How Should Cofounders Split Equity? A Cofounder Vesting Riddle
Here’s a cofounder riddle:
Cofounders A and B start a company around A’s idea. There are 10 million shares authorized. A gets 2 million unrestricted for the “idea.” A and B each get 4 million subject to vesting.
Due to unforeseen circumstances, A immediately quits. A’s unvested shares return to the company. B presses forward alone and vests all 4 million shares. The company succeeds without further investment.
At liquidation, A has 2 million of the 6 million outstanding. B has 4 million. A gets 2 million divided by 6 million = 33% of the proceeds. A’s idea premium was lofted from the 20% agreed-upon to 33%. B feels snookered.
What could A and B have agreed to on “day one” so that A would have ended up with just the 20% idea premium?
I posted this to the MIT Venture Mentoring Services forum. Here’s a summary of what was proposed by others:
- A, the departing founder, could be
- subjected to steeper vesting
- given a contractual claim or special class of shares, instead of common, that convert to 20% of the liquidation proceeds
- B, the remaining founder, could be
- granted additional stock or options
- signed onto a “bear hug” right of first refusal to purchase cofounder shares
- given a loan from the company to purchase cofounder shares
- Or we could do one of the following:
- forget idea premiums;
- accept ownership changes as a risk in starting up;
- forget the whole “riddle” as an impossible problem.
The type of solution we’re looking for is:
- Not predictive: we shouldn’t have to know whether A will actually quit;
- Prescriptive: if A does quit, or participates less fully than B desired, there is no disagreement on how A or B should be penalized/compensated;
- Smooth: the spectrum of A’s non-participation and B’s compensation, from “A quit” to “A is fully engaged,” should have no step changes;
- Tax-free: founders can still declare an 83(b) election to pay relatively zero tax on their founder stock; and
- Cash-free: founders should not have to come up with lots of money to maintain an agreement made early.
Many of the ideas above have either tax or cash consequences, or are not smooth, or are predictive.
The “bear hug” concept combined with an idea sent to me privately, issuing warrants that expire as the co-founder’s stock vests, seems to me to be an implementable solution with few tax or cashflow consequences. So that’s what I’ve been working on this week.
I will report back and/or blog about it if we produce anything interesting. Certainly the name of this scheme would be, “a completely warranted bear hug.” Stay tuned.
My Favorite Part of the Work Week is Saturday at 7:30am
Saturdays at 7:30 am (5:00 or 6:00 pm India time depending on daylight saving) I call the MassLandlords bookkeepers in India. I love it.
I actually get up at 6:30 to prepare for the call and to review our “treasury dashboard.” I love getting up early on a weekend. It feels so productive. Plus, this phone call represents two-and-a-half years of process development. We review income and expense reporting for MassLandlords and two MassLandlords partners. We use asana for linear processes, skype for the call and screen sharing, Google Drive for file transfer, and Google Docs for the dashboard itself.
The idea for the dashboard comes from my training in operations. You want to quickly see a visual status of the entire organization. One of these boxes updates via an API, most are manual and take 30 seconds to update, maybe five minutes for the whole week’s work. I can update them or the team in India can.
The other thing I really like about the team in India is their combination of hard working and good attitude. They have had no end of challenges, from power outages to dengue, and yet we have continually taken care of our people and our jobs. We’ve had language skills training to the point where we’re talking politics, technological innovation to automate a lot of our work, and a mindset of continuous improvement to leave us all feeling productive and headed in the right direction.
I’m lucky to work with their team leader, who is receptive to suggestions and candid with feedback. It’s a great team, almost three years in the making, and checking in on their progress is certainly my favorite part of the week.
The Worst GTD Backlog Since Tracking Began
This afternoon I’m at the worst backlog of “things to do” since GTD tracking began in late 2014. I have 333 items in my inbox, on my desk, and in my task list that all demand attention yesterday. What’s astonishing is that “days overdue” is only 8, which means none of these things really originated before the last week. That’s 300 things to do since last week.
I can take a lot of pressure, this is getting near the limit.
A big part of it is the MassLandlords meeting cycle, which holds back a lot of ideas and issues over the summer and then many of our 1,200 members start sending them in. That’s wonderful, but also difficult to manage. I’m lucky we have new part time staff in Springfield to help with some of these requests. But then again, the Springfield group’s dissolving and folding in has taken a lot of my capacity the last two weeks, contributing to the backlog.
The other thing that’s happening is I’ve implemented a really great expediting system, which is a sure sign of flow failure if ever there was one. Expediting certain tasks ahead of older ones in the queue signals my lack of bandwidth. It keeps the fires from raging but it builds up pressure on the overdue items and creates stress. The right way to schedule is to create excess capacity or flex capacity so that things like phone calls don’t send us off on a tangent that we didn’t have time for.
Clearly we need more staff at MassLandlords. I’m working on it. But as I’ve learned over the summer, it can be worse to put the wrong person in the job than to have no one at all. The wrong person can cause more harm than good.
My average pace has been 57 hrs/wk. I had a nice relaxing summer, where the average went down to only 37 hrs/wk. In the big scheme of things, I still exercise, and eat right, and sleep adequately. And I’ve put in harder hours in the past. But boy, I really could use another Friday right about now.
One thing I carry every workday
It has been over nine months since the last update. I have been busy. I may write an update soon. In the meantime, it occurs to me to share this strange fact: every workday, everywhere I go, I carry the final pages of Andrew Grove’s High Output Management. Lame but true.
High Output Management is a soft skills book written by an engineer-at-heart. Grove was CEO of Intel during their rise to prominence. Possibly he’s the reason you know the name Intel.
At the end of the book, he lists out homework. “You have trusted me enough to buy my book and read it. Now let me say a final thing: if you do at least 100 points worth of what you find here, you’ll be a distinctly better manager for it.”
I’ve been chipping away at his assignments since May 2012. So far I’ve earned 70 points. Every time I do an assignment, I write the date. I aspire to do one every two months. I guess the average assignment is worth ten points. So I’m doing less than two each year. Not brilliant. Here’s what I’ve done:
- 8-21-14 What are my outputs? 0 points (I made this one up)
- 2-25-15 Identify half a dozen new indicators for your group’s output. They should measure both quantity and quality of the output. 10 points
- 6-20-16 Install these new indicators as a routine in your work area, and establish their regular review in your staff meetings. 20 points.
- 10-11-15 and 12-17-15: Look at your calendar for the last week. Classify your activities as low/medium/high leverage. Generate a plan of action to do more of the high-leverage category. (What activities will you reduce?) 10 points each time
- 5-10-12 Forecast the demand on your time for the next week. What portion of your time is likely to be spent in meetings? Which of these are process-oriented meetings? Mission-oriented meetings? If the latter are over 25 percent of your total time, what should you do to reduce them? 10 points
- 8-13-12 List the various forms of task-relevant feedback your subordinates receive. How well can they gauge their progress through them? 10 points
- 8-11-15 GTD reread, review, and revamp 0 points (I made this one up)
Most of this work has been done for MassLandlords. The 2012 bullets were Terrafugia.
The December 17, 2015 assignment still is not done. This is the reason why I’ve been so busy. I am trying to get all of my time into high leverage activities. I can’t be mowing the lawn. Problem solved. I can’t be coding the website. Problem solved. I can’t be answering phone calls from customers. Problem soon to be solved.
Overall, this assignment has shown me that I am the biggest problem with MassLandlords. I’m the long pole in the tent, holding everything up. I’m supporting but I’m also delaying by being integral to every process.
The work to unload has been painful. Since last winter, I terminated two employees that didn’t work out. I also lost a cofounder on a side project. I missed (or am missing) two huge opportunities that I just don’t have time for. Every setback is another sharp turn downward on the startup roller coaster.
This is why I carry Andrew Grove around with me everywhere I go. I’m not yet where I need to be. But I will learn from him and others, and I will get there.
I updated my blog’s WordPress theme tonight. Lo and behold, it ruined everything. I had to reconfigure it, right down to the CSS. So I took the opportunity to rebrand this space. It used to be called “Thoughts on Business.” That’s boring. That’s limiting. That’s completely worthless from an SEO point of view.
A title I had been kicking around for a while was “Rocket Scientist Landlord.” That’s intriguing. That’s broadening. That’s unique! It also hints at my eclectic life experience. So here’s the new name.
I will continue to post here, but most of my writing is now being done at MassLandlords. =)
The Political Bottomless Pit
An Update on my Time as Entrepreneur
Next week marks three years since I left Terrafugia, which was the last time I worked as an employee. Since then I’ve wandered through various entrepreneurial roles and projects. In January 2013 I started tracking how I spend my work time. I now have 32 months of data (critics take note: this graph doesn’t include laundry or non-work stuff):
In green at the bottom there’s the rental property (MTL 7). I did a lot of maintenance this summer, like painting, and I had two turnovers, so it was the most intensive house work in a while. The house has been the underlying, ever-dependable “first business”.
In blue, dark red, and orange there’s ArtistBomb, Ghost Bear, and the BagPack. These projects all came and went. The BagPack is still being sold at low volume. ArtistBomb is still moving forward, soon to rebrand, but I’m largely hands off at this point.
Purple is MassLandlords. In the last six months I have finally settled onto MassLandlords as “the thing.” It’s now paying the rest of bills (what the house didn’t cover).
“MassLandlords development” in light purple was the bucket allocated to website work. It hasn’t received as much focus as the first summer after launch. That’s mostly because the management piece has ballooned. I’ve tried to straighten out membership lists, event marketing, accounting, and partnerships. We’re up to over 900 members consistently, and I think any day now we’ll announce an average membership of over 1,000. (It’s hard when two thirds of members still don’t have a credit card on file.) We have five partner locations (Boston, Springfield, Southbridge, Marlborough, and Worcester).
The big change has been the growth of the salmon colored streak, my new focus on public policy advocacy (ppa). In particular, I was asked to sit on the Massachusetts Senate Special Commission on Housing. There was a good idea floating around about homelessness and it looked like a win-win-win. I put some time into advocating for it. There’s a program in Seattle that does exactly what we need. The Commonwealth, the homeless, and landlords could all be better off. The details are unimportant but you can read about them elsewhere.
I sat on the commission with representatives of quasi-governmental non-profits that administer social benefits and advocate for tenant rights. They receive tens of millions of dollars annually (in one case, over $100 million annually) and have become experts at getting their way. They took our win-win-win, something for which we had real data, and ran it through the steamroller of their ideology. It hardly resembles what we had in mind.
The experience has chastened me. Without equivalent funds and back channel influence, landlords cannot hope to contribute to policy discussions on equal footing. Just as a poor person’s lone attorney can be buried by the opposing team’s paperwork, the relatively poor MassLandlords was buried by the big money advocates.
It was my first glimpse into the political bottomless pit. There is apparently no amount of third party data that can overcome ideology. There is only money and time and the stamina to outshout each other. MassLandlords could easily fall into this bottomless pit. In fact, this is where the old landlord trade association ended up.
Maybe someday we’ll be in a better position to advocate for data-based policy decisions. For now, I think I’ll return to putting my time into management.
MassLandlords.net Outgrew WildApricot
In late 2013 we switched our membership management system from a Google spreadsheet to WildApricot. It was so good I got giddy. I could search specific fields across all members. It would send automatic renewal reminders. We could have members-only forms, event registration, and a directory. I was over the moon.
Alas, all good things… The same time we chose WildApricot as our back-end, we chose WordPress as our front-end. This, it turns out, meant WildApricot’s days were numbered.
iFrames as Wild as an Apricot
WildApricot says it integrates with WordPress via iframes. There’s a little web page inside your main web page. They call this a widget. I’m fine with “widget.” But this is not an integration. There is no communication with WordPress whatsoever. And use of iframes causes problems for browsers that block third party cookies. This includes all iThingies and Macs. In our case, that’s 25% of our users. These folks couldn’t log in until they first visited a WildApricot site, received the cookie, and returned to the original page.
WildApricot’s help docs claim you can resize iframes to fit your site. But some developer at WildApricot didn’t get the memo and started using CSS floaters. These notify users about special messages. They are important to see. The one in the image below is trying to say that your membership is overdue for renewal, so “click here!” But the floater has ignored the iframe width and carved out space off-frame, beyond the iframe. It actually looked like this on our site:
We hacked their floater to wrangle it down into view the way you have to leap onto a stack of helium balloons to squeeze them into your car.
PayPal Integration Guarantees Lowest Possible Conversion Rate
Maybe I picked the wrong version of WildApricot’s plethora of payment options. I don’t know. All I do know is that we switched to stripe. We used wpstripe without any back-end API connection. Even though we then had to manually add new members to WildApricot, we were FAR better off. Suddenly new members were converting left and right.
In November 2014 I made the following note in my log, “The PayPal integration is awful.”
In general, any time you have to leave a site to pay, or enter too much information, you’re giving your customers a bad experience. It’s like pushing your grocery cart next door to pay. You ask, “Am I in the right place?” And they reply, “Maybe, give me your social security number and I will check.”
Our members tend to be of the generation that’s somewhat distrusting of PayPal. They would rather pay via what they perceive to be a secure paper check. Our simple stripe checkout generated none of these complaints about perceived security.
A Forum for Quiet Meditation
WildApricot members can’t post to the forum via email. This is a huge barrier to adoption with less computer savvy members.
The forum experience for members who are admins is really difficult. They can’t view the forum when logged in as an admin. Not allowed.
We switched to Google Groups. This left us with a lack of connection between our forum and our membership database. But again, even though we had to have someone add people manually to Google Groups, we were far better off. Our Google Groups stayed in sync and participation was robust.
Meanwhile, in the WildApricot forum, I sat quietly and pondered the meaning of life all by myself.
Good Email Reminders
I like the way WildApricot sends email reminders for new members, lapsed members, and other things.
But I have more complaints
I don’t really like the way WildApricot does members-only documents, where the link is public but just hidden. That’s open to brute forcing and sharing.
Their HTML edit windows are awful. If you paste in rich text from another editor they’ll say, “Cleaning html!” and then delete everything you’ve pasted in. (I wasn’t pasting anything crazy. WordPress handles the same text correctly.)
Their customer support is unfeeling. The number one answer I received: “try a different browser.” (Okay, so I will email all my customers and tell them to use a different browser.)
But here’s the thing about WildApricot: it took us three months and almost a dozen WordPress plugins to replace what they were offering.
Back in November 2014 I wrote, “We’re using WildApricot as an integration with a WordPress front-end, which I realize puts us in a class above your target user, in terms of sophistication. As we head down that road, I anticipate outgrowing WildApricot. But in the meantime, you’ve given us a lot of value and we’re not looking to leave just yet.”
Chris Borland, NFL Top Rookie, Retires amid Concussions Controversy
ESPN reported that Chris Borland is retiring after one year, giving up over $500,000 in salary, citing head injuries as the primary concern.
The NFL may be a non-profit, but its member teams are all businesses. It makes me think of one of the shortcomings of business. Normally I would argue that business is the principal framework for societal good. A business like the NFL provides entertainment. NFL team employees earn a living delivering this entertainment. NFL customers pay to participate in football through tickets, apparel, and consumption of ads. Two independent parties looking out for their own best interest are achieving something wonderful. That’s business at its best.
But what would happen if the NFL realized it needed to stop? What if they couldn’t get ahead of chronic traumatic encephalopathy and decided, for the health of their players, as a moral decision, just to stop what they were doing? They couldn’t. Every bit of value tied to the NFL has been based on the assumption of an infinite time horizon. “The NFL will continue indefinitely.” The values of all the teams and all the players and all the marketing are all inflated beyond what any finite business is worth. This is the case for most businesses. Livelihoods and standards of living are at stake for everyone who touches the NFL. The push-back on any decision to stop or drastically alter the course will be extreme.
There is no way to invest in a business knowing that it will someday end. Everyone assumes it will continue forever. If you don’t, you’re priced out of the market.
There is no mechanism for a business to return value to investors from an idea that has run its course. The only thing the business can do is let the investors sell their interests piecemeal, at ever declining values.
Could we be witnessing the start of a long, gradual sell-off into NFL bankruptcy? Will medical science make it possible to bang our heads against one another without lasting injury? Or will the NFL reinvent itself and the game to continue operating indefinitely, as everyone assumes it will, with no complaints?
The pace of business reinvention is proportional to the pressure applied by thinkers like Borland. Right now, there is no change. Will it start? Will it be fast enough? Time will tell.
Biggest Scientific Discoveries of 2014
Somewhere I read or heard that all economic progress is driven by technological advancement.
I think it behooves us all to stay up-to-date on the latest science. So I thought I’d find a year review of discoveries.
Short Detour: Biggest Discoveries of this Century
I haven’t ever done this before, so I first sought out the biggest discoveries in science since I left high school (year 2000). I figured my knowledge must be that far out of date.
If the Discovery Channel is to be trusted, then I had heard of 7 of their top 10 discoveries except:
- We’ve taken a direct picture of a planet around another star (instead of detecting it indirectly), 2008.
- The “missing link” between chimps and people has nearly been found in Africa, 2002.
- They found T-rex soft tissue in an ancient bone, and yes, it tastes like chicken.
If I learned of these when they happened, then I’d since forgotten them.
The other discoveries since 2000, in case you want to know:
- Pluto isn’t really a planet, and there’s a bigger Pluto nearby called Eris anyway.
- Dark matter exists (“Discovery Channel, wait a minute, does it really?”)
- People can control artificial limbs and things with their minds.
- Making stem cells no longer requires embryos.
- Mars had liquid water on it, and still has ice.
- The human genome was completely mapped.
- Glaciers are going extinct.
The Discovery Channel list was written before the discovery of the Higgs-Boson, about which I remember hearing. We’ll take the scientists’ word and agree that it’s also a big one. So let’s say there are eleven really big discoveries so far this century.
Biggest Discoveries of 2014
After that list, I googled “2014 in science.” Wikipedia to the rescue.
Overall, here are the trends I see in that massive list of discoveries in 2014:
- Many old species are now extinct, including
- The incredible axolotl (extinct in the wild)
- White rhinos (one down, 5 left)
- Many species were just added to the wait list for extinction
- Australian possums
- Climate change is being variously over and under-predicted, but mostly under.
- The number of studies saying that climate change is manmade completely dwarf the work to do anything about it.
- Asteroids are whizzing past our faces ALL THE TIME.
- 2014 had so many life sciences break-through’s it seems nothing about life sciences will remain a mystery for long.
- There are still undiscovered places on earth, including
- A coral reef off the coast of Iraq and Iran
- There are still undiscovered animals on earth, including dolphins, jellyfish, deep sea fish, and small mammals discovered this year.
Climate dominates the research so let me give one short thought on it:
I wonder why so many climate scientists feel the need to continue research proving that climate change is man-made. If you can’t convince the nay-sayers, it’s time to work around them. Carbon capture or other clean technologies made economically better would be naturally adopted without a single law, and faster than any law. If only a Prius cost what a Corolla did.
Apart from climate, here are some specific breath-takers from the list of 2014 discoveries:
- We can now cryofreeze a leech, and thaw it back to life after months. And moss, after 1,500 years.
- A prosthetic limb can now convey a sense of touch.
- Scientific output is now doubling every nine years.
- In our quest to find life on Mars, we have almost certainly contaminated it.
- We can instantaneously, faster-than-light transmit information over a distance of hundreds of miles using quantum teleportation. (You just have to carry two very small quantum receivers hundreds of miles.)
- Dental fillings may soon be a thing of the past.
- We saved the whales
- We can vibrate the air into solid feeling objects.
But that’s all. Most of the rest of the so-called discoveries were incremental refinements to our understanding about stuff. “Coffee might do this to the liver.” “Tea might do that to your brain.”
From the point of view of any single project, science is slow. But in the aggregate over all the projects, the pace is really astonishing.
I think folks would all feel a lot better if technology caught up to the global warming thing. Seems like that’s what was missing from the list of 2014 accomplishments.
Hardly blogging at all…
I still have things I want to write about. I’ve just been using all of my writing energy for MassLandlords.net. Here’s an update showing where my work time has gone.
You can see that ArtistBomb (blue) has gone way down. The two purple colors are both MassLandlords.net. Light purple labeled as “MassLandlords.net” counts Internet-facing work only. “WPOA” is the same organization but counts back-end administration, including finances, management, and a very little public policy advocacy.
So what happened to ArtistBomb?
Well, with any business it’s a race against opportunity cost. I worked hard for ArtistBomb, as the graph shows. Out of all the working hours in the past two years, ArtistBomb received just about half, or one full year. But ultimately, I’m not the music industry guy. When I was asked to take a more active role in MassLandlords.net, it seemed like the contributions I could make there could be more “on point” than what I was able to do at ArtistBomb. For me personally, it seemed like the opportunity lost by not working MassLandlords.net would be greater than the opportunity lost by not working ArtistBomb.
Plus, MassLandlords.net is already able to pay me a little bit.
For the rest of the folks there at ArtistBomb, I think it still makes sense to push forward. We can clearly see the need for what the company’s doing. Once they figure out a reliable income stream, they can build on that.
I think the challenge for ArtistBomb remains time allocation, actually. I doubt anyone there tracks their time to this level, but if they did, their ArtistBomb color might look more like my “WPOA” color: an important but small and variable focus. In startup land essentially all of the early work remains uncompensated. So finding more time to work on the startup can only be helped with funding or with financial independence.
As the graph shows, I’m still supporting the company with what I can provide, including legal and tax compliance. And I know they have big things in store. Big ideas take a long time to develop. In the meantime, we all need to make ends meet.
So what’s with MassLandlords?
Things are going well. But there’s a long road between where we are and full time paid staff.
All signs are that we’ll get there. It will depend to a large degree on whether we can build trust among the landlords in the state. We need their willingness to coordinate with us to reach “economies of scale.” Right now, for instance, there are still 17 groups that produce their own email newsletter without any of the benefit of our greater experience or content. We’re hoping to eliminate redundancies like this. It will free up local volunteers to focus on local problems. It will send resources to the state-level to tackle problems shared state-wide.
The time management challenge for me, personally, is not getting sucked into the never-end public policy work that lies ahead. This requires a full time paid public policy person, like they have at a local Chamber of Commerce. My mission is to build to that point. But the Commonwealth’s challenges concerning landlord-tenant law are manifest, and landlords are asking me to tackle those as soon as possible.
I’ll do what I can.