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I need your suggestion on below scenario.

I am planning to venture into one internet startup. Its a niche domain.

I have worked in the domain and understand the domain well. I have studied the domain and developed the solution which can reduce the flaw in the process. I have network within the industry. I have worked on initial business plan, executive summary, phase wise product implementation plan. I have designed and developed software product framework for the first phase and developed and designed few components for the same. The partners who are going to join me do not have any knowledge on the given domain but are very good at technical side.

At this initial stage, it is not decided who will stay and help me till what time, as everyone's priority changes, I suggested them two options.

1 I suggested to not to decide the percentage of partnership upfront based on arbitrary numbers.

But I suggested them to use equity sharing. In that, we will have 100% equity (or 100 shares) allocated at one place and then everyone will have to earn the equity (no upfront allocation) by completing their tasks and that way only one will grow his share or earn equity.

For this we, as a team, will need to assign "Value" for each task which is part of our long term plan and we will consider Time, Value and Money allocation by each partner against total time and money estimation for complete project.

Now in this case I am confused at few points.

1.1 Should I, as I have developed and worked for almost 1 year to develop this concept, assign 100% to myself and then slowly give it to each partner based on equity they earn based on their participation in all tasks.

1.2 Or should I take certain equity initially based on work I have already done when we all start together, say X%, and handle remaining equity and assign to all of us based on our work. As I dont want to assign equity upfront to people who join me arbitrarily withouth their ability and contribution. Also in this, where should I assign the remaining equity?

Also let me know if this is right approach. If so how to decide X% value?

Downside is that, this approach is very time consuming.

2 To go with upfront numbers. In this case, I will assign say 10% to myself initially and then remaining 90% will be divided between all the partners. Thus I will have certain more percentage compared to others.

Is this a right approach?

If not above then, please let me know what is the right approach to address this partnership issue?

Appreciate your time and help.

Thanks and best regards

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1 Answer

up vote 5 down vote

It sounds like you're trying to reinvent something which has already been invented, called vesting.

For tax reasons you don't want to be giving people additional equity as time goes on. Right now, your company is not worth very much, so when you give someone a lot of equity, there is no tax implication. However next year your company may be worth quite a bit and when you give them equity they will have to treat it as income and pay income tax on it, even though the shares you gave them are not liquid.

Instead you divide up the shares at the beginning when they're worthless, but you maintain the right to buy back any shares at a trivial price if people don't stay in the company.

For a typical example, a five-founder company might split the equity given each founder 20%, but vesting over four years. If one founder leaves after only two years, half of that founder's shares would be returned to the company.

This is extremely common; it is the only reasonable way to prevent a co-founder from quitting after two months and owning a large chunk of the company for a tiny amount of work.

If one founder (such as yourself) had already been working for a while you might simply accelerate the vesting for that person. So if you had been working for a year when you brought on the other people, you might agree that your shares are already 25% vested so you only have 3 more years of work to fully vest, while the other new cofounders have to work for 4 more years to earn all their shares.

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Suppose if there are four founders, structured with 60, 20, 10 and 10 - how does vesting work out? Suppose the one with 60 decides to withdraw later after a few months, what happens in that vesting situation? Does it mean the rest of the founders buy-back the new allocated 60%? – Alex Lam May 20 '10 at 8:04
I agree, I was trying to re-invent something already there. --- Thanks for your inputs. --- 1. If I divide the share at the beginning and consider time as the parameter to vest the equity then how can I make sure that the person is working with his full potential till the time finishes. As circumstances changes, it is difficult to track how people are putting their effort and then based on time the equity will be vested to them. I know this is pessimistic thinking, but curious to know, is there any way to vest based on time, money and value (quality of efforts)? – beginner May 21 '10 at 5:56
2. In this case, how the control over decisions is divided? Is it based on equity holding, means as I will have more equity vested initially and accordingly I will have more control, but as time goes (say after 4 or 5 years), all the partners will have similar equity and so as control over the decisions? Or will it be voting based and all will have similar rights? --- In this case how can I make sure that I get more control initially as I will be more focused and later once people gets more domain knowledge, they will get more control. – beginner May 21 '10 at 5:59
3. As you mentioned above that I should maintain the right to buy back the share if anyone wants to leave early, will there be any issue gaining this right solely by me or is it that, I will have more equity initially and so will have more rights? --- Thanks a lot for your inputs. – beginner May 21 '10 at 6:08
I suggest opening these as new questions. – Joel Spolsky♦ May 22 '10 at 16:32

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