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Friday, September 3, 2010

The three musketeers is best for co-founders...

Anyone starting a business with someone else will eventually have to tackle relative ownership and compensation questions.

For some founders the answers are simple, but for most it is a sticky issue that creates a lot of stress and runs the risk of ruining both friendships and the business.

With the possible risks in mind, these are certainly issues that don't need to be avoided. They need to be discussed openly and honestly. Many situations have been made worse by trying to avoid the thorny issues... you may be able to, at least, until they just blow up.

To try and take some of the emotion out of the negotiations I like to lay out some initial thoughts:

1. The initial founders should have the "skills"/"essentials" necessary for the core business plan;
2. if someone is not "essential" they don't really need to be part of the original founders; *(no one is "in" just because they were at lunch the day it was discussed)
3. if each founder is truly "essential" then lean toward more even splits;
4. shareholders should earn "profits" and employees should earn "wages"; and
5. once the core team is in place it's "pay to play" for equity.

With that in mind, I do tend to favor a 1/x approach to "equity" splits among founders in most startups, unless there is a compelling reason to do otherwise.

I don't, however, think that all founders need to receive the same "wage" unless their relative job functions would demand a similar wage on the open market. For founders wages, I am in favor of creating a specific wage and keeping track, even if there is no money to pay initially (just keep it on the balance sheet as a liability).

How to set that specific wage for each founder is another negotiation. I like using (and the like) as a starting spot because I can get reports for average wages based on specific job functions. It's also good to think about how particular jobs are typically compensated (ie - salary, hourly, commission, etc.) and to try and stay in keeping with industry standards, unless there is a compelling reason not to.

Certainly, it is easier if all the core parties can put in equal skills, effort and resources then just split everything equally, but in most instances that is not sustainable (maybe even on the front end), so it is important to think about what is fair to all parties involved for both the beginning and the years ahead.

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