Sample milestones for co-founder value-contributed equity distribution

Question: What are some sample milestones/goals to set for co-founders to allow them to gain equity for contributing value to the company, like a vesting-based equity plan.

Backdrop: Let's say for example, in a software company, there are two founders: 1 who is a seasoned developer- he has the idea for and makes the product, and 1 who handles the operational business side- marketing, sales, hiring, etc... The developer feels that since the flagship product is his idea and he is creating it, he should receive 80% of the equity initially. This allows 20% for the other co-founder. Since it is so early in the company's history, they agree that this seems fair initially (as one has clearly had more quantifiable results) but with the contingency that as the business grows there be availability for extra equity awarded based on their value contributed.

i.e. The developer creates another product. The business guy makes their first sale. etc.....

I would caution against using a milestone-based approach exclusively, because it is too restrictive.

In most startups, the idea/product that you have when you start is not the product/service that ends up making the business successful. By developing and marketing the initial idea, you will learn more and will very likely discover a more compelling problem to solve for your customers or a different solution that is easier to sell.

If you set up milestones based on your current idea, you incent the co-founder to push that idea forward regardless of evidence to the contrary. Startups need to be in the mode of "Fail Fast", meaning try something, figure out if it works, and if it doesn't - kill that idea and move on to the next idea. You want your incentives to be aligned toward rapid iteration, not toward sticking with the original idea.

For example, imagine that you get approached by a customer that says they want to give you a long-term contract, but only if you have a support team in place. The most important thing for your business at that moment is for your co-founder to build out that support team, but he doesn't get equity for that because you didn't anticipate it in the milestones.

Instead, I recommend a straight-out vesting program where he accrues his equity over time. Then, he can always be contributing to what the business needs most. If he isn't pulling his weight or isn't doing what you think is best for the business, you separate (fire him). This approach gives him incentive to do what's best for the company without having to stick to any rigid set of milestones.

I organize the Co-Founders MeetUp so I'm quite passionnate about this topic. If you really mean co-founders, then use this basic principle: all co-founders including you will be treated the same. You want to give them milestones? Then you should have milestones too.

In practice, milestones are not a good idea for co-founders. To me, one of the key definitions of a co-founder is that they will stick around and adapt to do whatever it takes. The key is that you can't predict the future. Co-founders are supposed to step in no matter what.

Employees and contractors are the opposite: they do what you pay them to do, it's not their problem if something is wrong with the rest of the business.

Now, do you see why co-founders and milestones don't mix? You are treating a co-founder like a contractor.

To put it another way: when your business needs change (and they will within a year or 6 months, it's a given), what do you want your co-founder to do? Work on a now artificial milestone to vest some stock, or work on something important?

Whatever the deal is, the founders need to get it in writing and agree before moving forward.

In terms of milestones, some to think about are:

• Sales (number or $ amount)
• Development milestones such as Alpha, Beta or Rev 1.0
• Raising money
• Signing joint development or distribution deals

Typically, when a company is formed, the co-founders get founders stock and a pool of stock is set aside for future contributions (at each round). This pool is distributed based on some management method (e.g. goals or milestones).

Any stock option plan (aside from founders stock) will be vested at a decided upon interval (usually 4 years), so you just need to figure out how to award it and how much.

By giving the "business" guy less, how would you feel in 1 year if the business never got profitable mainly due to lack of sales?

What would make him work hard, when given so little?

Do not underestimate the amount of time it takes to do all the operational business side of things. And do not underestimate the importance of those tasks getting done!

I'm a developer myself. I've build a product. I could be myself only, but I chose to bring in another guy to handle everything non-technical/non-product focused. I gave him 50%. Why?

I was in the same situation 6 years ago, and chose to be on my own. The operational business tasks was too much for me to handle and i closed down the business.

So I'd rather have 50% of something - than a 100% of nothing!

I sense and understand your trepidation. I've had 3 co-founders over the years at various start-ups who just plain sucked. They had been strong performers and successful co-founders in previous ventures, with lots of real success but they had either lost interest, the timing wasn't right, or they were just incompetent--I've never figured out what.

Having said that, I think the milestone approach isn't a good one. You should understand what level of hunger your co-founders have and what time commitment is available. I would consider the following points:

1. Never have a co-founder who isn't going to quit their job either immediately or some near-future date. A part-time co-founder just isn't going to cut it when everyone else is sweating bullets. (I am assuming you are full-time, here, of course.)
2. Never take on a co-founder without an assignment of IP to the company. If you don't have a corporation legally formed, do that first. These can be deadly problems to fix later on when things go south.
3. Understand the motivation for the co-founder. If it's a lifestyle thing ("I want to work at home" or "Being a founder sounds cool"), you're probably toast.
4. All founders should be vesting stock. What you do for termination or up-front vesting is up to you, just remember whatever deal you cut for the co-founder you cut for yourself.
5. Don't be afraid to have a small cliff. 3 months or so. If someone isn't going to do anything useful, it will usually be apparent in 3 months.
6. Don't be afraid to ask a co-founder to leave--but when you do, be sure you get signed paperwork done (see item 2). A co-founder with an open chain of title on IP--even if the co-founder did nothing--will either (1) make you un-fundable or un-acquirable, or (2) cost you a fortune to clean up.
7. You can always promote someone to founder later if they do a kickass job.

Good luck.