I've been voraciously reading about startups for the last week, this site included. Unfortunately, I've come to the conclusion that the equity structure of our startup needs to change and I would like some feedback on what I should do and how I should approach it. This is a lot to chew on, but I felt it necessary for getting a feel of the situation.
Back-story About 3 months ago 2 friends and I decided to come together for a venture. One of the co-founders, who is non-technical, call him A, had the original idea for a piece of software in his non-technical line of work. He proposed starting a software company with my friend, call him B, who is technical (more sys-admin than programmer, with an eye for design that I don't have, but which is less necessary in this project). My friend then came to me knowing that I had the skills they needed to make the project work.
From the beginning I knew two crucial facts: A could only be part time because he has a job and does not have the resources (or is unwilling at this time to procure them) for being fulltime, and B would not be fulltime because he is in his last semester of school. On the other hand, I work a high-paying hourly contract job which is very flexible so I can and have been able to devote a lot of time to the development of the project. A is essential to the project because of his domain knowledge and understanding of the customer, though there is less overall work for him (than me) to do until the company comes out of stealth-mode.
I early on pushed for getting an operating contract agreed to by all three because I intuitively believed "make things explicit" would prevent heart-ache in the long run. My one big mistake was not doing due diligence, that I've now done, on how things should be done for a startup. The agreement that we are currently under is each founder gets a third, but we log our hours and get paid an hourly wage (significantly less than my contract rate but significantly more than A's salary rate) which will be paid when when the company starts making money. The wage was a concession to me because I knew I'd have a lot of up front labor (but its now not seeming worth the risk its supposed to offset).
Though I initially (with misgivings) agreed to those terms, now everything I've read has lead me to conclude that vesting is a necessary component and that the equity dispersement should be completely restructured. The problems I see with the current implementation are as follows:
- Since equity is already dispersed future contributions (or lack there of) are not taken into account
- There is little incentive for a founder to work on the project, since his equity is already guaranteed (In the long run the wage component seems negligible)
- The equity split does not take into account that I am taking on much more risk in both labor and opportunity cost
- Based on what I've read from Noam Wasserman, Frank Demmler, and many others, both my experience and raw ability should give me starting equity positions greater than B (as should A's be greater than B because of his domain experience and knowledge
I've now approached the others on this touchy subject and have definitely felt a big push back. My understanding of A's argument is that vesting is too co complicated, what we have already agreed upon works, we won't fall into the traps latent in the problems I outlined above, and that we should instead be focusing on the product. I feel like going forward with the way it is currently would likely be a huge mistake, which is supported by another friend who is a co-founder of a separate startup which has received VC money. I've put in about a 200 hours (compared to 30 for B and 60 for A) and the project idea and implementation look supremely promising.
So here are my questions, and please be critical (ideally there should be at least one person tries to support the other side):
- What would you do or have you done in this situation?
- Am I justified in requiring a restructuring to a vesting plan before I continue development?
- Would you consider the current arrangement acceptable? If not, how would you modify it?
- Am I justified in thinking that a vesting plan should probably place B (and perhaps A due to less risk taken) with less over all equity?
- Are there reasons why I should keep things the way they are? Any more reasons why things are currently problematic that vesting/restructuring could solve?
- What would be the best way to convince my co-founders that things need to change, when I've already outlined to one the problems above and still met with resistance?
- Since I already agreed to the current agreement should I suck it up and chalk it up to a life lesson (even though I feel like its a demotivator for me)?
- I've considered that hiring a contract programmer whose cost we will all share equally, might allow me to not feel like I getting the short end of the stick so much, while keeping the structure the same. But even so, should I be concerned about the other related problems with the current structure?
Whew, if you made it this far, I applaud you.