and the
bottom stripe took the least, and each "stripe" shares an equal number of
shares, which magically gives employees more shares for joining early."

As usual, Joel proposes you use some common sense, instead of trying to come
up with some perfect function. The important thing isn't if employee 4 was
hired on Dec 31st and Employee 5 was hired on Jan 1st. If Employee 4 was
working in your living room and working off his own laptop, and Employee 5
joins when you have a tiny office, provide him with a computer, have
comprehensive health insurance, they're in different bands.

~~~
Timothee
I understand that, but the thing is that you don't know in advance when you'll
go from your living-room to an office, so what do you do when you hire your
first employee? You know she'll be in the first stripe, but since you don't
know how many you'll put in that stripe, you can't use the nice formula 10%/n.

What I'm saying is that it sounds very nice and fair to engineer-type people.
But it also sounds like it only works after the fact.

And again, I understand it's not really to be read as a strict formula, but
more as something to give you a gross idea of what you're trying to
accomplish. But in that case, it's not much different to what's already
happening naturally: founders and employees know that the equity offered
should reflect how early they arrive in the mix and what they bring to the
table. I'm sure you can go in many startups and find the stripes that
naturally formed and get something close to that "formula".

------
xarien
Here's my totally fair method of dividing up the ownership. Talk it out with
your co-founders. Whichever cut is chosen at that discussion is fair. Why?
Because it was discussed and not proposed..... Furthermore, because it was
agreed upon.

------
johnkchow
At my startup, we have talked about this issue several times about how we can
fairly compensate employees for their contributions to the company. Our
company is a bit different in that we have a lot of young employees who are
eager to learn and believe in the vision rather than people who maximizes
reward and minimizes risk. Because of our employee makeup, we're adopting a
revenue sharing plan. In my eyes, that's as fair as you can get: getting a ton
of experience with the latest technologies for a temporary cut in pay. As a
lot of commenters have said, it really depends on your situation, but I
believe the reward is potentially great if you're a young engineer who's
seeking a long-term reputation as a good programmer.

(And for those of you who think I am mad, my company is great in that it's
fun, the work is extremely challenging yet exciting, and the vision aligns
with my own personal vision. It's my dream job.)

------
wjessup
Two points:

1\. It's not always about the salary for employees. Some people just don't
have the DNA to work at the type of company who gives the 120k salary (
assuming large-co ). They like small companies, being empowered, and all of
the other benefits of being part of a team building something. They expect to
get 70k and _not_ recoup the difference because they consciously "buy" the
lifestyle with the difference in pay. They are driven by the passion of the
founder and want to be involved in building "something big". They can't miss
the chance to get this experience that would take years in a big company.

This type of employee sees equity in two parts: First as an emotional
connection that they're working on something they "own" and second as the
dream of a potential payout that gives them the vision / hope of a great
future. Both are important emotional motivators that enable the team to gather
round a vision and kick-ass nights and weekends to make something valuable.

A startup employee who says, "4%, so you need to sell at 15m or i'm out of
here…" is the same person who says they should pay less for electricity
because they didn't use as many lights as you. That employee shouldn't be
choosing to work at startup A because they offered offered 5k more salary and
1% more equity than startup B. Which one are they passionate about? Where do
they want to spend their life for the next few years? The equity is just
gambling.

2\. Not all founders will share the risk equally even if they all work full-
time, quit their jobs, etc.

Scenario A: Founder A is a serial entrepreneur with a few M in the bank while
Founder B is an engineer who needs a paycheck. Does Founder A give B 50% or
does he just pay him for his work as employee #1?

Scenario B: Founder A doesn't take salary from the company but has a
consulting gig that pays 10k/month and takes ~4/hrs a week. Founder B is
wealthy and doesn't take salary but doesn't need to spend 4-8 hours a week
doing "other obligations" and says Founder A isn't dedicated.

Things get more complex once people become serial entrepreneurs.

------
radikalus
I think it's totally reasonable that, if one founder is putting a significant
amount of capital at risk, he should hold a higher share of the company going
forward.

I would think that dividing things equally really only makes sense for pretty
lean startups.

I'm not sure I really see the point in obsessing over how "fair" the deal
you're getting is -- it's not like there's a basket of equivalent startups
you're deciding between. Ultimately, your opinion of the EV of the particular
business seems likely to trump obsessing over a few hundred basis points of
ownership. (At least that's how I justify to myself not being an "equal"
partner)

------
Jun8
"What if one of the founders doesn't work full time on the company? Then
they're not a founder. In my book nobody who is not working full time counts
as a founder."

This point, which I fully agree, seems to generate a lot of comments. When he
landed on Gibraltar in 71, Tariq ibn Ziyad
(<http://en.wikipedia.org/wiki/Tariq_ibn_Ziyad>) immediately burned his ships
and gave a speech to his men starting with: "Oh my warriors, whither would you
flee? Behind you is the sea, before you, the enemy. You have left now only the
hope of your courage and your constancy." The point is, if you don't have this
sort of desperate courage, most probably your startup won't succeed. And you
cannot do that while holding on to your day job and salary.

~~~
JGailor
There are plenty of examples to counter your argument in the startup
community. FriendFeed is an easy one. It was built while each of its founders
had day jobs until they had a viable product to shop around.

I take issue with these kind of quotes because, to be quite frank, they are
completely out of context and make no sense in the myriad of ways people try
to make them apply to unrelated contexts. It sounds like nothing more than
marketing hype, as opposed to a message of substance.

~~~
Jun8
But how about all the other examples of people leaving work to work full-time
on their startups. Remember that YC expects to not leave work but _relocate_
to SV for three months.

The quote is, of course, over the top, after all we're not fighting for our
lives in a foreign land. But I don't think it's _that_ out of context: I'm 42,
have a child, pay a high rent and support my larger family. For me to quit my
daily high-paying job to pursue what mat turn out to be a dream _does_ require
a huge amount of courage. If the company doesn't succeed, say, after 2-3
years, I may not be able to find another job like this. That's why quotes like
that resonate with me.

Please understand that not all would-be founders are 25 year-olds with little
to lose.

~~~
umjames
Wait, so do you agree that co-founders with day jobs should be treated as
first employees equity-wise or not? Your original comment seemed like you did,
but this comment makes it seem like you don't.

Personally, I believe that having a day job while working on a startup should
not be held against you. If everyone agrees that you're a co-founder, then you
deserve co-founder equity.

Do you have less work to do because you have a day job? No, not necessarily.
Were you there from the beginning? Yes. Are you involved in founder-like
meetings and decisions? If yes, that should be qualification enough.

------
plumber12
There is a company in India which has not taken any outside funding and doing
great business so far. There are many employees who has been toiling there for
10-15 years with expectations that they will become rich sooner as company
started doing really well with all hardwork. Recently, one fine day "the
founder" in his internal memo says that you can call me the super rich. All
shares has been distributed to himself and his family members and now all
employees are monkeys with hand full of peanuts. Wake up with shattered
dreams. Guess who is this company? Yes, you are right, its ZOHO. Period.

~~~
nrao123
I can guarantee you that Vembu would not have said it the way you are
suggesting & the timing of the "memo". See this link
[http://www.sramanamitra.com/2007/07/16/happily-
bootstrapping...](http://www.sramanamitra.com/2007/07/16/happily-
bootstrapping-zoho-ceo-sridhar-vembu-part-7/) where he was categorical that he
is not going to be giving options and there was no expectations.

I think the real issue is not about sharing wealth since it can be shared
through other mechanisms for the core team - faster promotions, more cash
comp, better work environment...

Its really about whether you want to keep it private. If you want to keep it
private, then what is the value of the options if there is no exit?

I presume this is the same thinking that James Goodnight at SAS
([http://en.wikipedia.org/wiki/SAS_Institute#Company_and_softw...](http://en.wikipedia.org/wiki/SAS_Institute#Company_and_software))
& Mike Bloomberg would have gone through to try and keep the company private.

~~~
plumber12
Mr.Rao, I don't know about your interest in Zoho. There is no lie in what I
had said. You will not understand the feelings until you are one among them or
gone through the same. This has affected the morale and overall performance. I
agree that there are other means to share the wealth, has it really happened
at Zoho?, you need to understand that the compensation at Zoho is at par or
less with other technology companies in India. In fact services companies has
better perks and onsite opportunities to make quick money and they too have
stock options. People at CTS or Infosys with 10+ exp. are millionaires.
Facebook has 24% for employees.

You need to understand that for any organisation for long term success and to
be world class, one need to have people who has enthusiasm, hope and
imagination to live a prosperous life and can do anything for his/her leader
and not those who just stick around because they are forced for survival with
shattered dreams. People needs to have immense faith (it was thus far) in its
leader for any organisation for long term successes. We live in a capitalistic
world and money plays a important role in every way, you understand it and so
Mr.vembu. And I am really doubtful, if monkeys can bring all successes which
Zoho can but happy people do.

------
bri3d
I especially like this because it flattens series / preference. There's no
"Series FF"-style shenanigans where founders can convert and cash out in later
rounds while their VCs hold out for a fanciful exit, leaving employees high
and dry, and there's no opportunity for broken preferred/common conversion
that lets VCs exit with a much better deal than their founders or employees
get - everyone owns the same shares.

Sadly, because it actually aligns VCs, founders, and employees in the same
pool, I don't see this being accepted by very many investors.

------
Tichy
What is an IOU?

~~~
ggchappell
"IOU" is an informal term for a promise to make some specified payment at a
later (perhaps unspecified) time. In other words, it is an acknowledgment of a
debt. The name comes from "I owe you".

------
fady
good post, but most cannot afford to pay them out-of-pocket for their time
(nor do they expect that), and we're all approaching this as a project we'll
do on our nights and weekends, right?

isn't "vesting" traditionally determined as "in service" with the company, ie:
full-time employment?

side projects are a flake factory. everybody is "busy." you split 50-50 w/
some guy and then he disappears for 6 months. you're pretty pissed.

------
logn
so are these numbers accurate? is he saying employee 50 should get .7%?

------
jean_valjean
I disagree with his assessment that it's fair for some founders to take cash
now and others to receive only IOUs payable later.

The second group face not only a time value of money problem, but they're also
accepting the risk of default (which is fairly likely in startups). They
deserve substantial additional compensation for their willingness to leave
capital in the company during early growth. One potentially fair way to do
this would be to give them convertible notes with the same terms as whatever
your first external angels get.

After all, leaving $100,000 in the startup's bank account has the same net
effect as drawing the salary, then investing $100,000 in the startup.

~~~
philwelch
Time value of money can be solved by adjusting later payouts, and risk of
default is meaningless because equity in a failed startup will be worth the
same 0 that IOU's from a failed startup would be.

~~~
jean_valjean
The goal of the equity adjustments is to keep the expected value (at time of
compensation) roughly equal.

The expected value of a $100k IOU from a startup is likely $10-20k.

The expected value of $100k in equity is (if priced reasonably) roughly $100k
even though the value in case of default is $0.

If somebody was really adamant with me about IOUs being treated equivalent to
cash, I'd ask if we could simplify and just pay all the founders equally, at
the same time to get rid of the discussion.

~~~
philwelch
It's not a useful argument anyway. It's like arguing about what's the best
sexual position: what you and your partner can agree on means infinitely more
than what a bunch of total strangers on Hacker News think anyway.

~~~
jean_valjean
This isn't some search for objective truth. It's me sharing my opinions and
the supporting rationale in the hopes that somebody might find them useful
when they run into this situation in the future.

~~~
philwelch
And I'm just saying the opinions of people not personally involved in these
kinds of equity decisions are of limited value, and that our discussion has
easily reached that limit.

