My team and I are nearing the launch of our initial product this August. We are wanting to develop a metrics-based system that will be implemented upon product launch that will determine founder's equity throughout the life of our company.
Relevant Company Background:
Your Thoughts? Too ideal? Anybody have significant problems with something similar to this? As of right now the benchmarks are undetermined and the 80/20 split is more of a reference point.
Thanks in advance for your help, suggestions, and thoughts regarding our new initiative...
One piece of advice I frequently give startup founders: don't try to invent two things at once.
You've got enough problems inventing a new product which you are trying to launch. That is the entrepreneurial risk you are taking. Don't risk the whole thing by also trying to invent a new way to allocate equity.
You're going to need every brain cell you've got making your product great. Time spent inventing, arguing about, adjusting, and implementing complicated share allocation systems is time you should be spending nurturing your product. Your product is a very, very delicate candle in the wind. With this scheme, the founders are all going to take time off of working on their great idea to argue over whether Linda met her metric and whether Frank should be compensated for the fact that his metric turned out to be impossible to reach because you had to change the business model. And while you're blowing a lot of hot air at each other over equity and targets and so forth, nobody's going to be paying attention to the candle. Which will go out. And you'll be bitterly arguing about absolutely nothing.
You're going to need every ounce of personal fortitude you've got to keep the team of four people together, on the same page, and in the same boat. The minute you invent a complicated game-like system with rules and who the hell knows what that can only serve to create inequality, you're just opening the door to fights and arguments. You've got enough fights and arguments ahead of you already. Don't invent a new system to generate more fights and arguments. It'll kill the company.
Alternative: Stick to the 25/25/25/25 system. It's awesome. It will serve you well. Everyone will feel happy. Have one CEO. If someone screws up badly enough to get fired, the CEO fires them, and their unvested stock goes into the pot. That's how everyone else does it and it's hard, but it works, and that's why everyone else does it that way.
The problem I have with coming up with a system for earning (or retaining) equity is that, apart from being nearly impossible to come up with a "fair" system, it ultimately undermines the trust that you have within your team.
I really like the 37 signals analogy that "choosing co-founders is like a marriage " and what you guys are really saying with a system like this is "how do we protect ourselves from being screwed over". Essentially you're making a pre-nup and the reason you're probably struggling to get a "sweet spot", is the same reason it feels wrong when applying these principles to a marriage - because you're starting off by saying "I don't trust you"... or more accurately: "I trust you, but..."
When you co-found a business, what you are essentially doing is forming a specific type of relationship with a person, or group of people, with the intention of achieving a common goal, and just like any relationship, everyone must contribute to make it work and most importantly, there needs to be trust there. Nothing will undermine that trust quicker than putting checks and balances in place to ensure that everyone is meeting their requirements for that relationship.
If you apply your logic to marriage, suppose you work and earn money and your partner stays home and looks after the kids, how would you apply a metric and benchmarks to ensure you and your partner are both contributing and both meeting those benchmarks?
Finally, doing things like this sets the tone for your business. It basically says "we're the kind of business that is going to try and minimize risk" as opposed to "we're the kind of business that is trying to maximise rewards" and there are plenty of businesses you can work for that are in that first category without having to deal with the stress of a startup.
If you feel like you don't have the level of trust in your partners to be able to contribute fairly and equitably to your business without being hit with the "metrics" stick then I would seriously consider whether these are people that you want to be going into business with in the first place.
My advice would be to split everything 25/25/25/25 and trust your team. If someone isn't pulling their weight, you'll be able to tell pretty quickly and then you can assess the situation and try and reconcile it amicably.
I like the concept and the buy in on shareholding that is a very good idea.
What you haven't said is
I think your incentive scheme should assign a large percentage of the shareholding / profit to be awarded on the collective effort and acheivement of the group OVER individuals. Infact I think most of it should be collectively "did we make it or did we not" ... "did everyone put in the hard yards" (whatever they ended up needing to be). Did everyone collectively contribute to deciding what the next steps should be, did they all contribute to nailing those next steps?
Further research needed Incetive schemes aren't new, there have been many different variations, start with googling stuff like "problems with staff incentive systems" and have a read about some of the issues that can come up.
There was a great TED talk a year or so ago about this problem by Dan Pink, where individual incentive schemes most of the time ended up with the whole performing worse because it fractured the collective drive into competing and conflicting individual objectives.
Good points from Robin (maybe referring to the Dan Pink TED talk?). There is good and bad in this. I can't give a definitive answer, but I would ask two questions:
In general if there is no clear "owner" who's making the whole thing work and there's a bit of uncertainty or people aren't fully committed yet I would think it's fair to have everyone earn their way in, and if they drop out others will get more equity. If you have four people who know each other well and just quit their jobs to do this it might come across better to get a bit more up front. Again it takes good judgement to decide if they should be there in the first place.
Herein lies the problem.
Apples are not Oranges.
You're seeking a mathematical formula where none exists and you are forgetting the human equation.
If the four of you are compadres, then, create an LLC for the four of you that owns 100% of the primary LLC (where the IP resides). Include buy-out provisions in the management LLC (the four of you), where if three of you agree (super majority, no questions asked), then the 4th slacker can be bought out for current market value.
Keep it simple. Keep it fair.
Also, plan for success. Build a wall of protection around the management team that no one can f-with. Stick together. Sure, have a fall back if it turns to s*it. But, put the focus where it needs to be: on success.
I agree with Joel's answer. But you probably also want to consider that it's a lot easier to measure performance for business guys (just measure the money) than tech guys. I'll go as far as to say that there's NO decent scientific measure that will tell you whether a programmer has performed well. All the conventional metrics are either silly or can be gamed in some way. The only thing you'll accomplish is people slowing down their development to try and satisfy the formula they'll be judged by. Performance metrics are a terrible tragedy for a startup.
I'm am not experienced in this matter but I wanted to share my little experience. Not so much long ago, I had an idea, and I wanted a partner, because I like to discuss ideas, I think that it is better to discuss everything, to improve, validate and execute. It should be better right?
So I told the idea to a friend who initially seemed interested, after a couple of weeks he came up with weird performance rules for the business. It was kind of absurd for many reasons but this is what I have learned:
I am glad that we didn't move forward, because it would have been a mess if later on he came with that proposal.
I would just stick to splitting on equal parts, for ownership, and then keep track of the effort spent on the business, so you are owner an a worker. You get money from working for your company and you also have equity on it.
I hope I can help someone with my xperience, for me was really useful, I ended up with a sweet and sour taste, but now i see that it was a step that i needed to go through.
Last note, finding the right partner/s it is not easy task.
I am searching myself for good answers to this question. I have read a lot of case studies
and found, unfortunately, that most advices out there fail to address the following basic problem:
Trust is great and important but people break trust all the time!
Yes, you can degenerate into wasting your team's brains into eternal discussions doing that. But this is just the same with anything you are doing. Just pick up any question you have to solve as startup! So what? Should you avoid solving this question in first place?
I honestly see a bar between getting into endless fights and spending a quick afternoon to try to get something. If it does not work, you can always get back to the "classical" solution, where however the above problem remains. If however it does work for you, it may save your startup from future failure! Is it worth to spend few hours time on that? I'd say yes!
Now I have to ask:
Yes, people want to see that they are rewarded for their work. But does this reward really have to be a fixed percentage of number X, about which value nobody has a clue? What for? So I can say to my friends, I have 25% of X (where X is between 0 and infinity :)?
Am I competing with my co-founder? Sorry but when I see people eager to go 50/50 I have to ask - do they worry that otherwise the co-founder gets too much? Because there is simply no one else there at the moment to "compete for the pie"!
If yes - you feel to be in competition - then - where is the so-called "trust"?
So what is the solution? I am still looking for a perfect one (aren't we all?) but the best advice I have found until now is in the book of Mike Moyer Slicing Pie. It advocates dynamic approach, where each contribution is counted and only later is converted into equity. And the most important thing I learned from that book, that applies to every situation even with fixed equity split carved in stone is:
Why I am writing it here? Because I would very much like to avoid that kind of subjective non-constructive comments here again. So before you rush to you down-vote to "save the world from undesired answers", please consider the following:
Ownership should be allocated based on value and risk. As far as value is concerned, you'll need to clearly define your business and identify your competitive advantage. Your competitive advantage is your core business. Once you've identified your competitive advantage, you'll see the skills needed to make your advantage sustainable. Those members that add the most value to the core function of the business should have more ownership. Every skill is not equal.
Risk is another important component. The members that have contributed the assets (which can be tangible like capital and equipment, or intangible like intellectual property as in "Who came up with the idea?") should be compensated more.
I don't like the performance metric at the ownership level. You should use value and risk to define the equity allocations. You'll need to have a system for diluting shares when other members join in, i.e. venture capitalist or talents that want a vested interest to work for the company. You should settle these issues beforehand and open up shop with a fixed allocation. Appoint a CEO and you're set! Good luck.