If I launch a new division within my employer's company, should it be treated as a separate startup?
I've been working for my current employer for the past several years as CTO. I recently pitched them on starting a separate division that is more entrepreneurial and experimental to spin out innovative projects/sites/apps which are related, but not directly competitive with our existing business.
For me, this would offer a fresh start, with a small, new team, doing more interesting work, while maintaining my salary and benefits. They agreed to pay me and a few freelancers, and will provide use of physical infrastructure and some basic resources (accounting, legal, etc...).
If you were me, would you insist that this new division be a separate company? If so, how would you determine the equity split between you and your current employer, turned investor?
Thanks in advance!
3 Answers
The way you describe it, the company you work for is giving you all you need to get started working. They're backing you and covering all the downside.
There are a number of factors that could influence whether this should be a separate legal entity.
First is how you access additional funding. If it's internal, then look at what house style is. If it's external, then you need a distinct company vehicle.
Second is how you will experience and cover risk. As a rule of thumb, the further you are from core business, the higher and more unfamiliar the risk. If, in order to pursue the business you have scented, you will be exposing the core business, they are likely to prefer you to be a distinct corporate entity, so that the maximum exposure is loss of their investment.
Third is the trade-off between cost and opportunity. Depending on your location, there may be significant opportunities for the company to offset some costs of new activities against tax, or to access grant funding. Sometimes this pushes against separation, sometimes towards. Get specialist support externally if this isn't an area the company already knows well.
Fourth is a view of the end game. If you are becoming the new product pipeline, it may add more complexity than benefit to spin out. If you are a way of helping the company make money away from core business, then that will often push the other way.
The default, in my view, is not to spin out unless there's a compelling reason to do so. But from your own point of view, you might want to focus less on the equity question (which is only relevant with one of those paths) than on how you want to be incentivized. That breaks down into how should you be measured, how should you be rewarded based on those measures, and what part of that reward should be short-term cash, and what part in equity or equivalent long-term instruments.
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+1 for covering it in a single answer – Chris Kluis 13 years ago
Tough to say. They are guaranteeing your salary and providing infrastructure. What is the relative risk/reward position for you versus the company. It would appear they have more to lose than you and thus should stand to gain more.
Unless you were willing to put some "skin in the game" - if I was the company I would not make it a separate company and give you additional equity in it.
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Thanks Chris. I appreciate it. But, I'm a little confused by two of your statements. You said that 'It would appear they have more to lose than you and thus should stand to gain more.", but then you said, "if I was the company I would not make it a separate company and give you additional equity in it." If they have more to lose, which I believe they do, wouldn't they want to make it a separate company and give me equity? – Adam 13 years ago
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No, because they have more to lose (your salary and the contractors salaries) and you have little to lose (you still make the same salary) - as a company they have little incentive to give you an equity stake. However, if you took a reduced salary, offered some upfront cash, and put your whole livelihood on the success of this project - then it would be fair to give you equity in a separate venture. – Chris Kluis 13 years ago
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I guess the model I was thinking of was a typical investor/startup relationship. In this case, I'm the startup that the investor knows and trusts can execute. My employer is the investor. The only difference is that the investment is in the form of payroll and benefits instead of cash. And, if they don't do this, I will likely leave to find something more exciting, and this opportunity will likely disappear for them, since it was my brainchild. – Adam 13 years ago
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The problem with that is if it potentially related to your current employer - then depending on your situation - the employer probably owns the rights to that idea if it was generated while you had your position as a CTO. I'm not going to advise you on IP rights, but be careful to get permission if you do leave. I also understand your ideas, but the typical investor/startup relationship usually has something. Sweat equity or money invested for the startup before the investor will pony up money. – Chris Kluis 13 years ago
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You make some good points Chris. Thanks for being active on this! – Adam 13 years ago
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NP. I got my MSE from ce.usf.edu and we covered start-up issues non-stop. I think many people under-estimate the importance of "Skin in the Game." That is no investor in their right mind would fully fund a product/company where the founders are not fully behind it with their time/money. The saying we heard every day was mortgages are cheaper than any other form of money. If you are considering angel/VC money and haven't mortgaged your house... you are doing it wrong. – Chris Kluis 13 years ago
Yes, I would certainly recommend that you try to set it up as a separate entity w/ your own share. That ways you are assured of some long-term protection for your ownership. For example, I had a friend to set up a few business line in one of Silicon Valley companies. During the downturn, he was fired as part of cost-cutting; while that new business still continues w/ a lower paid MBA who my friend hired and trained...
