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This is a discussion taken from Answers.Onstartups.com written by Joel Spolsky.
The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc. That is why I would always rather split a new company 50-50 with a friend than insist on owning 60% because "it was my idea," or because "I was more experienced" or anything else. Why? Because if I split the company 60-40, the company is going to fail when we argue ourselves to death. And if you just say, "to heck with it, we can NEVER figure out what the correct split is, so let's just be pals and go 50-50," you'll stay friends and the company will survive.
Thus, I present you with Joel's Totally Fair Method to Divide Up The Ownership of Any Startup.
For simplicity sake, I'm going to start by assuming that you are not going to raise venture capital and you are not going to have outside investors. Later, I'll explain how to deal with venture capital, but for now assume no investors.
Also for simplicity sake, let's temporarily assume that the founders all quit their jobs and start working on the new company full time at the same time. Later, I'll explain how to deal with founders who do not start at the same time.
Here's the principle. As your company grows, you tend to add people in "layers".
The top layer is the first founder or founders. There may be 1, 2, 3, or more of you, but you all start working about the same time, and you all take the same risk... quitting your jobs to go work for a new and unproven company.
The second layer is the first real employees. By the time you hire this layer, you've got cash coming in from somewhere (investors or customers--doesn't matter). These people didn't take as much risk because they got a salary from day one, and honestly, they didn't start the company, they joined it as a job.
The third layer are later employees. By the time they joined the company, it was going pretty well.
For many companies, each "layer" will be approximately one year long. By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. There might be two founders, five early employees in layer 2, 25 employees in layer 3, and 200 employees in layer 4. The later layers took less risk.
OK, now here's how you use that information:
The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer.
Two founders start the company. They each take 2500 shares. There are 5000 shares outstanding, so each founder owns half.
They hire four employees in year one. These four employees each take 250 shares. There are 6000 shares outstanding.
They hire another 20 employees in year two. Each one takes 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we're giving each layer 1000 shares to divide up.
By the time the company has six layers, you have given out 10,000 shares. Each founder ends up owning 25%. Each employee layer owns 10% collectively. The earliest employees who took the most risk own the most shares.
Make sense? You don't have to follow this exact formula but the basic idea is that you set up "stripes" of seniority, where the top stripe took the most risk and the bottom stripe took the least, and each "stripe" shares an equal number of shares, which magically gives employees more shares for joining early.
A slightly different way to use the stripes is for seniority. Your top stripe is the founders, below that you reserve a whole stripe for the fancy CEO that you recruited who insisted on owning 10%, the stripe below that is for the early employees and also the top managers, etc. However you organize the stripes, it should be simple and clear and easy to understand and not prone to arguments.
Now that we have a fair system set out, there is one important principle. You must have vesting. Preferably 4 or 5 years. Nobody earns their shares until they've stayed with the company for a year. A good vesting schedule is 25% in the first year, 2% each additional month. Otherwise your co-founder is going to quit after three weeks and show up, 7 years later, claiming he owns 25% of the company. It never makes sense to give anyone equity without vesting. This is an extremely common mistake and it's terrible when it happens. You have these companies where 3 cofounders have been working day and night for five years, and then you discover there's some jerk that quit after two weeks and he still thinks he owns 25% of the company for his two weeks of work.
Now, let me clear up some little things that often complicate the picture.
What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the answer is simple: the investment just dilutes everyone.
Using the example from above... we're two founders, we gave ourselves 2500 shares each, so we each own 50%, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3rd of the company.
1/3rd of the company is 2500 shares. So you make another 2500 shares and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's all there is to it.
What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money saved up, so she decides to go without a salary for a while, while the other founder, who needs the money, takes a salary. It is tempting just to give the founder who went without pay more shares to make up for it. The trouble is that you can never figure out the right amount of shares to give. This is just going to cause conflicts. Don't resolve these problems with shares. Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU. Later, when you have money, you'll pay them back in cash. In a few years when the money comes rolling in, or even after the first VC investment, you can pay back each founder so that each founder has taken exactly the same amount of salary from the company.
Shouldn't I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to pay someone in equity for an idea. If one of you had the idea but you both quit your jobs and started working at the same time, you should both get the same amount of equity. Working on the company is what causes value, not thinking up some crazy invention in the shower.
What if one of the founders doesn't work full time on the company? Then they're not a founder. In my book nobody who is not working full time counts as a founder. Anyone who holds on to their day job gets a salary or IOUs, but not equity. If they hang onto that day job until the VC puts in funding and then comes to work for the company full time, they didn't take nearly as much risk and they deserve to receive equity along with the first layer of employees.
"What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in cash or IOUs, not shares. Figure out the right price for that computer they brought with them, or their clever word-processing patent, and give them an IOU to be paid off when you're doing well. Trying to buy things with equity at this early stage just creates inequality, arguments, and unfairness.
How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end up owning more than 50%, the founders are going to feel like sharecroppers and lose motivation, so good investors don't get greedy that way. If the company can bootstrap without investors, the founders and employees might end up owning 100% of the company. Interestingly enough, the pressure is pretty strong to keep things balanced between investors and founders/employees; an old rule of thumb was that at IPO time (when you had hired all the employees and raised as much money as you were going to raise) the investors would have 50% and the founders/employees would have 50%, but with hot Internet companies in 2011, investors may end up owning a lot less than 50%.
There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, straightforward, and, above-all, fair, will make your company much more likely to be successful.
Feel free to disagree..
Today, I decided to resign from CRMthis.com, another startup idea by me. We had a team. We built the API and the back-end very quickly for the Minimum Viable Product (MVP), but the front-end never arrived. We were targeting to beat Buffer's 7-week product to revenue milestone. And we could have done it! We had two partners on board. But it only takes one team member in a startup team to kill it. And this is the second time it happened to me. First time, I managed to keep it going for 18 months before I found a way forward. I was not prepared to do the same this time round.
StartUp Team Dynamics
A startup needs a driver. At early stage, its about driving, rather than leading. And I was that person. You also need a team of one or more who could build the product, initially the MVP, but have the capability to continue developing. We had two developers (in fact 3!). The back-end developer was a well seasoned tech entrepreneur with two successful exits. He knew his stuff! He brought one of his employees and together they built the API and back-end using latest technologies in record time. Yeap, we have node.js, backbone.js, Riak (NoSQL) and all the other sexy technologies.
We had a Rookie for the front-end, who struggled to keep up. Weeks went by without progress, and then turned into months. We had great team dialogue at the beginning. Things started to really slow down, where team members stopped responding to emails, and time was not spent on developing. Signs of a dead startup started to appear many months ago!
I could have fired the Rookie and found a replacement. But the whole idea of trying to find another front-end developer became too daunting. So I finally decided enough is enough and resigned today.
This is a very controversial subject. We agreed not to discuss equity split until the product was launched, and we understood how much time each of us would commit to continue. We trusted each other. Trust is a real vital component for the startup team. Just to give some idea about team backgrounds:
1. Me - already had two companies running, but was fully capable of taking the third one on, as it complemented edocr.com
2. Back-end Developer - He also ran a very early stage techstartup
3. Front-end Developer - Was employed full time
There were no salaries involved and we did not need any funding. Backend Developer paid the bills for AWS services, which was kept at a bare minimum.
What was the idea behind CRMthis.com?
We were trying to address few issues, mainly:
1. edocr.com captures document leads. We have integrated with salesforce.com to export leads, but was not keen to integrate with every CRM on the planet.
2. CRMthis.com would have integrated with edocr.com and CRMs, so that leads from edocr.com could be exported to any CRM via CRMthis.com
3. It will also integrate with other social networks from the famous four (facebook, linkedin, twitter and google plus) to minor ones, so that contacts can be exported to CRM seamlessly.
4. It will allow your contacts to be sorted before exporting to CRMs. It gave you the ability to segregate personal and business contacts, so that business contacts can be exported.
5. It would also integrate with Non CRMs such as Zendesk.
6. It would integrate with your address books, and sync your contacts across all your apps.
In a nutshell, we were developing Plaxo 2.0. The main focus being, "manage your lists once and for all, and stay in sync". It had the opportunity to grow fast as a SaaS product, and would have been very attractive to investors.
So what now?
In my email of resignation, I gave unconditional rights to my team members to continue, except with holding the rights to the domain name. Whilst I have not heard from them, I doubt they will continue. Remember, you need a driver. My team members were not as passionate as me with CRMthis. Whilst they saw it as a good opportunity to be involved and did not want to miss the opportunity, they were never going to take part without a driver.
edocr.com would be keen to develop a less functionality rich CRMthis some point in time.
I was fortune enough to meet Martin and Shaf yesterday and discuss about their new startup. I saw the passion in them. We never had that level of passion in CRMthis. I knew we will continue to struggle, even if I manage to get to MVP. It was something I knew for a long time, but refused to acknowledge, until yesterday. So it was time to say sayonara!
I was privileged to be asked to join a brainstorming meeting held by the founders of a new techstartup called Twocial.
What's in a name?
Whilst I am not into original thinking (nothing against you Manchester Business School!), not having an original name for your startup is inexcusable. Most people, even branding experts get this wrong (e.g. Mike Perls' MC2 with mcmc.co.uk). I believe my own startup got a great name, but it is misspelled most of the time (eDocr, eDOCr, etc) by those who are cleverer than me!.
Who are the Nutters behind Twosocial?
In my book, there are three types of people who setup startups, these being
+ Commercially minded - these are the guys with significant capital behind them, who go after a well researched commercial opportunity with precision.
+ Nutters - these are the guys who want to change the world. In my case, it has been about liberating business documents from file servers. Not a very sexy subject like sharing your pictures with few buddies (yeah, I am talking about you, Mr. Instagr.am). By the way, our unwritten motto these days is "upload once make it available anywhere"
+ Fun lovers - these guys build products because they can. Some just give up and others become successful tech companies
Ok, so who are the nutters behind Twosocial? The techie in the team is "fun lover" turned "nutter" Martin Rue. The newbie behind the team is a chap called Shaf Choudry (he is alright except little bit too tall for my liking! - let's make shorties rule!).
I got an issue with Martin, as he did not finish Tweetdoc. But I managed to convince him to integrate with edocr.com to produce brand reports. Being a "Fun lover", Martin developed many products, but never spent enough time on one product to make it a success. So I am counting on Shaf to make sure the team deliver this time!
What's it all about?
Mmh! Something to do with brands..As we had the meeting at Tech Centre Manchester, I made sure they took notice of my thoughts. Here is what I think it ought to be:
- We all know about the growth of price comparison sites. People are no longer content with price. They value better service, and are prepared to pay a small premium for it. The next evolution of comparisons will be on sentiments. Take Klout and Peerindex for example. These startups give a rank people based on level of engagement and number of other criteria unique to them. Whilst I think its all crazy, people are taking them seriously (I'm gutted as my scores have dropped recently from highs of sixties to below fifties - no wonder no one listens to me!). I like to see Twocial build a highly visual product that focus on sentiment of brands.
- It ought to focus on large businesses. You need lot of tweets to understand the sentiment of brands. The team wants to focus on SMEs. I think this is a mistake.
What's the approach?
Twocial wants to share how they develop the product publicly. I think this is a great strategy. The founders of edocr.com also had the same idea, but we never managed to achieve it due to many reasons.
Take it or leave it advice
Here are my key suggestions:
1. Please complete it - you have no excuse. You have jobs to keep the money coming in. You are young and there is nothing to loose. Just go for it!
2. You already know about leanstartup methodology and all those who practice them - so keep engaging.
3. Listen to suggestions from everyone. Execute what you think is right! Don't try to satisfy everyone including me!
4. Release daily if you can. Maintain a status log on tumbler like us
5. List your startup on Angel.co, and let the investors follow you.
As you engage openly, you will build a fan club naturally. Happy to be of some help! Now go! Make it happen.
If you have not watched this before, you should!
Adzuna (http://www.adzuna.co.uk), the next-generation job search engine, has today announced it has raised £500k investment financing from Index Ventures, The Accelerator Group and existing investors including Passion Capital. The latest funding follows a seed round last year.
Launched in July 2011, Adzuna aims to become the world’s leading search engine for classifieds, by bringing together all the ads and connecting users with them in new ways.
Adzuna collates almost every job ad in the UK in real time from hundreds of websites, including all of the major job boards as well as sources like the London 2012 Olympics, Williams Formula 1 and the Royal Household. In addition to listing around 500,000 vacancies, the unique Adzuna Connect feature helps users “get hired with a little help from their friends” by connecting them to jobs where they have first or second-degree connections on LinkedIn or Facebook.
The site also offers a wealth of data about the jobs and companies recruiting, from average salary data to employee reviews, interview questions and “CEO Approval ratings”.
Since launch in July, Adzuna has rapidly grown to hundreds of thousands of visitors per month, and was named a Top 20 Startup of 2011 by Startups.co.uk, a finalist in the Website of the Year awards, and shortlisted for the Europas.
This latest round of funding will be used to drive further product innovation around social and data, and expand into other verticals as well as international markets.
Robin Klein, Venture Partner at Index, said, “We’re delighted to be working with Andrew and Doug, experienced entrepreneurs whom we know well from their track records at Gumtree, Qype and Zoopla. The Adzuna team has achieved a great deal in a short period of time, and we believe the innovations they continue to bring to the market will change the way people search for classified ads.”
Doug Monro, Co-Founder of Adzuna, said: “We’re really excited to have top-class investors like Index, The Accelerator Group and Passion involved. We are passionate about making the classifieds search experience fundamentally better for users in the UK and beyond. This will help us towards that vision.”
Adzuna.co.uk is a search engine for classified ads which makes it easier for you to find the right job locally - and soon properties and cars too. We search thousands of sites so you don't have to, bring together millions of ads so you can find them all in one place, and organize them with useful features so that you can easily find what you need.
Adzuna founders Andrew Hunter and Doug Monro met working at Gumtree in 2005. They stayed in the local internet space for the next 5 years and finally hatched the Adzuna plan in 2010 on the back of an envelope in a central London pub. The site was launched in July 2011.
Doug Monro was most recently COO of property portal Zoopla, leading the growth of the team from 5 to 75 people and the site to number 2 in UK property with 5M visitors a month. Previously he was MD of Gumtree.com, the UK's largest classified ads site, and has worked for eBay UK, Bain & Co and Unilever. He has a BA in English from Cambridge and an MBA with distinction from Kellogg.
Andrew Hunter was mostly recently VP Marketing and General Manager of local review site Qype, where he grew the site from 0-17m monthly unique visitors in 2 years. Before Qype, Andrew was Head of Marketing at Gumtree.com and ran Search Marketing for the Thomas Cook Group. Andrew has a BSc in Business & Economics from Oxford BrookesUniversity.
For more information please contact Andrew Hunter at email@example.com +44 7957324720 or Doug Monro at firstname.lastname@example.org +44 7971224604.
About Index Ventures
Index Ventures is a leading venture capital firm specializing in investments in information technology and life sciences companies. The firm invests in seed, early and growth stage start-ups across US and Europe. Since its inception in 1996, Index Ventures has backed visionary entrepreneurs who have taken on incumbents and built seminal companies in a number of growth sectors including: open source software companies such as MySQL, Trolltech, Zend and Pentaho; broadband and VOIP companies such as Virata, Skype, FON and Rebtel; Internet service companies such as Dropbox, Path, Betfair, Oanda, Last.fm, SpotRunner, Lovefilm, Stardoll and Netvibes; and life science companies such as Genmab, ParAllele Biosciences, BioXell, 7TM Pharma, Addex Pharmaceutical and PanGenetics.
About Passion Capital
Passion Capital (http://passioncapital.com) was established in March 2011 by Stefan Glaenzer, Eileen Burbidge and Robert Dighero with the aim of becoming the premier early stage digital media and technology investment firm in the UK. The partners have more than 50 years’ collective experience in entrepreneurial, founding and executive operational roles in technology firms.
About The Accelerator Group (TAG)
Based in London, The Accelerator Group (TAG) has been an investor in early stage and start-up companies since 1995. They focus on the Internet services, eCommerce and multi-channel retail sectors, investing primarily in the US and Europe. TAG's current investments include: Moo, Wonga, Moshi Monsters, Graze, Zoopla, Skimlinks and previously: LoveFilm, Fizzback, Tweetdeck and Dopplr.
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