Angst, anxiety, selfishness, and more…
For a new startup, the first difficult decision and most difficult conversation is typically around division of ownership, a.k.a. division of the founders’ shares, also more generally called the company equity.
When I talk to entrepreneurs and early employees on this topic, the first advice I always give is to expect everyone in the conversation to walk away disappointed.
RULE 1:
Expect to be disappointed.
Why? Because there is only a limited amount of ownership (percentage of equity) to share. Because, with few exceptions, most founders and early employees overvalue their value to starting up the startup. Because, again with few exceptions, they focus on the efforts to get the company started and forget or dismiss the vast amount of effort required in the future to make the company a success.
For these reasons and more, the team often desires ownership that adds up to more than 100%, but, by definition, there is only 100% of the pie to be divided up.
Thus, if everyone around the table compromises, then everyone walks away unsatisfied and potentially disappointed. Some may walk away completely and choose a path that does not include being part of the company.
My measure of a good outcome is unanimous dissatisfaction. If anyone in the group walks away happy, then, more likely than not, that person received too big a “slice of the pie” (i.e., percentage of the total).
And do note that I choose the words “around the table” on purpose.
This conversation may change the team structure and team dynamics. It may lead to people dropping off the team and may include discussions about other people whom you want to bring onto the team. These are major decisions about the company and need to be taken seriously.
Seriously enough to merit everyone getting together in person, to talk face-to-face with no other distractions. The conversation may get uncomfortable. Being together in the same room will help settle any such issues. Being on the phone or video conference is simply not the same. Trying to do this over email is unlikely to succeed.
Ideally, this discussion begins and ends all in one day, all in one (potentially long) discussion. This topic can evoke strong feelings in some participants. Feelings of distrust, lack of respect, and greed. Letting these feelings fester and grow across multiple meetings only makes the discussions more difficult. Coming to a resolution in one day minimizes those issues, plus it proves (or disproves, if the discussions fail) that the team can work together well and find solutions to difficult problems, which is an ongoing occurrence at startups.
Set aside a few hours, get everyone in one room, and come to an agreement before ending the meeting.
RULE 2:
Meet in-person, and come to a decision before leaving.
With the advice provided in the rest of this book, it can be done in a few hours. Remember, dividing equity has been done thousands of times before and can be done by you, too.
Note: This is not the first book in the series
For those of you who have not yet created a business plan, or who want to ensure you have thought through all the important parts of your plan, start with companion book, The Next Step: Guiding you from idea to startup.
If you are out recruiting co-founders or team members, or are out pitching to investors, or trying to make your first few sales, you may want to consult, The Next Step: A guide to pitching your idea.
