Startup Equity — Vehicle to build Momentum or the Killshot of the Project
This is article #10 of “180 Days to Startup” series documenting my entrepreneur journey. In case you want to start from the beginning, please click HERE to the first article. You can also check out what Nodis.io is looking to accomplish HERE.
Equity is often the tougher discussion for startups teams. Often, startup teams are made up of friends and turning that relationship into “business partners” completely changes the dynamic. Not only does equity mean the ownership of the company and authority of shareholders, it also puts a number on the value of contribution an individual has. And no one likes to hear their “value” is less than the expectation or another partner.
I had an experience where I was working on this project with a friend. I was under the wrong impression that I was going to be a partner. After working on it for a little while, I realized that he was simply just offering me a job. Needless to say, I had to turn it down. I was willing to take the risk in a startup if it’s an entrepreneur opportunity but not if it’s just another job. He was and still is a good friend of mine but that incident did turn our relationship a bit awkward for a little while (at least for me).
At the beginning, equity has little to no tangible value (unless there is capital involved). There is no customer nor revenue and any valuation tied into it is all hypothesis. Equity is paper money with perceived value and can’t be monetized, yet. It is the carrot reward that founders use to attract talents to work without pay. It is also a promise of the great return in the future for the sacrifices we have to make now. People need to buy into that vision to believe there is value in the company equity.
Motivating people through a passionable cause and equity are key tools to keep people going until there are more tangible returns. However, splitting equity among team members in fair, rewarding, and agreeable ways is one of the more difficult, delicate, and subjective exercises in startup team management.
The original equity structure with Nodis.io was just a hard split and everyone would get a set amount with no vesting or incentive to work harder. There is no motivation to do more or committing to weekly meetings. When life gets in the way, then the project goes on the back burner. I knew things had to change and I needed to come up with a different equity incentive system.
After a few iterations, I came up with a creative incentive system that allows members to earn equity through actions. This new structure with points can be earned through the following objectives:
- Attending meetings
- Taking vacation days to work on the project
- Capital investment
- Meeting deadline for tasks they were assigned
Without going into too much detail of the math and calculation behind these factors, everyone is working under 1 pool of share. The more 1 person does, the more share he earns, which also means that there are less equity for others to get in the same pool.
This new system gave us a significant improvement in productivity. Meeting attendance and task completion rate improved dramatically. People were taking a week or more vacation to work on the project. Money was also being invested. Along with a purposed-driven mindset and a rewarding system, we were able to do more work in 4 weeks’ time than all the previous 3 months combined.
The downside was that everyone had to start at a lower share %. My own equity went down 10% and I had to work my way back up even though I was the founder and provided for the majority of the capital. With the original equity structure, I would have gotten more equity when I invested an additional $8K into the project, but under the new structure, I was simply just catching up to my original share.
Some may ask if that’s a fair distribution for me? My view is that equity means nothing if there are no products to offer. With the way it was going, it would have taken significantly more time (possibly with lower quality). In fact, that lack of momentum would probably have killed the project eventually. If by reducing my own equity means that we can have a serious commitment to speed up the development, then I feel it’s well worth it.
However…
This system isn’t without its flaw. One downside is that it doesn’t encourage collaboration and the development team was racking up significantly more equity than the business side (myself). Our co-founder didn’t end up getting too many task completion points either because he was focusing on helping the rest of the team. I personally didn’t get anywhere near where I wanted to be because my tasks were meant for a much later stage in the project.
My co-founder and my equity would have all been fine eventually if we didn’t have to lock in the % pre-maturely. This brings me to the next big flaw: unnecessary internal competition.
While my co-founder was looking at the big picture and helping others, he was constantly under the pressure as his equity was fairly stagnated. Another team member was also afraid his share would have decreased if others were to do more work.
After 2 months of steam, we just had to end the incentive system and locked everything down. But on the bright side, the core team was significantly more committed and the momentum kept on going. In fact, one of our teammate (Sean Zhao) believed in it so much that he recently quit a good permanent paying job to go full time on this project WITHOUT pay and additional equity!
In Conclusion…
Equity splitting discussion is a delicate business. It can make or break the team. Friends can turn into enemies if things go sideways. By God’s grace, we made it through that phase and we are on a good momentum to build on. The discussion still comes up when new members join and it can still be serious as it affects us all, but we have a much better foundation to deal with it now than before.
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