Founders: Get Your Fair Share of Equity

The truth is rarely told but known by everyone: not every founder of a start-up does an equal amount of work.  And some do no work at all - yet insist, when pushed, that they are worth every non-earned cent - because "they're a founder".  

Hogwash.  Here's four things to think about when you're on the verge of greatness and dividing up the pie between yourself and your two college roommates.

1. Stock should be earned from Day 1

Think stock options are for big companies?  Startups that have passed their first financing milestone?  

No way.  The most important time to put in place options is the very beginning.  That way, if one of your two partners suddenly disappears to an ashram in India, leaving you to do all the work, he doesn't take half the company with him - he just takes what he's earned until that point.

This is real easy to do.  One way is to use Stock Restriction Agreements, in which your fully-paid shares are granted you to, then given back to the company using a mechanism through which the shares vest back to you over time, based on how much you contribute to the execution of the business plan.

2. The percentage of equity should equal the percentage of value contributed

Here's a novel idea: if you're contributing twice as much as your partner, then you should get two thirds of the equity.  How simple as that?  Surprising un-simple, when it comes to some partnerships.

Yet it makes so much sense - if one guy if tied to a keyboard 18 hours a day, and the other founder is contributing big ideas one every two weeks and surfing the rest of the time... well, maybe the first guy deserves a little more equity.  Because the first guy has no ability to hedge or contribute anywhere else, whereas the second guy clearly doesn't face the same issues when it comes to the opportunity cost.

3. The timeframe for judging the value should be years, not months or days

The hardest thing for the tech guy, is after all the initial coding is done and everything has been outsourced, people tend to forget about the divorce, the upset children, the sacrifice.... and wonder why he has so much of the company.  Two years in, and people are wondering, do we even need a CTO?  

CEOs and sales guys face similar issues.  There is nothing sadder than a sales-oriented CEO that can't sell anything because they are waiting on product - or worse, waiting for a "too-early" market to turn ripe.  Their KPIs suck.  People are screaming for blood.  There's no way she/he's worth the equity in his pocket... it's a brutal time, the startup stage of a startup.

4. Why startup salaries are a key factor

Most of the above points really relate to the need to stand back and look at the contribution over time, and award stock on the basis of a thoughtful look at the value contributed.  But there's an additional factor: salary.

If one of the founders is getting paid $150k a year, and the other guy is getting by on $75k, you need to perform a simple piece of analysis:  Take three years of salary and total it.  Take the value of the stock you both hold and total it, based on what you think the value will be three years from now.  Then multiple both totals by the amount of time you're spending of you waking hours executing on the Plan.

I guarantee you this calculation will be not only en eye-opener, but an argument-winner.  Here's to getting your fair share.

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John Sharp

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