This Developers & Entrepreneurs Meetup wasn’t actually my first. Over the last couple of years, I have been to a couple of other similar events. Nevertheless, it’s the first one I’m going to write about here, so I’m grateful it was a good one!
This wasn’t a ‘pitching’ event, but a well managed discussion around a fairly well-defined topic. We heard from two speakers about their own very different experiences in finding their co-founders, and what sort of conversations and agreements they had come up with (Jose Bort of pickevent.com and Kwesi Johnson of Imakethathappen.com – both startups that have launched recently) .
Both were very open, and their stories were interesting, which got things off to a good start, and from then on there was a fairly free flow of contributions from around the room.
Robert Fenton, who seems to be a serial organiser of such events, kept things flowing, gently bringing the conversation back onto the topic when necessary, without squashing interesting asides.
EVENT RATING – Good, go again
WHAT I LEARNED – on the topic under discussion – Equity vs salary for co-Founders
Going over what I heard at the session, my own conclusions were:
1 – 50% (or 60% or 40%) of no market value is nothing.
2 – Most ideas come to nothing.
3 – If an idea is of the ‘make a good living’ type, then percentages matter more than if it is of the ‘infinitely scalable’ type. One percent of a billion is lots!
4 – People’s attitudes to startups are likely to change over time. In particular, if something begins to look as if it will be a big success, then relative percentages will begin to seem significant – the problem being that it’s then too late to have a relaxed conversation about money. Stress in such conversations at a cusp in the development of the business is dangerous, both for the business and for the individuals involved.
THEREFORE: have early, detailed conversations about the agreement – consider some likely scenarios, make sure all involved are happy with the implications of the agreement in those scenarios. Given 1 & 2 above, this conversation should be relaxed.
THEN: Write the agreement down, sign it, put it away in a safe place and get on with the important stuff. If you make a go of that, then perhaps the it might be worth getting the agreement out one day. If the project doesn’t work out, then you haven’t spent any more of your life than absolutely necessary discussing imaginary money.
WHAT I THOUGHT – 1
It seemed to me that many people’s experiences of finding a suitable co-founder in the first place had been more stressful than the conversation they had had with them about equity and salary – even though some people had obviously had difficulties in this area further down the line.
It occurred to me that useful social mechanisms for finding founders need to be nurtured and developed – the world of tech moves far too swiftly for it to be viable to do what humans usually do, which is to muddle along while something gradually crystallises. This is a community that is used to, and fairly good at, hacking social formats with a specific intention. The best analogue I could come up with was my experiences when arriving at University wanting to get into a band – finding ‘drummer wanted’ notices, jamming with different groups without commitment on either side, choosing a few different bands to play with before eventually putting together your own group with the best/most compatible/serious people you’d come across.
I spoke up about this, and got a strong reply, to the effect that exactly these networking events and ‘hackathons’ (sorry, still can’t write that without scare quotes – I’ll work on myself, honest I will) were functionally equivalent in the tech world to the jamming circuit in the music world.
I was happy to learn something I didn’t know – namely that ‘hackathons’ (still working on it) are not just for coders (I’ve always been too frightened to even look at what attendance means, such is my superstitious awe of people who can really write code); apparently, even people like me, with nothing more than ideas, creativity, enthusiasm and opinion to contribute, are allowed in! This is great news, and I will be looking for opportunities to participate. But still, after thinking more, I wasn’t convinced. If it all works fine, then where were all the difficult stories coming from? Some conversations afterwards suggested that other people with more experience than me weren’t convinced either. I’ll write another post about this.
WHAT I THOUGHT – 2
My own thoughts on equity are probably naive, and certainly untested with lawyers, accountants or investors, so please take this for what it is – a simplistic idea. I’m planning to attend one of the Start-Ed legal Meetups in the near future, and I’ll hope to get some expert feedback then. I’ll write about any advance in understanding that results.
Briefly then, the idea is that, since the value of equity in the early stage is zero (and possibly even less than zero if you take on liabilities before you get limited liability status), there is really no point talking about 60%, 40%, remembering also that most startups fail, and since at some point most startups will give up significant amounts of equity in return for development capital, then I suggest not distributing anything but token amounts of equity at the start – say 4% each for the co-founders – and put the rest into a lightweight trust, with a trusted third party as chair (this person may or may not control equity of their own – I would suggest choosing someone who doesn’t to avoid conflicts of interest). The psychology of this seems healthier – the setup is closer to the likely outcome from the start. In practical terms, it also deals with an issue that was discussed during the session; dilution.
Simplistically, what dilution means is that if you and your co-founder start of with 50% of the equity each, then as soon as you bring in someone else who is going to get equity, then, crudely, your share must diminish in proportion. Of course, it’s much more complex than this, and when I learn more , I’ll try to write about it. If you’re desperate to know more right now, you can look here, but I haven’t read it myself, so caveat emptor.
Complexities notwithstanding, the approach I suggest means that simple dilution doesn’t occur. You started with 4%, plus a seat on the Trust board that controls the voting rights of the majority of the shares (this is separate to the Board of the company itself). After you sell a chunk of the company to an investor, you still have 4%, and still have the seat on the Trust board, which still controls a chunk of the shares. Its up to the Trustees whether to co-opt the investor onto the trust Board (irrespective of whether the investor joins the board of the company itself, as is normal). Again, the psychology of this seems healthily aligned with the reality. You can appreciate the opportunities for growth offered by the capital injection without experiencing irrational feelings of having ‘lost’ something by virtue of dilution.
As I say, this is a naive idea (in the best sense of the term, I hope) – and I’m here to learn, so, comments appreciated