Ask HN: Percentage table for startups
5 comments
Joel Spolsky wrote the canonical post on this:
https://gist.github.com/isaacsanders/1653078
Spoiler: "Coming up with idea", "working on initial prototype" doesn't earn you any equity. Also: vesting usually runs 4 years. One year is certainly not long enough.
https://gist.github.com/isaacsanders/1653078
Spoiler: "Coming up with idea", "working on initial prototype" doesn't earn you any equity. Also: vesting usually runs 4 years. One year is certainly not long enough.
Do you think that 4 years is the right amount of time? Why do you reject one year as not being enough? Simply because it isn't what is usually done by other companies, or is there more to it than that?
Also thanks for sharing that link. It's a good read, although I don't entirely agree with everything in it
Also thanks for sharing that link. It's a good read, although I don't entirely agree with everything in it
It's the "replacement principle". Alice and Bob are co-founders. Bob gets hit by a bus and goes on disability for N months; he's out of the picture. The company must now replace Bob. Does it have the resources to do that?
If the bus hits Bob during the first two months, Alice and Bob are probably the only employees. Risk is still very high. Bob must be replaced with another co-founder, who will demand the usual amount of co-founder equity: 50%. The co-founder shouldn't settle for 25% of the company. (For that matter, neither should Alice.) Bob needs to get nothing. That's why there needs to be a one-year cliff.
The same logic applies if the bus hits Bob in month 13. If Bob disappears with 50% of the equity, there just won't be enough equity left to exchange for the employees that haven't been hired yet. You can only give away half the company so many times. However, by month 13 the company has hopefully learned something, built something, gotten some traction, so risk is lower. Perhaps a few more employees have been hired. The company can now afford to give Bob 25%, plus 2% per month.
The vesting timeframe is based on the typical time required for the founders to distribute their equity among a group of early-stage employees. It makes intuitive sense: To insure against the loss of any one person, the company recruits more and more people and shares the risk, and the reward, among them all. Eventually the company is sufficiently distributed that it can withstand even the loss of a co-founder.
But it doesn't happen overnight. As Spolsky says, it will take roughly a year to hire every round of employees. Hiring is hard, growing a functional organization is hard, and these things can only happen on human timescales: Months and years, not hours and days.
After the first four years, Bob's share will have been diluted by grants to investors and early-stage employees, and the company will have a track record and a trajectory, which mitigates risk. At that point, future success won't depend on keeping Bob from packing up his full share and moving to Costa Rica.
If the bus hits Bob during the first two months, Alice and Bob are probably the only employees. Risk is still very high. Bob must be replaced with another co-founder, who will demand the usual amount of co-founder equity: 50%. The co-founder shouldn't settle for 25% of the company. (For that matter, neither should Alice.) Bob needs to get nothing. That's why there needs to be a one-year cliff.
The same logic applies if the bus hits Bob in month 13. If Bob disappears with 50% of the equity, there just won't be enough equity left to exchange for the employees that haven't been hired yet. You can only give away half the company so many times. However, by month 13 the company has hopefully learned something, built something, gotten some traction, so risk is lower. Perhaps a few more employees have been hired. The company can now afford to give Bob 25%, plus 2% per month.
The vesting timeframe is based on the typical time required for the founders to distribute their equity among a group of early-stage employees. It makes intuitive sense: To insure against the loss of any one person, the company recruits more and more people and shares the risk, and the reward, among them all. Eventually the company is sufficiently distributed that it can withstand even the loss of a co-founder.
But it doesn't happen overnight. As Spolsky says, it will take roughly a year to hire every round of employees. Hiring is hard, growing a functional organization is hard, and these things can only happen on human timescales: Months and years, not hours and days.
After the first four years, Bob's share will have been diluted by grants to investors and early-stage employees, and the company will have a track record and a trajectory, which mitigates risk. At that point, future success won't depend on keeping Bob from packing up his full share and moving to Costa Rica.
One year is good enough for 25% of the equity. A one year commitment is pretty minimal, and you certainly have not earned the full stake yet.
I think that such a thing would be very difficult to apply to all startups. When assigning percentages, it should be based upon value provided by each party. I've seen startups where the prototype is something that any developer could kick out in a week. I've seen others where the prototype took months of effort by people with very specialized knowledge.
I don't want to repeat the wheel - does anything like this exist?
eg: instead of simply assigning 33% to each founder at the start (when you have no idea or commitment) you have a big pot you can assign percentage from:
All these percentages are made up as an example: Came up with idea: 5% Worked on initial prototype: 5% Built the v1 product: 20% Came on full-time to work on the product: 70% vested over year 1
If anyone fails to deliver or drops out then they lose their percentage up to the last stage.
For me this would solve a big issue of expectations and fairness.
What do you all think?