
Joel Spolsky on allocating ownership in your startup - _pius
http://answers.onstartups.com/questions/6949/forming-a-new-software-startup-how-do-i-allocate-ownership-fairly/23326#23326
======
ghshephard
Joel's article is pretty good as a starting point, but, I think there is a lot
of variation on what the first set of employees get.

I've been a first 10 employee (As an infrastructure contributor, not core
engineer) twice in companies that eventually were valued at greater than $1
Billion. The first time I received 0.03% Equity (Before Dilution) - the second
time I received 0.1% Equity (Before lots of dilution).

For one of those companies, I know that some of the core engineers received
3-4x what I did, so - extracting to all of the six core engineers in Layer 1,
Plus the Administrative crew - comes around 6 * .4% + 3 * .1% = about 2.7% for
the first nine employees. We had our series A before anybody came on board, as
an employee.

There is probably a different allocation method for teams comprised of "Serial
Entrepreneurs" - Your risk in joining that team is much less, so your equity
is typically much less. Also, the approach usually goes like the following:

Step 1: Two - Four Founders create a company. Roughly sharing the equity,
though, if there is a "Named" founder that will Garner
Press/Financing/Customers, they take a bigger chunk.

Step 2: Founders brainstorm for month or two, commit to working together for a
minimum of four-five years, and then go pitch their preferred VCs. VCs give
them a valuation of $5-$10mm (pre-money) and invest $1mm-$2mm.

Step 3: First 5-10 Employees are hired, with a stock pool of 3%-10% - Sr.
Employees with a great track record who currently have great jobs at
Google/Facebook/etc.. will require a larger equity share. Out of work
contributors who have a solid, if not exceptional track record will receive
significantly less. The team now has a clock ticking, and has to demonstrate
some traction within six-nine months to get their next round before the money
runs out.

------
agmiklas
I didn't think his IOU solution for founders that either don't take a salary
or contribute property made much sense. For that to be fair, you'd have to set
a super high interest rate on the loan.

At the same time, I see the difficulty with assigning a concrete value to the
shares early on. The angel investment world solves this exact problem using
convertible debt. Why not take the same approach with investments-in-kind made
by the founders?

If a founder forgoes a salary, why not agree to convert the pay difference
relative to the other founders into stock at the time of the first equity
financing at the share price negotiated with the VCs?

~~~
balloot
Yeah I found that part especially wrong too. His article is all about
fairness, and it seems especially unfair to me that someone would work and
have a huge chunk of compensation deferred with a nontrivial chance the
company never pays.

If I work for someone, they need to compensate me right away. This may mean I
receive an option grant that is eventually worthless, but at least in that
case I would have had an upside to my risk. The IOU has no upside but has the
same possibility of worthlessness.

~~~
kgo
He's talking about founders, not employees.

Made up numbers, but say you get 500,000 from investors. And the going rate
for engineers is 100,000. Two founders can take a salary and hire two, maybe
three, employees. If they can afford not to take a salary, they've doubled
their staff size. Since each one of them owns 25% of the company, it may be
worth the risk to them. It's obviously not worth the same risk to the first
round of employees, who each end up with 2.5% of the company.

------
ookblah
I come from perhaps the small subset of a being good friends w/ my co-founder,
having a 50/50 split, and being the technical one ....so that sets up context
for my thoughts.

I resonate w/ this article a lot because to me, the appearance of fairness
trumps everything. The 50/50 split lets me know that I don't have to worry
about who does what exactly or who is working harder, but sets it up so we are
both "all in". I feel like if you're debating equity split at that stage
(provided you're both at the same point, quitting your job, etc) you're
already setting up a rocky relationship. Either that or you're not really
finding a co-founder, more of a dedicated employee.

I guess I'm just a little unclear on how you can define clearly what a "60/40"
workload split looks like when they might not even be the same type of work.

~~~
bconway
Except the problem with a 50/50 split is that it's rigid and you both need to
be contributing equally _all the time_ , which will never, ever be the case.

 _I guess I'm just a little unclear on how you can define clearly what a
"60/40" workload split looks like when they might not even be the same type of
work._

That's one of the advantages. It's _fluid_. 60/40 isn't measurable, but if you
know you're providing more value than the other founder, it's going to be
close enough unless the other one stops working entirely.

~~~
portman
>> and you both need to be contributing equally _all the time_

You lost me there. My wife and I have a 50/50 split on life, but we don't both
contribute equally "all the time".

Sometimes one of us will go out to dinner with friends and have an awesome
meal while the other one struggles to puts three snotty, sick kids to bed.
Certainly not equal contribution that night.

The beautiful thing about a 50/50 split in any partnership -- be it a marriage
or a startup -- is that you don't _have_ to keep track of every nickel and
dime of contribution.

~~~
robryan
That is a 50/50 partnership, it will eventually even out or it will probably
fail. Sometimes in startups for whatever reason founders won't be putting in
the same amount of work and it won't even up for the foreseeable long term.

------
alain94040
1\. Use <http://foundrs.com> to split equity early on, before your project
gets traction. It has vesting built in. And it forces co-founders to have that
oh-so-feared discussion early.

2\. I respectfully disagree with Joel on certain aspects. He is very unclear
about how to split equity among a few founders. He seems to advocate 50/50,
which I strongly advise against. Fairness is one thing. But my litmus test is:
if you quit, would the project die instantly? Then you are the CEO and you
should get more.

I have advised tens of founders on those issues, including convincing some to
fire useless co-founders. It's painful, but usually pretty clear when an
outsider (like me) listens to all sides.

~~~
mduerksen
Your litmus test ist flawed:

1\. Nitpick: What if all co-founders meet the criterion (i.e. the project
would instantly die if he left)? Are all CEO's then?

2\. Instant vs. delayed death: Lets say if A leaves, the project instantly
dies - and if B leaves, the company will die the next 6 months if no
replacement is found who is just as good. Who is more important? What if the
skills of B are the leverage you depend on to become successful and stay
competitive?

And with 2) you are right in the middle of the discussion you want to avoid:
Who is worth how much, who works harder etc., which is just distracting
because nobody can tell for sure, and endangering your company because it
hurts morale. That's why I agree with Joel to just split equally. And as joeag
has pointed out, since it's vested, co-founders that really turn out to be
useless won't get a large chunk of the company anyway.

~~~
alain94040
Yes, my litmus test, as I explained it, is simplified. It's a great way to
start a conversation on what's really important, but it's not a yes/no
question that can be settled in 2 seconds of course.

That being said, I prefer that people don't give bad advice online. When you
recommend 50/50 split, what is your experience for advising so?

------
limist
A 50/50 split can work for the (very) small subset of cases where two people
of comparable skill and commitment start building something from scratch
(nothin' but a half-baked idea) together, with no prior investment/work/IP, no
domain expertise, no key contacts, no customer channels, nor any major capital
infusions. Oh, and both parties have a clear record of making good decisions
together and resolve disputes effectively.

But for most other cases in the real world, these two resources offer a more
rational and open/honest approach:

[http://founderresearch.blogspot.com/2006/01/splitting-pie-
fo...](http://founderresearch.blogspot.com/2006/01/splitting-pie-founding-
team-equity.html)

[http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%2...](http://www.andrew.cmu.edu/user/fd0n/35%20Founders%27%20Pie%20Calculator.htm)

~~~
staunch
What makes you think that's a small subset? I'd guess _most_ startups are
evenly split.

I created a poll, so maybe we can get some data:
<http://news.ycombinator.com/item?id=2445715>

~~~
stanleydrew
The small subset applies to the set of startups that meet all the conditions
noted. The suggestion is that 50/50 isn't a good idea unless your startup
meets all the conditions. Most don't. But you might be right that most
startups split equity evenly, even if according to the GP they shouldn't.

------
Chocobean
His answer for "What happens if not all the early employees need to take a
salary? " makes sense, but leaves the question of "why don't I get paid now
instead of getting paid later if it means I get just as much (or less due to
inflation)." Presumably, you'd have an understand co-founder who understands
that cash in the company now is a little more important. Failing that, I think
it might be fair to add interest to that IOU.

~~~
barrkel
The other problem with the approach is it increases the risk of the guy who
goes without salary, without any reward (that theme seems to be a strong
justification for compensation in Joel's article, though I'm not sure it is
intrinsically fair).

If you go without salary, while the other people don't, and get IOUs, but the
company goes bust anyhow, you'll be out of pocket but the other people won't.
You're taking more risk; why not have more upside?

But the other side is this notion that reward is _necessarily justified_ by
risk. What if the company is motoring along steadily for a couple of years but
as a lifestyle business, and then gets a star employee who creates a new
product that takes off? Are they necessarily not justified in seeking more
compensation - perhaps they have created more value than even the founders? Or
are the founders better off with a bigger slice of a smaller pie, and not
trying to reward innovation in their employee base?

~~~
Chocobean
Right. So the IOUs need to be a form of investment as well.

re: star employee example--it's not how much you made the company, it's how
much of the company is yours to begin with. Founders will be smart to reward
performance, but to reward proportionally based on contribution wouldn't work.
If the star is unhappy, he's welcome to quit, take the risk and start his own
company.

~~~
barrkel
Right - and by letting the star quit, the founders are ending up with less
value, in this hypothetical. In other words, they are acting irrationally.

~~~
zem
that seriously underestimates how important the perception of fairness is. i'm
with joel on that one.

as a side note, taking the emotional impact of your decisions into account is
_not_ acting irrationally. indeed, it's more rational than deciding things on
a purely monetary basis, because it takes all possible inputs into account.

~~~
barrkel
No, it's not about fairness; it's about loss aversion bias, and how it can
lead to suboptimal economic outcomes. It leads to poor investment choices all
over the place. _People are worse off_ when they don't control for it.

------
ozataman
Good article, but leaves a few points open in my mind. The biggest issue that
most people seem to be missing is control. When you have a 50/50 setup, you
better make sure that you are comfortable with all the decision-making
dynamics that partnership structure will bring.

Consider when you have a technical and a semi or non-technical founder. Let's
say the technical founder is the visionary for the product you are building,
understands what the customer needs (which means he has some/good business
savvy) and give direction to all engineering related activities - from
technology stack selection to what features and how they will be built. He/she
is the one who will take the lead in defining the product and its -hopefully-
many iterations going forward. A quick high profile example that comes to mind
is Mr. Zuckerberg - he did the programming and he continues to give direction
to the product.

Now you also have the semi/non-technical founder, who is obviously there
because he/she is talented, smart and will have large impact going forward in
building customer relationships and contribute to higher level discussion on
where the products should go. There is a good chance the company won't go
anywhere without this guy either.

How would you now do the split? A 50/50 arrangement would mean both parties
get the same say/leadership over where the company/technology needs to go. Is
that right? This is not about money, as both parties will be in good shape as
long as a reasonable arrangement is chosen. It is about what is
fair/right/sensible regarding what the company is going to be about and how it
is run.

------
bravura
What do you do about disputes in the case of 50-50 ownership? In particular,
what do you do if one founder wants to fire the other founder?

I've heard of a so-called "shotgun clause". It's analogous to the problem of
fairly cutting a cake. One person cuts, the other person gets to pick a piece.
IIRC, in the shotgun clause, one founder can demand that the other founder
leave, and names a price for the company. If the other founder wants to stay,
he can buy out the first founder for the named price. This sounds reasonable,
except that founders might not actually have the money to buy out the other
founder.

------
acangiano
> Otherwise your co-founder is going to quit after three weeks and show up, 7
> years later, claiming he owns 25% of the company.

Or half the company for a $1000 investment.

~~~
bruce511
No, not the same thing.

The investor who puts in $1000 for x% is an investor, not a founder. They have
already completed _all_ their obligations.

The founders are "earning equity in return for work". Their obligation is to
work for a period of time.

Incidentally int he case you're referring to, his shares would have been
diluted in proportion to the "other 50%" - so his 50% then does not equal 50%
now.

~~~
mcobrien
I think acangiano was referring to the current Facebook claim
([http://www.businessinsider.com/facebook-lawsuit-paul-
ceglia-...](http://www.businessinsider.com/facebook-lawsuit-paul-ceglia-new-
evidence-2011-4)).

------
mkramlich
Sounds like reasonable advice. And I'm reminded of how good of a writer Joel
is when in peak form. I'm also a fan of Inc. magazine and it's been great to
see both him and Jason Fried contributing in print there as well.

~~~
fredwilson
i particularly like the way he throws humor into his writing. like this:
Joel's Totally Fair Method to Divide Up The Ownership of Any Startup

a little humor goes a long way

------
kchodorow
A lot of comments seem to be squabbling over details, but your startup is
almost certainly going to fail, and the longer you haggle over splitting
proceeds, the more likely failure is. Just split it and start working already!

If your company is a success, great, but is it really going to matter if
you're worth 50 million vs. 60 million in the infinitesimal chance that it
pops?

------
Murkin
10% for the first 4 employees (paid?).

Anyone has example of a startup that actually did that ?

AFAIK the total employee pool is rarely beyond 15% total. And that number is
for a few layers ahead.

------
gatlin
I'm working on starting a small worker co-operative. The advantages are
normally considered for a large group (say, to increase buying power for
interested consumers) but in the case of a lean startup, the law simplifies
these questions. After bills and other fixed costs, you apportion net savings
to the members proportionate to their contribution. Additionally, in a small
group democratic (maybe even consensus) voting allows everyone to be equally
in control of what is a joint partnership. I know Texas has laws covering
"cooperative associations," can't speak for other states. Thoughts?

~~~
autarch
I'm actually planning something similar. I want to start my own business, and
when I get to the point of bringing in other people, I want the company to be
cooperatively owned.

Each person hired will get an equal share, but I'll probably put in some sort
of probationary period (3-6 months), just for safety.

As for governance, it always makes sense to divide up responsibilities instead
of making every decision via consensus, but for the big things (taking on a
big financial risk, selling the company, etc) the employee-owners are the
board, and get to make the decision.

~~~
bruce511
I'm in a company with a similar system. I graduated from employee to "equal
owner" - we've since had 3 more people do that - but also 3 owners (including
the 2 original founders) have moved on.

We've made some mistakes along the way, and refined the system somewhat as
well. What we realized (somewhat painfully) was that we wanted those working
"in" the business to "own" the business. So while we have a vested system for
earning shares, we also have a vested system for getting them back.

Once you leave, over a period of time, your shares revert back to the company.
(we're a private company, not public, so the shares would only have any actual
value in the event of a buyout, or dividend. The length of this vesting-out
phase is proportional to the time spent in the company (with a cap). During
the vesting-out phase dividends are paid out to "not present owners" in
proportion to their share. To make sure this isn't completely manipulated we
limit bonuses to the owners to the same % as what the staff get.

The idea is that while you're here, you're adding value. That value persists
after you leave, but will becomes less important as time goes by.

The key thing - know how people get _out_ and agree on that before you start.
Getting out is harder than getting in.If the rules are in place while everyone
is still keen then they'll be fair. when it comes time for someone to move on,
they already know the rules so there's no animosity on that front. By
determining the rules _before_ you know which person will actually _use_ them
you're likely to come to a very fair agreement. You know you could be on
either side of the agreement later on. If you're negotiating this after one
person has decided to use, then you've both staked out your camp and so both
sides have very different goals - which leads to very difficult and painful
arguments.

My partner once described business as a "marriage" and like a good marriage a
pre-nup serves the interest of both parties.

------
imwilsonxu
I second Joel’s method. Sum it up.

\- For ownership, fairness, and the perception of fairness, is the most
important because arguments are very likely to kill the company. 50-50 is
simple and acceptable.

\- For stakes, divide people into layers by risks they take. Taking the
biggest risks, founders the first layer should end up with 50% of the company,
total. Each of the next layers take 10% respectively, split equally among
everyone in the layer.

\- Do use vesting to prevent some jerk that quit after two weeks and still
think he owns 25% of the company for his two weeks’ work.

My thoughts.

\- For founders, ownership can never be calculated accurately. We’re human
beings, we can come up with excuses as many as possible to claim our benefits.
That’s why 50-50 works in most cases.

\- 50-50 is a perception of fairness, is a symbol of “Hey guys, we are equal
to each other, we are working for our company, not any of us!”, no matter who
brings up the idea, who has more experiences, etc.

\- Ownership is a process, not a decision. What determine your cake is risks
you took, value you created, how long and hard you got involved, etc. Instead
of a meeting, a discussion, or even an email.

------
gyardley
Holy good lord, that's a lot of equity for employees.

I can see this causing all kinds of problems. You're not going to allocate an
option pool for employee layers one through five all at once, prior to your
seed round, because that'd be massively dilutive to you in the event of an
early sale. (The unused options go away, but the premoney the VC invested at
takes the unused options into account.) But creating such hefty option pools
down the road is going to cause issues with your existing investors, who at
that point _would_ be diluted.

The conflicting interests of founders and earlier investors (who don't want to
be diluted by a large new option pool) and later, new investors (who want to
make sure the company has a lot of options to incent new employees) will get
you to an 'industry-standard pool' pretty naturally. Unless the market's
changed dramatically recently, that standard pool is a hell of a lot smaller
than what Joel's suggesting.

------
slowpoison
IIRC, in "Founders at Work", I think it was Vinod Khosla, who suggested to
Excite (@Home) founders to have an unequal split based on a set of criteria,
or it'll get ugly later (I'm paraphrasing). And I think it makes sense.
Dividing everything equally amongst founders may make sense in the simplistic
cases, but more often than not, people of varying capacities/skills come
together to form a startup. It's better to not ignore those inequalities and
design a split that address that upfront.

------
krosaen
Do the founders get the equity in the meantime before the future "stripes" are
granted? e.g, let's say after two rounds of 10% employee equity, the company
gets acquired, leaving 30% that had been set aside for future rounds of
employee equity, but never granted. I'm assuming the founders would split the
remaining 30%? Curious if anyone had insight into why this would not be the
case.

------
ry0ohki
The general advice I've heard is you don't ever want 50/50 splits because if
there are important decisions to be made, you can often end up in deadlock,
and no one is truly in charge of making a final call or being responsible.
Since I don't have enough karma on onstartups to ask Joel this, I'm curious
what his response would be.

~~~
_chap
I use to think this way, but I'm agreeing with Joel.

If the 2 founders can't make a contentious decision as a team, they're not
much of a team.

------
hxf148
I hardly know whether to call my infostripe.com operation a startup or not.
I've invested in good scalable hosting with rackspace and act as all
dev/ceo/marketing roles.. it's early for us but I guess being a startup is a
presence of mind in many ways.

------
fedd
what about the advisors? some suggest give them stake.

Zuckerbergs need Sean Parkers so that VC would invest faster

------
tomjen3
This is great advice, except that he puts a yearly cap before the first
vesting which means that the company is better of fireing you the day before
you earn your shares than keeping you employed.

Neither you nor your employees need that kind of perverse incentives.

~~~
petenixey
That would be true if the employee is a bad employee who needs to be fired and
in that case the sooner the better - leaving it to day 364 is just
procrastination.

If an employee is good there is no way you would want to fire them, disrupt
and demotivate the other employees plus have to go out and look for a
replacement. The disruption hit would be far greater than the equity gain.

~~~
michaelochurch
Agree. Startups are small companies. Firing someone on Day 364 to dodge equity
vesting is going to be noticed: he'll send emails or place calls to former
employees. Even if every other employee agrees that he needs to be fired, _no
one_ is going to have good thoughts about it if he's scumbagged.

The way you handle that, if it's day 330 or so, is to negotiate a fair
severance and buy out the equity on a pro-rated basis. "I don't have to give
you anything, but you've worked nine-tenths of the year and your equity stake
would be worth about $50,000 at the current valuation. Here's $45,000 not to
make waves."

