How do you decide how much to pay yourselves, before investment, in a very small startup?


2

Say your startup:

  1. is made up of two or three people where the equity has already been split evenly,
  2. has some money coming in on a regular basis from a single project worked on by everyone,
  3. but the effort put in by each individual varies wildly over time, by individual, and by skill (development, testing, documentation, client relations, management etc...)
Before investment, if you'd like to pay yourselves by profit-sharing, how do you decide how much each individual gets?

Hourly rates seem a simple enough solution, but as I learned when asking another question can often be seen as too complicated and incurring a lot of overhead. Milestones are another seemingly clear choice, except if there's one thing I've learned over the past six months it's that estimates of the effort required for a particular feature or milestone is hard, very hard.

So, what are some of the best practices for 'fairly' sharing profits before investment in a small startup with a highly dynamic team?

Equity

asked Feb 7 '12 at 10:08
Blank
Daniel Gill
175 points
  • So since this is the second question you've asked, related to this, I'm assuming you're not satisfied with just splitting the profits evenly, or coming up with an uneven but fair, and fairly permanent split for the profits(33/33/33, or 30/40/30)? If you haven't yet, be sure to read Joel Spolski's answer to a very similar question here: http://www.brightjourney.com/q/forming-new-software-startup-allocate-ownership-fairly. What are you guys looking for that this answer doesn't cover? – rbwhitaker 5 years ago
  • I had indeed read Joel's post and apologize for not getting my point across. I've updated my question but essentially we've already split the equity by thirds, my issue is more with paying ourselves through profit-sharing before we find investment (we're in very early talks) and can afford salaries and start building company profits. Thanks again for helping me clarify my posts =) – Daniel Gill 5 years ago
  • So you're already splitting equity in the company (3 ways, equally) but you're trying to figure out how to handle immediate payments (in lieu of salary) using some other mechanism? I'm still curious why you wouldn't just split it evenly three ways as well. The principles that apply for splitting your startup's equity probably also apply for profit sharing. I'm not saying that equal pay is the *only* way to go, but it does seem like a good default. What forces are in play that are making it hard to just say "everyone gets equal pay"? Are you worried about people slacking off in that case? – rbwhitaker 5 years ago
  • No I'm not worried about people slacking off at all. In fact I'm amazed at how committed they've been so far given all of their other commitments. Essentially our time commitments to this particular project are split roughly 65/25/10. I suppose we're also coming from a background of offering consulting services for which we usually charge hourly rates. – Daniel Gill 5 years ago
  • All in all I'm not entirely against everyone getting equal pay, I guess I read Joel's post as not really applying in these particular circumstances, in these early days. I mean if I were creating salaries for my team, given our different time commitments, it would never occur to me to make them equal. – Daniel Gill 5 years ago
  • possible duplicate of [How to share profit based on both effort and skill?](http://www.brightjourney.com/q/share-profit-based-effort-skill) – Michael Pryor 5 years ago
Add Comment

2 Answers


3

I think I finally see where you're coming from, after the little discussion we had in the comments of the question.

You've found a way to divide up ownership of the company (equally, or otherwise) but you're at a point where you want to start drawing salary for your work up front, since you're bringing in some money.

The real solution is, do whatever makes your team happy. That's all that really matters. Just because some random person on a Q&A site said you should do something doesn't mean you should. It really doesn't matter what the "general rule" says if it doesn't make your team happy.

After thinking about this for a while, I think if I were in your situation, I would basically pay in IOUs. Figure out how much you think everyone is worth, at an hourly rate (perhaps everyone is the same) and keep track of the hours you put in. When the company is bringing in money (through sales or outside funding) you pay off the IOUs. If you do this, everyone knows that all of the hours they work will eventually get paid off, when the business becomes profitable. And, it doesn't mess with shares and ownership of the company.

In the mean time, you're bringing in some money, and some of the people want to grab a part of that, so they don't need to live off of just Ramen. With the money you get, you can start to pay off some of the IOUs to whoever needs it. The trick here is coming up with a system that seems fair to everyone.

I might suggest that the people who are only doing this in their evenings and weekends, and still hanging on to their full time job, should probably should offer to not take any of this money up front, or at least, not very much of it. They should wait until the big bucks are coming in, and they move away from their day job. They'll still get paid for their hours, just not until later.

If that doesn't fully cover it, I'd probably suggest you pay off the earliest hours/IOUs first. If in month #1, you work 160 hours and the other two work 20, you would take the money you bring in and pay off the IOUs for your 160 hours and the others' 20 hours before moving on to month #2. If it takes four months to finish off month #1, so be it.

answered Feb 8 '12 at 14:35
Blank
rbwhitaker
3,465 points

2

Do thirds. That's what Joel would suggest. The risk of back biting infighting etc is offset by thirds. Do you want 1/3rd of a successful company or 40% of a failure?

answered Feb 7 '12 at 10:37
Blank
Paul Cezanne
649 points
  • Sorry about the misunderstanding, I've clarified my question. We've already split equity by thirds, my issue is more with paying ourselves through profit sharing before we get an investment and can afford salaries and avoid some of the issues of profit-sharing. – Daniel Gill 5 years ago
Add Comment

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Equity