‘Grunt Funds’ Are Trending in Startup Circles | Hacker News Reader

‘Grunt Funds’ Are Trending in Startup Circles

businessweek.com

36 pointsmikemoyer31 comments

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.

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.

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.

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?

Yeah, that's the concern I have. Instead of complaining directly about equity, people will complain about the number of hours, or start rounding, or start talking about each others' efficiencies, etc.

But I think it may be a step in the right direction. Simply stating that the business's equity is dynamic might be enough to allow more communication, which might help to dispel or at least lessen hard feelings and grudges.

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.

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

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."

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.

Depends. If you invest a ton of time developing something but you pivot, whoever invested the most time on that gets fucked hard. If they contributed a lot to the pre-pivot effort, that should be accounted for somewhere for something.

Vesting is a reasonable approach, but it comes with its own baggage. One year cliffs are somewhat arbitrary -- afterall, why does a gregorian calendar dictate when ownership is divided? There's room for more granularity than that. What do you do with someone who needs to take a sabbatical for health or family even though they were outstanding contributors early on? What about someone who comes in several months after the original founders, but has great performance? You don't necessarily deserve more just because you were there on day 1. Dynamic splits account for all these scenarios plus more without overcomplicating the initial paperwork.

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.

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

On finding a business partner: do some sort of tangible work with them before you start on a larger project, make sure you've got some seriously deep social validation of them and be sure you have a complimentary skill set. Oh, and liking them helps.

My business partner and I were able to spend all our time arguing about the product rather than whose contribution was bigger.

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.

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

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

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.

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.

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.

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.

Hear, hear. I left management consulting precisely because quality and impact are almost ignored in favor of hours billed. What will prevent people from logging lots of "junk miles" to up their stake? Seems like this approach may result in a pissing-contest type workplace where people stay until very late even when there is no work to do.

As jtchang says above, a significant benefit of this method would simply be the opening of communication channels for voicing equity concerns.

Since the equity is dynamic in everyone's mind, it can be changed through discussion. If you think you deserve more in the case you stated, you could bring it up at a meeting and the equity could be redivided.

Exactly. So I move into the office and sleep under my desk.

The dynamic split comes with a performance/experience multiplier that is based on your market rate. The structure already accounts for the fact that one person's hour is not equal to another's. The system is based more on opportunity costs, if you will. Not to mention, there are many other contributions that are accounted for in the "grunt fund" as well, like cash, equipment, relationships, etc.

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.

That sounds like an entire startup in itself.

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.

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

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

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.

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