I'm an investor in a small company (< 50 employees) that went through a very rough time in the beginning because of co-founder issues and it got resolved mostly because of investors working hard to save the company from going under.
You could cynically conclude that that was done to protect our investment (and that might even be the right conclusion).
What founders have been up to is not always immediately clear when you invest, sometimes the proverbial skeleton in the cupboard can be hidden quite well. I make a living digging such stuff up so I was fairly well prepared but the degree to which these things can blow up still surprised me.
Take that for what it's worth.
Which is nothing. We don't have the context and it's always amazing how people, even just observers with no skin in the game, will have wildly divergent interpretations of the same events. There's definitely some interpretation going on here as Snapchat guy almost assuredly didn't say "I'm more successful than you".
Given it's consistent with the public's perception of how Snapchat operates, I'm simply reinforcing the parent comments sentiment.
There are many reasons someone may feel that a speaker is smug. Some may be warranted and some may not. Since we don't know what happened and can't evaluate whether the parent's friends made a correct assessment or not, with this type of matter, it's best to just ignore it entirely. It has nothing to do with our familiarity with anyone's line of work.
I took that as referring to field expertise. If that wasn't the intent, my mistake.
I get what you're saying, but there isn't video documentation of everything, so at some point you take the words and recollections of others.
One time I saw Sergey Brin be mean to someone. Take that for what it's worth. Maybe he's EVIL.
Don't read my comment as defending anyone. I really couldn't care less about Evan Spiegel, so I don't dance on his settlement like most comments here are doing, but this whole TMZ "we got video of Evan being smug at a panel, CLICK HERE" comment thread is just the worst of this industry. Ask yourself if you've contributed to life in the manner you expect as you typed out that comment.
Take that for what it’s worth.
How can one betray the other besides of letting him/her unknowingly sign an unfortunate contract?
Yeah, verbal agreements aren't worth squat. At best, you get a settlement, at worst you get nothing. I'm surprised these guys didn't sign contracts amongst themselves.
And friends starting something together often don't anticipate it becoming a source of friction in the future, and don't do what you'd expect people in an arms-length relationship to do. Sure, anyone whose been around the block once will likely have learned -- and lots of people will learn before they've been around the block themselves. But quite a lot of people won't, or will learn but think that it doesn't really apply to the little project their doing with their friends, and by the time they realize that they should have, they'll be enough money already involved that what one side sees as a "reasonable division" will be what the other side sees as "cheating me out of what I am due".
I may be mis-interpreting all this but if that's true then that alone would likely be enough to give him a very credible claim.
You receive equity because you have agreed to receive that equity in return for something, whatever that something is. If after that the other party breaks that agreement in some way then you can sue them for breach of contract. If the agreement is only verbal then it will be an uphill battle but in these days of email, text messages and skype an awful lot of that stuff is logged to the point where it could be used to support the existence or non-existence of such a verbal agreement.
So whether to you he's 'not even close to being a co-founder' is not important, what mattered is that they apparently agreed that he was a co-founder and would get an equal share in the to be formed company.
Nothing unique (disappearing photo apps existed before, see the rest of the thread).
No programming expertise, he didn't make anything.
“We acknowledge Reggie’s contribution to the creation of Snapchat and appreciate his work in getting the application off the ground.”
I wouldn't think they'd add a sentence like this to their press release if his only contribution was only an idea.
That's exactly the sort of thing that was likely specified in the settlement agreement itself, probably in exchange for a lower financial cost of settling.
This is such a common question here and elsewhere that I will attempt to write the world’s most canonical answer to this question. Hopefully in the future when someone on answers.onstartups asks how to split up the ownership of their new company, you can simply point to this answer.
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc. That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because “it was my idea,” or because “I was more experienced” or anything else. Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, “to heck with it, we can NEVER figure out what the correct split is, so let’s just be pals and go 50-50,” you’ll stay friends and the company will survive.
Thus, I present you with Joel’s Totally Fair Method to Divide Up The Ownership of Any Startup.
For simplicity sake, I’m going to start by assuming that you are not going to raise venture capital and you are not going to have outside investors. Later, I’ll explain how to deal with venture capital, but for now assume no investors.
Also for simplicity sake, let’s temporarily assume that the founders all quit their jobs and start working on the new company full time at the same time. Later, I’ll explain how to deal with founders who do not start at the same time.
Here’s the principle. As your company grows, you tend to add people in “layers”.
The top layer is the first founder or founders. There may be 1, 2, 3, or more of you, but you all start working about the same time, and you all take the same risk… quitting your jobs to go work for a new and unproven company.
The second layer is the first real employees. By the time you hire this layer, you’ve got cash coming in from somewhere (investors or customers–doesn’t matter). These people didn’t take as much risk because they got a salary from day one, and honestly, they didn’t start the company, they joined it as a job.
The third layer are later employees. By the time they joined the company, it was going pretty well.
For many companies, each “layer” will be approximately one year long. By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. There might be two founders, five early employees in layer 2, 25 employees in layer 3, and 200 employees in layer 4. The later layers took less risk.
OK, now here’s how you use that information:
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.
Two founders start the company. They each take 2500 shares. There are 5000 shares outstanding, so each founder owns half.
They hire four employees in year one. These four employees each take 250 shares. There are 6000 shares outstanding.
They hire another 20 employees in year two. Each one takes 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we’re giving each layer 1000 shares to divide up.
By the time the company has six layers, you have given out 10,000 shares. Each founder ends up owning 25%. Each employee layer owns 10% collectively. The earliest employees who took the most risk own the most shares.
Make sense? 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.
A slightly different way to use the stripes is for seniority. Your top stripe is the founders, below that you reserve a whole stripe for the fancy CEO that you recruited who insisted on owning 10%, the stripe below that is for the early employees and also the top managers, etc. However you organize the stripes, it should be simple and clear and easy to understand and not prone to arguments.
Now that we have a fair system set out, there is one important principle. You must have vesting.Preferably 4 or 5 years. Nobody earns their shares until they’ve stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it’s terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there’s some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Now, let me clear up some little things that often complicate the picture.
What happens if you raise an investment? The investment can come from anywhere… an angel, a VC, or someone’s dad. Basically, the answer is simple: the investment just dilutes everyone.
Using the example from above… we’re two founders, we gave ourselves 2500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2500 shares. So you make another 2500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That’s all there is to it.
What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money saved up, so she decides to go without a salary for a while, while the other founder, who needs the money, takes a salary. It is tempting just to give the founder who went without pay more shares to make up for it. The trouble is that you can never figure out the right amount of shares to give. This is just going to cause conflicts. 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. Later, when you have money, you’ll pay them back in cash. In a few years when the money comes rolling in, or even after the first VC investment, you can pay back each founder so that each founder has taken exactly the same amount of salary from the company.
Shouldn’t I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to pay someone in equity for an idea. If one of you had the idea but you both quit your jobs and started working at the same time, you should both get the same amount of equity. Working on the company is what causes value, not thinking up some crazy invention in the shower.
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. Anyone who holds on to their day job gets a salary or IOUs, but not equity. If they hang onto that day job until the VC puts in funding and then comes to work for the company full time, they didn’t take nearly as much risk and they deserve to receive equity along with the first layer of employees.
What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in cash or IOUs, not shares. Figure out the right price for that computer they brought with them, or their clever word-processing patent, and give them an IOU to be paid off when you’re doing well. Trying to buy things with equity at this early stage just creates inequality, arguments, and unfairness.
How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end up owning more than 50%, the founders are going to feel like sharecroppers and lose motivation, so good investors don’t get greedy that way. If the company can bootstrap without investors, the founders and employees might end up owning 100% of the company. Interestingly enough, the pressure is pretty strong to keep things balanced between investors and founders/employees; an old rule of thumb was that at IPO time (when you had hired all the employees and raised as much money as you were going to raise) the investors would have 50% and the founders/employees would have 50%, but with hot Internet companies in 2011, investors may end up owning a lot less than 50%.
There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, straightforward, and, above-all, fair, will make your company much more likely to be successful.
I've found this sentiment is very prominent among engineers (myself included) and not-so-prominent among anyone else. It seems the general populous believes 90% of the work is "thinking up a great idea". The reality is that almost any annoyance or inconvenience in your life could be turned into a profitable company. There is an unlimited supply of ideas that could, hypothetically, be developed into a profitable company. That's one of the reasons new profitable companies can keep getting started, even though there are 6 billion other people on earth who could've beat you to the punch.
I just wonder why that knowledge is so rare. I understand engineers understand it intimately since they spend years making these things come to life, but you'd think it'd be at least a little more visible to non-engineers.
If you're ever in a situation where the entire remainder of the company, investors included, are wanting the company to go in a completely different direction then I would have to agree that something is terribly wrong. Maybe 50% is enough. Maybe I'm bringing up a hypothetical that has no basis in reality.
So what's the lesson here? Don't be careless. I don't care what the idea (startup) is - get the details on paper. True, 99% of startups fail, but you don't want to be in that 1% that's making the lawyers rich.
This a thousand time.
My first hard earned rule of thumb? Don't do business with your friends. Lost relationships, bitterness, and great financial loss is never worth it. I got burned really bad and spent the better part of four years trying to get my money back.
Since then, it's just something I live by.
I think it partly depends on the definition of friend. I don't start companies with acquaintances, I start them with people that I love and respect.
When you do that, starting a company becomes a really special endeavor.
This is very relevant for me at the moment because I am starting a new company and the person that I am hounding to be the founding CTO is a "newer friend" (we have only known each other for 4 years or so) but I am convinced that we will be a great team.
My advice is to start companies to work with people you love vs. trying to make a bunch of money. It's such a great way to "work" and greed will have a hard time breaking that.
But I've been in business with my spouse for over a decade now.
Now she finally wins her case and its like a blip on the radar? Pretty sad if you ask me.
Or just get a good salary/benefits/etc
I have an experience...
I think we all do! ;-)
Back in the day, I was a co-founder in a company, started by my advisor's wife. She called us (me and a colleague) to their house, and promised the two of us 20% ownership (and the remaining 60% she kept).
I worked like a dog for about 1.5 years, spending nights and weekends getting it off the ground (the business was website creation and other backend stuff). We managed to get the ear of one of the largest grocery chains in the country, and their VP came over to talk to us. My ideas were the core of the presentation. As soon as it looked like it might take off, she started cutting me out. Then one day, the locks were changed in the office!
As her husband was still my advisor, I couldn't do anything but grumble and continue working on my dissertation.
A few years later, the company was sold for $30MM.
After some thought, I decided to give it a rest and move on. I had learnt a valuable (and very pricey) lesson: always take things in writing.
 - http://www.rff.org/Publications/Pages/PublicationDetails.asp...
It's pretty clear it happened. Is there anything else to say about it?
(Personally, I think the Tinder thing is more outrageous than the Snapchat thing, and it was a bigger drama when it first surfaced.)
The normal way for start founders to receive equity, is only from one or more of these 3 things:
- For hours worked, based on the vesting and usually the hours must be beyond the cliff or you get nothing.
- If you built a crucial part of the IP that the company needs to buy from you with equity.
- Cash invested up front - less common.
He fulfilled none of those. Not even close to being a cofounder. Ideas aren't included among those.
I wrote a longish answer to your comment here:
Vesting is quite common in the EU, but only when it is agreed upon by all parties. If you're founding a business on equal equity based on the capital deposited you get those shares up front, any additional shares emitted subject to vesting/shareholder agreements, payments and so on.
What you agree on matters, not what you later think you should have agreed on.
Anyway, I note the case has been settled and that you either have some hidden knowledge about this case or that your position is at odds with reality as currently on display.
But the downvotes trickle in even after you realized that your arguments, or emotions were not quite up there.
Idea: Functionality to mark your own post with "I concede", keep it grey like downvoted posts and block further voting.
It's worth noting that you rarely end up with more than -1 or -2 votes. Write a single popular comment and it more than makes up for it.
I'm not sure what your comment about "people linking to old comments" means. Either you stand by your comments or you don't.
Edit. The comment I replied was by the user "compare" and said the following:
In this case, it was people linking to old comments, to try to make the attacks more personal, and attempting vote brigading.
I wish we could ban most of the top active commenters on hacker news. They get controlling and territorial.
Downvotes are clearly intended for moderation (visibility change of font), but are easy to misuse for passive debate.
Assuming I'm on it, let's see the rest of your list of HN'ers you'd like to see banned.
I find it annoying when people delete posts as well, but there are valuable reasons to do it.
Only because I disagree with his views on everything (besides crypto).
Just kidding. If it weren't for the tptaceks of internet, I'd have no reason to ever leave a comment.
I would not even want to see people banned for asking other people to be banned. It's just totally against the grain of the community. I read back some more through 'compare's' comments and he did indeed have a run-in with Thomas so you may be on to something there.
I wish the site admins would place a clear written policy against these and other personal attacks next to every comment box.
Of course, you can also stand by your original post, which is something I've done sometimes.
Agreements tend to be legally binding on both sides of the Atlantic, if my experience is any guide then the US is much stronger on contracts and agreements than Europe, but apparently we we're not going to agree on that.
What matters is that we're talking about a very specific case, not just your experience or general matters. And that in that specific case which the linked article talks about there was more than just smoke about there being 3, not 2 co-founders to snapchat and that one of them got unfairly cut out of the deal.
What the US norm is in such cases is not relevant, if you agree on a three way split then that is what you should do. If someone contributes to your start-up in a non-material but essential way then you can decide to reward them or not, but once you've made a commitment towards sharing in the proceeds you can't later backpedal on that.
And there is nothing European about that. Case in point: this lawsuit is going down in the US.
You seem to be really stuck on this point. EU economies suffer because we take contracts extremely literally?
I don't know why you would bring this subject up in several unrelated treads but that's something you can probably answer better than I can. This thread has reached enough levels for me.
Unfortunately, I've met founders that equate the latter with the former, and think it's fine to steal off with "ideas" that people have worked on for years because "well, ideas have no value, only implementation does." If the "idea" is several paragraphs (or even pages) long, and includes comprehensive implementation details, it has value. No question.
Now, SnapChat, I agree, there isn't really much going on there beyond a one-sentence pitch. But not all ideas are that simple, and the complex ones are given inherent value by their complexity.
Reggie's mistake was not getting it in contractual form. However, clearly the law still takes clearly communicated pacts between friends somewhat seriously, as it forced Snapchat to settle.