Seth's Blog: Advice on equity | Hacker News Reader

Seth's Blog: Advice on equity

sethgodin.typepad.com

62 pointsmattjung46 comments

This doesn't sound like vesting, but a list of milestones to reach before granting the stock. That is a horrible idea.

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.

Even if things are important, and the person executes well, and that business unit could get crushed by something unforeseen. To align interests, employees should have the whole company in mind, not just their personal goals to get equity.

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)

This is why I find corporate HR "goal-setting" to be such nonsense. You set a bunch of goals, but then you have real work that needs to get done, that is probably completely different from what you thought it would be. At the end of the quarter/half/year, you look back at your goals and say wow, I didn't accomplish any of that! But you were still productive, in completely unexpected ways. The future is funny like that.

It does sound like a bees nest of problems.

I much prefer just splitting 50/50 and having both founders kick as much ass as possible. This does force you to be able to rely on your cofounder, but that is probably is a good idea (and unavoidable) anyways.

The bigger problem than unfairness is that if you split 50/50 between two founders, you're screwed when you want to bring a third person in to do partner-level work.

That would be a tough situation, with no great solution.

Am I wrong in thinking you either bring in people from then on as employees?

I can't picture bringing on a 3rd and giving them a full founder stake down the road, and the middle ground is very tough.

Not allowing yourself to bring in key contributors in the future is an awfully big handicap to accept.

Allocating equity from a large pool, vesting and granting to the original founders as time goes on, and leaving a lot of headroom for future contributors seems like the right play.

If I am giving someone equity from an equity pool - I wouldn't consider them a founder. But that may just be semantics. Bringing in another founder down the road could work - it would just be a non-trivial decision to make regarding the split. Which slightly differs from what I originally, but I didn't mean to say I would completely rule that possibility out.

I definitely agree if you want to get and retain good people, having headroom in your equity pool is important.

You mention that you "prefer" this. IMO, this can never work, but I'm curious how/where it's worked successfully for you that you prefer it.

What if you realize that you need to add more executive-level people or even just regular employees to the company, or raise money?

I was referring to the founder split in the company. Providing an employee option pool or raising funds would equally dilute the founders.

I think this depends on how you implement it. I've been a part of several startups that have issued shares to founders on Day 1, and every single time issues have arisen down the road.

* The partners were equal at the beginning, but down the road, their value and contributions weren't equal

* Passive partners were given the same share as active partners

* People were brought on out of loyalty, not because of their value going forward

All three of these problems can lead to instability and conflict.

Partnering is serious business, and it's important to do it right. If people are bringing money to the table, it's relatively simple - value the company and issue shares. But when a company has no value, or if you aren't even sure where the company will go, it's important to vest ownership progressively, based on contribution. Not to say that this is easy, but it's better than just issuing everyone 1,000,000 shares at the concept/seed stage.

Fire people that are passive. Grant more options to those that deserve it. Don't hire based on loyalty.

What about the large spectrum of contributions between "passive, deserving of dismissal" and "top-3 contributor"? This seems a little too black and white.

Ideally, people are vesting on a share of stock proportional to their contribution. That's all I mean. If people are "passive" compared to what they are expected to do, they shouldn't be there any more.

Some investors are passive, giving money and doing little else. They don't vest and their roll is clear.

My comment is a bit black and white, but was commenting in the context of the thread: employees getting stock and expected to contribute proportionally.

you are more right (I bought up vesting below). Hopefully hackapreneurs reading this thread will ignore SG and take on the comments instead.

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.

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.

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...

The problem with same equity is that there is no boss. I am not sure if democracy works too well in start ups.

But I am sure that dictatorship will lead directly to failure ;) Conflicts between founders must be resolved by good arguments not by outvoting...

No doubt about that.

But there has to be one guy whose word prevails... trying to do everything by consensus wastes a lot of time and doesn't always lead to best decision

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.

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.

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.

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.)

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.

"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.

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.

To solve your problem you could agree that a person has to give back his/her shares if he leaves the company before a certain time has passed (a few years) or if she/he doesn't live up to the expected level of commitment.

that is essentially what vesting does - except it is more legally sound.

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

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.

I tried to write a convincing argument why vesting is a must for all startups, bootstrapped or VC-backed: http://blog.fairsoftware.net/2009/02/11/reward-performance-w...

I have enough stories to tell and frankly, as a founder, I want to have vesting in place for myself and everyone else. It's the fair thing to do and it will eliminate a lot of headhaches down the road. You know that startups never turn out the way they were planned.

> "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).

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

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.

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.

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.

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.

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)

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

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...

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.

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.

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