Ask HN: deferred compensation structures, pre-funded startup
13 comments
I have written an ominous-sounding article (entitled "Mistakes Founders Make - Ill-Documented Relationships") that describes some of the risks here. (http://www.grellas.com/faq_business_startup_009.html)
For the venture: the IP developed by the loosely-affiliated team will belong to its individual members and not to the venture. Solution: need simple work-for-hire agreements (promise of future equity alone is OK as the "consideration").
For the individuals: getting stiffed on the promised equity.
By all means, do document this at least informally with a founder's term sheet.
By no means should you attach a money value to the services performed. If you do, and it gets audited, you will all have tax problems (generally, your services would constitute immediately taxable compensation even though all you would get is a piece of paper for it at the end). Keep all discussion on this framed solely as "x will get _% of equity in exchange for [whatever]" but without reference of any kind of money value.
Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations).
This kind of situation is inherently nebulous and can easily lead to problems with a far-flung team.
Best advice: keep everything on a short leash. That way, if someone gets burned, hurt will be minimized.
When trust is established, and company seems viable, get it documented legally ASAP.
For the venture: the IP developed by the loosely-affiliated team will belong to its individual members and not to the venture. Solution: need simple work-for-hire agreements (promise of future equity alone is OK as the "consideration").
For the individuals: getting stiffed on the promised equity.
By all means, do document this at least informally with a founder's term sheet.
By no means should you attach a money value to the services performed. If you do, and it gets audited, you will all have tax problems (generally, your services would constitute immediately taxable compensation even though all you would get is a piece of paper for it at the end). Keep all discussion on this framed solely as "x will get _% of equity in exchange for [whatever]" but without reference of any kind of money value.
Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations).
This kind of situation is inherently nebulous and can easily lead to problems with a far-flung team.
Best advice: keep everything on a short leash. That way, if someone gets burned, hurt will be minimized.
When trust is established, and company seems viable, get it documented legally ASAP.
very good info.
this is extremely helpful as is your article.
"Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations)."
this part i will need to research a bit to fully grok. it's great though to have a starting point here.
this is extremely helpful as is your article.
"Do remember to describe the attributes to be associated with any equity (e.g., "100% immediately vested," or "20% immediately vested with balance to vest ratably over 48 months subject to repurchase by company at cost upon any termination of holder's service relationship with the company" or whatever fits your team's expectations)."
this part i will need to research a bit to fully grok. it's great though to have a starting point here.
I didn't intend anything fancy by this statement.
If someone is doing a piece of the development by which they will get, e.g., 1% of the company (whether in stock or in options exercisable at a nominal price), and if this is fully earned once that piece is done, then the language would say that he gets that piece (without strings and without vesting requirements).
If others, however, will be true founders once the company is formed, will get larger equity pieces, and will anticipate earning out their larger equity pieces over time, then this needs to be specified so that it is not simply assumed that someone's 20% piece, for example, is fully earned at inception simply because that was the size of the equity grant promised as a founder's percentage. In such cases, the general terms of the vesting should be described as well as the size of the stock piece.
This is just another way of saying that, even when put into a term sheet, the terms should be clear on what is to be granted and, if there are to be vesting conditions attached to the grant, they should be made clear (normal vesting for founders is at a rate of 1/48th per month over 48 months, i.e., four years, but there is no rule about this and it can be anything the founders agree to, e.g., 1/36th/mo over 36 months or even no vesting at all).
If someone is doing a piece of the development by which they will get, e.g., 1% of the company (whether in stock or in options exercisable at a nominal price), and if this is fully earned once that piece is done, then the language would say that he gets that piece (without strings and without vesting requirements).
If others, however, will be true founders once the company is formed, will get larger equity pieces, and will anticipate earning out their larger equity pieces over time, then this needs to be specified so that it is not simply assumed that someone's 20% piece, for example, is fully earned at inception simply because that was the size of the equity grant promised as a founder's percentage. In such cases, the general terms of the vesting should be described as well as the size of the stock piece.
This is just another way of saying that, even when put into a term sheet, the terms should be clear on what is to be granted and, if there are to be vesting conditions attached to the grant, they should be made clear (normal vesting for founders is at a rate of 1/48th per month over 48 months, i.e., four years, but there is no rule about this and it can be anything the founders agree to, e.g., 1/36th/mo over 36 months or even no vesting at all).
I apologize for the spam, but I just was finishing a blog post about how you can use our site (http://FairSoftware.net) and its Software Bill of Rights as a free insurance between founders before they incorporate.
If you want true 0 cost, legally-enforceable system, you can register your project there, have everyone agree to the equity split. Then, everyone starts vesting their shares over time. That sort of takes care of 90% of the issues you'll face. When you become successful, you can just go your own route, incorporate, raise angel money, etc... but at least you put in place a recorded, auditable trail of what the equity is supposed to be among founders.
You can change the equity split later if everyone agrees, but if some founders become unfriendly, you have an insurance and can still legally use their contribution even if they never talk to you again :-)
If you want true 0 cost, legally-enforceable system, you can register your project there, have everyone agree to the equity split. Then, everyone starts vesting their shares over time. That sort of takes care of 90% of the issues you'll face. When you become successful, you can just go your own route, incorporate, raise angel money, etc... but at least you put in place a recorded, auditable trail of what the equity is supposed to be among founders.
You can change the equity split later if everyone agrees, but if some founders become unfriendly, you have an insurance and can still legally use their contribution even if they never talk to you again :-)
I'll definitely take a look.. thx.
IANAL so beware what I say.
Question: how legal savvy are you? You can write or find generic no-frills stuff yourself that can do in a pinch for small shares. Your "brief statement of understanding" is helpful - you can simply formalize that more.
I don't think you should/need to put a "monetary value on hours spent" - you're giving shares of equity and both parties agree to the deal. What else is there to say?
Words of advice:
* Vest whenever possible
* Give them as little as you can now so that you can attract them later to come on full-time (if that's what you want)
Good luck!
Question: how legal savvy are you? You can write or find generic no-frills stuff yourself that can do in a pinch for small shares. Your "brief statement of understanding" is helpful - you can simply formalize that more.
I don't think you should/need to put a "monetary value on hours spent" - you're giving shares of equity and both parties agree to the deal. What else is there to say?
Words of advice:
* Vest whenever possible
* Give them as little as you can now so that you can attract them later to come on full-time (if that's what you want)
Good luck!
People working for equity - WHAT? I tried to find mobile phone developers / gui artists / server side programmers to do that and got laughed out of town! If there are people out there that want to be a part of a startup mobile/web app please reply. I'm in Vancouver BC. Thanks.
Newman, maybe you could instigate a webspace to connect idea types with coder types who are interested in working on a startup - even part time. Thanks.
Newman, maybe you could instigate a webspace to connect idea types with coder types who are interested in working on a startup - even part time. Thanks.
"idea types"
This is why you "got laughed out of town." Why in the world, if I'm a coder-type, would I want to give even 1% of the benefit of my work to an "idea type"? There are plenty of people with great ideas and skills to make them happen, and the best part is, there's reason to believe that being the sort of person who can put execute on ideas makes you come up with better _ideas_ as well.
This is why you "got laughed out of town." Why in the world, if I'm a coder-type, would I want to give even 1% of the benefit of my work to an "idea type"? There are plenty of people with great ideas and skills to make them happen, and the best part is, there's reason to believe that being the sort of person who can put execute on ideas makes you come up with better _ideas_ as well.
While I generally agree that an idea is not worth the paper used to write it down, there is also a certain level of domain expertise that a coder will lack which an "idea person" can supply if they have the right sort of experience. You may be a rails "rock star", but if you don't know dick about the widget* supply business then your widget management app is not going to go anywhere.
*I do hate how useless wen plugins have appropriated a nice generic term...
*I do hate how useless wen plugins have appropriated a nice generic term...
Absolutely right. Still, I'd be wary of bringing on an "idea person" to a lean start-up if they didn't also have business contacts within the widget supply business that could be leveraged into sales, or skills to otherwise contribute to the product.
Also, I don't think it's all about coders. Depending on the business, there are lots of other day-to-day productive roles that need to be filled. But it's incredibly rare that I would describe any of them as "idea person".
Also, I don't think it's all about coders. Depending on the business, there are lots of other day-to-day productive roles that need to be filled. But it's incredibly rare that I would describe any of them as "idea person".
I agree completely, but there are also a lot of ideas out there that need coders because coders don't have all the ideas . . . I guess the approach may be to find a place to post my idea and see if any coders think it is worth their time to join the startup.
The part I want to think through carefully is how to protect both myself and the collaborators in this equation -- without writing formal legal contracts etc. It seems that getting into legal costs would put the cart before the horse at this stage. We're building the proof of concept.
My thoughts have been to write a brief statement of understanding that simply gets iterated/emailed/signed back and forth describing the timings, expectations and compensations. Not a formal legal doc, but at least concretizes and marks the basic understandings.
But I am trying to think through the compensation part. How does one structure something before one has an established biz structure? ....
* Equity.
* Placing a monetary value on hours spent to be compensated at time of investment and or revenue.
* The possibility of key role/involvement in the funded phase of the product.
It's more straightforward when there's simply a local-fulltime-team being built -- all agree on a division of equity and off you go. But I am talking about working with people in smaller time-chunks, and in scenarios where being a part of the ongoing team may not even be desired, or an option; for example a collaborator is half way around the globe and creates a set of visual themes.
It's great to be able to collaborate like this ...but how can we set this up so that when things do take off there are no messy situations, just coolness and excitement all around.
Appreciate any experiences, resources, ideas.