Founder’s Equity. Hearts and Wallets.

To read the Green Pants Chronicles from the beginning, click here.

Act 1: Inception

This is a little out of order chronologically, and I think there may be some debate about how this all went down, but I’m going to write how I remember it, and if Brad, Chris, or Scot want to tell their version, I’ll post those, too.

Founder’s Equity

The net of it is that we were playing company again… Spending time on nights and weekends, and enjoying the feeling of entrepreneurship without the risks, but unfortunately without the progress and the focus either. Brad was still in the MBA program at UNC and interviewing for MBA-type jobs (including at GE… how corporate could you get!). Scot was consulting for Credit Suisse and had a good gig going, but was ready for a change. Chris was still at LSSiData, and getting paid well for a pretty low risk effort post acquisition. I had made the decision to leave my job though, so for me, the risk was about to get really real.

Brad and I had come up with some split for the purposes of incorporating as an LLC, but it was a placeholder until we could get something in place formally.

So, the question arose about sharing equity amongst the four founders, and we hit a bit of a chicken and egg problem. No one wanted to commit without knowing that they’d get equity. I didn’t think it was fair to assign equity without commitment to go full time in the venture. So, I built the simplest of cap charts in Google Sheets with 10% set aside for an eventual employee pool, and then 90% for the founders. And for the founders, I wrote 87%, 1%, 1%, 1% (see Chris’ note below) and then shared the spreadsheet. It met with the expected consternation from my fellow founders. “You can’t expect us to leave our jobs for 1%!”

Hearts and Wallets

I was happy to share, but I needed people to get in the game. I said “I have your hearts… I need your wallets, too. I need you to commit.”

So, we started having conversations about what was fair. I won’t share the specific numbers, but the levers that moved things around were:

  • Who had the original idea?
  • What kind of money where we leaving on the table by leaving our respective jobs?
  • What did market research give us in terms of norms that we could point to?
  • Who had the handsomest ears? (Me, clearly).

We also needed some startup capital. I put in $10k. Chris put in $10k. Scot put in $5k. Brad was in his second year of business school (ie, 2 years w/out income) and about to face a third. He didn’t specifically put money in, but he did get us into the UNC StartUp Challenge, where we won $7,500 (1st place, tech track). This all shifted the equity shares around a bit as well.

With everyone seeing a full view of the numbers, and no back-room dealing or obfuscation (extra points for the use of the word “obfuscation”), we had achieved our first full expression of a critical corporate value (Openness and Transparency), and we arrived at a set of numbers that felt fair (or at least fair enough) that we could all get on board for a year of no salary.

As I remember it, Scot committed first. Then Brad arranged it with his family. Chris worked it out with his wife. We had to make accomodations for Brad to finish out business school and spend all available time outside of it with Windsor Circle. Likewise, Chris had to finish out something at LSSiData, but in doing so, he was going to draw down his PTO and work nights and weekends.

Suddenly, we were sailing past our first milestone of team formation. We still had to formally commit it in legally, and technically, Chris, Brad and Scot had to formally turn in their notices, but we were now committed to each other, and honor and integrity were now in play.

Not Everyone Could Commit

There were actually a few more very capable people who wanted to join the founding team, and we wanted them there. But, as the day came when we needed the full commitment to jump in with both feet, not everyone could commit.

Some couldn’t convince a spouse to join. Some couldn’t quite get around whatever financial risk didn’t feel right (school loans, or mortgage payments, or healthcare, or whatever). I’m not demeaning that… in fact, I’m actively making a decision right now to join a team instead of starting my next company because I’m choosing some things in my personal life over my desire to start my next company.

Mark Suster calls it a time to learn, and a time to earn. The net of it is, that the stars have to align a bit. For some of the initial interest group, the stars didn’t quite align, and we had to keep moving forward without their contributions.

The next post will be about our values, which we committed in writing before formally committing as a team.

Chris’ Perspective on the Value of Openness and Transparency

I’m excited about incorporating the first of the memories and views from the outside in these posts. I asked the founding team to comment on this post before publishing it, and Chris shared this perspective:

I don’t actually remember [the 87%-1%-1%-1% splits to force the conversation], but I do remember the equity wasn’t at a point that I could commit to the risk and that we ultimately got there. The one thing that both encouraged me and surprised me was how open we had these conversations. All 4 of us knew what was happening for all 4 of us. That was a key not only for our relationships, but for the company surviving the ups and downs of a startup.

Author: wi11iamm

https://www.linkedin.com/in/mattwilliamson/

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