
Seth's Blog: Advice on equity - mattjung
http://sethgodin.typepad.com/seths_blog/2009/03/advice-on-equity.html
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ivankirigin
This doesn't sound like vesting, but a list of milestones to reach before
granting the stock. That is a horrible idea.

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abstractbill
Any list of milestones you draw up when you start a company is likely to
contain things you mistakenly thought would be important, and omit things that
turned out to _actually_ be important. Doesn't sound very workable to me,
agreed.

~~~
alain94040
Precisely. So the right solution is vesting, which is a way to say:

a) today we both accomplished only 5% of all the work that needs to be done
(that's Seth's point of view)

b) there are many things that still need to be done (still in line with the
article)

c) we can't predict what else will be important, but we'll work on whatever
needs to be done (that's where vesting beats Seth's proposal)

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mattjung
I disagree with Seth. Any discussion about who contributed what and who more
may absorb a lot of energy from the startup. Founders starting together should
have the same equity because they can expect from each other to give their
maximum to drive the success of their company. And they will have the same
motivation and interest to give their maximum.

~~~
swombat
That's a nice idea in theory but it ignores the practical fact that
contributions _will_ be different, people's commitment _will_ vary over time,
and people's expectations _will_ clash.

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mattjung
There is a study that suggests that equal equity among founders leads to more
stable and successful startups:
[http://founderresearch.blogspot.com/2006/12/equity-split-
res...](http://founderresearch.blogspot.com/2006/12/equity-split-results-
part-2.html)

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ispivey
That strikes me as a terrible idea. His plan would have the founders
constantly second-guessing each other over reaching milestones, and would take
ordinary disputes ("You never start work before 11AM"; "The design work is
taking 3x as long as the development, you're a bottleneck") and turn them into
knock-down drag-out brawls over equity every few months.

I'm a fan of splitting things up at the beginning, attaching a vesting
schedule, and having everyone work as hard as possible.

You also shouldn't have this conversation until everyone's committed to
working full-time on a business. Trying to give equity to someone who has a
day job and promises to leave "when the new business is really underway" is a
disaster in the making.

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kjw
Agreed. As many have said, Seth's post sounds like a terrible idea. Although
there's no simple solution, an up-front equity split will have fewer potential
problems down the road.

Whereas vesting is just linked with the passage of time, putting in milestones
is very dangerous. It can lead to all sorts of erratic behavior, all in the
name of achieving milestones, which may or may not be relevant. You can't just
look into the future and know what the right goals will be.

VCs definitely include vesting schedules but tend to avoid milestones.

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CWuestefeld
I just say Geddy and Alex of Rush on "That Metal Show". They attributed part
of the reason that the band has survived so long to having skipped any
nonsense about "who contributed what and its relative value" to simply
splitting everything evenly, three ways.

~~~
tptacek
This would be a compelling story if Neil Peart's predecessor John Rutsey was
getting an equal share of revenues from albums after '74, or if you believed
that Neil Peart would happily concede his share of future Rush revenue to any
drummer that replaced him. Companies are more complicated than bands, but even
this story is too oversimplified; Peart is a world-famous drummer and has
massively contributed to the Rush brand --- you think his hypothetical
replacement would deserve a full share for filling his shoes?

(Disclaimer: though I know a bit about Rush, I do not listen to Rush, and hope
to exit this thread with my indie cred intact. Go buy the new Neko Case
album.)

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nikblack
or in other words a vesting schedule, which is how almost all funded startups
are structured

SG is over-rated, but lets leave that discussion for another time.

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Alex3917
"or in other words a vesting schedule, which is how almost all funded startups
are structured"

FWIW Seth is actually talking about a bootstrapped company and not a venture
backed startup. As it stands the software is already complete, and there are
maybe ten thousand potential firms who are well-suited to buy licenses. They
don't want to grow in any way, so at any given time there are only two things
the founders can do that would create value: sell a license, or add a feature
/ improve UI. Because of this I think some variant of Seth's suggestion
actually makes sense in this case, albeit choosing a split upfront and then
vesting is normally a much more sensible way to go.

~~~
nikblack
Even if you don't intend to seek funding you should still adopt the same model
- there are very good reasons why it is used.

Doing an even-split stock grant amongst founders at the formation of a new
company is absolutely the worst thing you can do. Almost all company classes
allow you to create a stock pool - even if there are only 100 shares. You can
then setup vesting schedules for everybody (including employees). I wouldn't
even grant a single share to any founder.

I'm speaking from experience - first two companies I was involved with had co-
founders that faded quickly and it took forever to work out the allocations
after they eventually left. If you grant somebody stock, it is very hard to
get it back.

If you started a thread here on HN about horror stories with stock allocations
you would probably hear a thousand stories. Almost every startup has one, even
the companies that go on to IPO or big acquisitions.

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coglethorpe
So who "owns" the stock that's in the pool? Suppose a company is purchased
before everyone is vested, who get's the cash?

~~~
nikblack
within vesting agreements there are change of control conditions. For outright
sales, it usually works out that those who are over the cliff have their
vesting accelerated. In a merger (which a lot of acquisitions technically
are), the acquiring entity will usually lock the employees down with a new
agreement that includes the requirement to further vest out.

In other words, it depends. The best thing to do is to find a good law firm,
pref in the valley and pref a firm that works with startups. Get a fixed price
(or fixed price + options - some firms do that) for incorporation docs and
establishing the pool and agreements etc. Setup a decent employee pool plus
some for advisors and board members down the road. If you do eventually get
funding, the VC will have a hard time arguing that you should wipe the slate
clean if everything is already setup. VC's use pools and allocations to
squeeze you further on a deal, usually without the founders noticing.

Don't use off-the-shelf agreements that you find online, do it properly. It
should cost you $1-3k all up for the lot.

I am not sure what YC do as part of their foundation docs, I would be
interested to know.

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aneesh
> _"Today, right now, your contribution is worth 5% of the company and my
> creation of the company is worth 5%. The other 90% is based on what each of
> us does over the next 18 months. Here's a list of what has to get done, and
> what we agree it's worth..."_

Otherwise known as vesting (essentially).

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sanj
Stop arguing about the value of something that doesn't exist and go build it.

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run4yourlives
I don't get this. Dividing equity is easy in the beginning, just like slicing
a pie: equal shares.

The idea of 70/30 or other offset splits only suggests that one partner is
more valuable than the other, hence by definition they aren't partners - they
are superior and subordinate. You're already creating a situation where the
person with lower equity isn't as motivated as the one with more. That has
failure written all over it.

I think if you're talking about taking a business from piece of paper to
something real, and you have partners involved, the only way you can ensure
any measure of success is to divide things equally.

If the share isn't equal, I don't think partnership is what you should be
discussing at all.

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tptacek
I don't think you read the article carefully. He's advocating equal shares; 5%
each. He's then advocating that further equity grants be structured around
milestones, which is an alternative to vesting.

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run4yourlives
But what's the point of leaving all that out there to argue about later on?
He's not solving the issue, he's deferring it.

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tptacek
Because people who try to "solve" this issue up front always get it wrong,
because there isn't enough information to make decisions like this.

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run4yourlives
Which is why I'm suggesting to split equally and get on with it as an
alternative.

(Admittedly this is going further than my experience allows)

~~~
tptacek
I'm not saying Godin is right, only that you're ignoring his argument.

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herval
don't you have to assign 100% of ownership when you open a company in US? I
mean, in my country, the company contract has to sum the shares up to 100%...
there can't be a '90% floating', it's not legal...

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redhex
Equity equates to liability if the company folds and incurred debt. Hence all
the shares must be defined at the point in time and not only 5% now and then
another 5% when X is done.

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sokoloff
I think that's wrong on two accounts:

1\. True corporate debt dies when the company dies, just as personal debt dies
with the person. If someone has signed a personal guarantee on "corporate"
debt, that's not the case, of course, but in that event, the shareholders of
the company are not obligated to dip into their pocket to satisfy what amounts
to personal debt of someone else.

2\. If 90% of the shares remain with the company as treasury shares and you
and I, as co-founders, each has 5% of the company vested, then our 5% stakes
ALSO have a beneficial interest in the proportional share of the treasury
shares. In a valueless company, of course that's irrelevant.

