

‘Grunt Funds’ Are Trending in Startup Circles - mikemoyer
http://www.businessweek.com/articles/2012-12-18/grunt-funds-are-trending-in-startup-circles

======
brianchu
There was an interesting recent HN discussion on perverse incentives:
<http://news.ycombinator.com/item?id=4921954>.

I suspect there may be many unintended and harmful consequences with this kind
of arrangement. By focusing the majority of the rewards (or the easiest and
lowest-hanging way to achieve rewards) on hours worked, people are
incentivized to sacrifice quality for quantity of work - working "dumb"
instead of working "smart." People who loudly advertise their accomplishments
(play the internal politics game) would get ahead in this system over people
who instead focus all their energy on actual work.

And given that every person keeps track of his/her own hours, you're probably
even more likely to have founders disagreeing with each other over hours
worked. Even if you're fundamentally honest, you still have a strong bias
towards overestimating your own contributions and # of hours worked.

~~~
richcollins
Right. Why doesn't the owner just contract work to the others in exchange for
cash / equity. Then you have a market that prices these things.

~~~
rmm5t
That's almost exactly what the dynamic split does. You bring in workers who
are exchanging their time for equity, and the rate of exchange is determined
by the market rate for that person. Afterwards, there's a formula to help
determine the overall "theoretical grunt fund valuation." Of course, there are
other inputs other than time, such as cash, relationships, equipment, etc.

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jey
So instead of settling the matter early using something like a vesting
schedule and then moving on, you're supposed to continually argue about what
coefficients to assign to your contributions in some equity formula?

~~~
wheaties
Why not? It's pretty clear non-developers have absolutely every idea how long
and hard developers have to work to get "simple" features done. And developers
totally can measure soft skills like marketing and such.

And in other news, those that can, do; those that can't, teach.

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sethbannon
This is a terrible idea. Hours clocked does not equal contribution. Founder
vesting and 1 year cliffs exist for a reason.

~~~
tarice
I believe "hours clocked" was only one of the contributions included in the
model.

From the article:

 _> "Basically, Moyer’s idea assigns monetary value to every tangible and
intangible contribution individuals make to a startup, from intellectual
property and relationships to time and cash."_

~~~
narrator
This seems like a recipe for micromanagement and politics. Performance reviews
are far less burdensome.

It also sounds like a way for an unethical person to cheat their employees out
of equity by creating rules that are so complicated that they lose out due to
some technicality.

------
codex
Many startups accomplish the same thing via the performance review process.
Equity is usually in a state of constant dilution, so each employee's total
effective slice the pie can be adjusted over time, to a certain extent, by
giving them bigger or smaller supplemental grants. I suppose the events
depicted in The Social Network could be considered an extreme case.

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timharding
Finding a business partner you trust and who shares a vision for the company
and then getting the fuck on with it seems like a better approach.

I agree with @hmurakami on this: <http://news.ycombinator.com/item?id=4940379>

~~~
rmm5t
Agreed, that's absolutely important, but life gets in the way. Things change,
priorities change, and opportunities change. The dynamic split helps those who
contributed early keep a stake even if they need to make a change later. It
also gives an easy way to reward those who step in to contribute later. And
this is done without absent partners potentially strangling equity from other
contributors.

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hkmurakami
If you need something like this for your founding team, I think I'd reconsider
the composition of said founding team...

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purplelobster
This would just increase competitiveness, arguments and gaming the system.

~~~
rmm5t
I believe it does the exact opposite. There's room to game any system, but in
a dynamic split, if a team member is seen as gaming the system, there are
simple ways to remedy that early. At the end of the day, there still needs to
be a trust relationship between the members.

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frugalfirbolg
Instead of including hours in the equation, the team can a high level overview
of action items and assign points based on their value to the team. Action
items would include features, contacts, capital (funds and tools), and
anything else that pops up at the meeting. Higher value items are
automatically prioritized.

My concern would still be that the team is essentially guessing how valuable a
given contribution is going to be beforehand. Even with industry experience it
can be hard to know how much impact that new UI feature will have vs
establishing the partnership with so-and-so.

I think some of the risk (of over incentivizing) could be mitigated by having
only a set amount of equity distributed dynamically, and have a clear
definition of the lock in point where the equity is no longer dynamic and is
actually assigned. Also include your typical clauses for whether or not
someone that left before lock-in point receives equity. This can be handled
separately from what you get for bringing cash to the table.

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poppysan
Time isnt necessarily the most important factor when considering a persons
contribution. If i work faster thus produce more than a partner, or if they
are stuck grinding out a problem that i may have breezed through they will be
rewarded for their inadequacy, as opposed to an actual relevant contribution.

~~~
olefoo
I'd agree that not everyone contributes the same value per hour. And as with
any arrangement where you have self-reporting meeting monetary reward it will
be necessary to have checks against bad actors. But those are problems that
you deal with in any sort of business, and it's an agreement among peers, so
the social pressure to be honest about both the value and quality of work
contributed is going to be quite high.

------
olefoo
I like this dynamic equity split idea.

To really supercharge it:

1\. Embody the terms in a straightforward template operating agreement.

2\. Automate and integrate all of the required bookkeeping in one central
piece of software that gets feeds from github, constant contact, dribble,
amazon, stripe etc. so that all of the costs and contributions are measured in
one repeatable and auditable place; and all the revenue goes through one
central checkpoint.

3\. Join it to a social milieu like Startup Weekend, so that it's very easy to
form new development groups to explore profitable ideas; and so that many
experiments can be tried.

4\. Harvest the best practices for successful ventures and spread that
knowledge around.

~~~
Alex3917
That sounds like an entire startup in itself.

~~~
tarice
I agree with Alex. The dynamic equity concept doesn't sound simple to begin
with, and I think your suggestions would just complicate the idea further.

A business can't spend all day meta-managing their equity, after all.

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monochromatic
This sets up a more perverse incentive structure than pretty much anything
else that comes to mind.

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languagehacker
Someone apparently hasn't heard of or doesn't recognize the value of "knowing
where to put the X".

------
jtchang
I don't have any problem with an arrangement like this if only because it
causes everyone to TALK about it. The fact is...every startup can come up with
whatever way they want to split up equity. If this works for everyone involved
then go for it.

