Can a mod change the date? It's a repost of his original answer from 2011: <a href="https://web.archive.org/web/20110416041922/http://answers.onstartups.com/questions/6949/forming-a-new-software-startup-how-do-i-allocate-ownership-fairly/23326" rel="nofollow">https://web.archive.org/web/20110416041922/http://answers.on...</a><p>There's been a lot of discussion since, including <a href="https://news.ycombinator.com/item?id=2445447" rel="nofollow">https://news.ycombinator.com/item?id=2445447</a> and <a href="https://news.ycombinator.com/item?id=3489719" rel="nofollow">https://news.ycombinator.com/item?id=3489719</a>.<p>Also, at the time, Dan Shapiro argued against it here: <a href="http://www.quora.com/What-do-you-think-about-Joel-Spolskys-advice-to-split-equity-50-50?share=1" rel="nofollow">http://www.quora.com/What-do-you-think-about-Joel-Spolskys-a...</a><p>I also think the share distribution Wizards of the Coast (Pokemon, Magic the Gathering) accidentally used was interesting: founders had no shares, and worked their way up into the single digits, which supported small, individual investors, but it's probably not recommended if you're planning for traditional investment: <a href="http://www.peteradkison.com/blog-entry-2-wizards-of-the-coast-equity-distributions-part-1/" rel="nofollow">http://www.peteradkison.com/blog-entry-2-wizards-of-the-coas...</a> and <a href="http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-distributions-part-2/" rel="nofollow">http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas...</a>
"Don't resolve these problems with shares. Instead, just keep a ledger of how much you paid each of the founders, and if someone goes without salary, give them an IOU."<p>The IOU solution is not a good one:<p>1. Not taking salary when a startup starts is basically a very risky loan. An IOU simply doesn't take into account the risk involved.<p>2. This is not symmetrical to how investors are treated. In both cases there is an investment in the company which can be measured in terms of dollars. In the case of the employee he is only getting an IOU, but in the case of the investor, he is getting shares. I don't see any reason why these should be treated differently.
The most important bit of advice in this post pertains to vesting. If you do nothing else Spolsky advises, make damn sure you pay attention regarding vesting.
My startup does not fit well with Joel's model of employee layered risk. I've bootstrapped early and every layer the last 3 years got payed a normal, market salary, and on time every month. We also payed bonuses and the CTO even drives a company car from day one. Almost everyone was hired either straight out of college or was unemployed, although that was not intentional but probably my subconscious deflecting the extra pressure of being responsible for screwing up someone's career. Now I'm boarding our first investor and we're planning what our option pool will look like. I feel nobody but myself took any considerable risk coming to work here, and whenever there were troubled waters, my compensation was the only one that suffered.<p>I finally decided I favor giving stock as bonuses based on individual merit, as a payback for any extra effort and dedication in the past and as a motivational tool in the future. Unlike Joel, I'm reluctant to see employee risk-taking as relevant or even measurable or fair, and I wonder if that is really the case at other startups. I mean, can one say their new hires are actually assuming uncompensated risk, beyond the reasonable risk anyone assumes switching jobs, as to be entitled to equity mainly for that reason.<p>Employee risk seems like an oxymoron to me.
Interesting bit about diluting shares when new investment comes in. Joel's answer is very simple and seems extremely fair.<p>How common is this straightforward approach, where everyone is diluted in the same ratio of existing shares to new shares? I'd be interested in hearing about experience/knowledge other people may have had here.
Can someone explain to me why being hired in a later round of hiring is really that much less risk? It sounds right on the surface, but is that really the case in practice? Not in my experience.<p>I've never known startups to be steady long-term job providers. Seems like most live on the edge, always with not more than 3 months cash in the bank. Even when you get a big round of funding and hire more people, the investors want to use that money even faster than your last round.
Open question: how do you look at the equity where one of the co-founders (Founder A) does not have to work for X number of years, since they've cashed out of another company. They have the capacity to work full time, whereas the other "co-founder" (Founder B) is only able to work part-time. Founder A has the means to not work for a lengthy period of time. While they're taking on an opportunity cost, is their risk viewed the same as some other guy that quits his job (kills his income) and maxes out his credit cards?<p>EDIT: According to Spolsky in his hypothetical situation, Founder B was not a co-founder because he kept his job. Founder A, OTOH was essentially unemployed and took on all the risk, and therefore was a "legitimate" founder.
TL;DR equal shares in the same layers and vesting are the big points.<p>For the top layer: the real nature of a person comes out when they have a perceived opportunity to win big at someone's expense... hence good friends can make good cofounders. Failing that, find someone that plays well with others and considers the long-game of their actions. (You're gonna stick together for the next venture if this app doesn't work out, right?)<p>For the second layer: should be people you'd like to work with that may be founders in the future or people that have been recommended.<p>Third layer are more/less startup employees. So not regular corporate like employees that need to be thought for or are super niche, but T-shaped folks that can take initiative and worry a little more about details.
Honest question - wouldn't a large stack of IOUs (say, 200k) tend to cause problems in the next investment deal? Wouldn't most investors demand to wipe that out before they are putting money in?
This sounds like very bad advice for tax consequences. Is an IOU tax deductible? Does one declare IOUs in an 83b election?<p>Beyond tax implications and VCs, the IOU system strikes me as particularly terrible advice. In what realm is it reasonable to simply ignore hard interpersonal problems until they go away? If some group of people can't quickly come to an equitable arrangement for the division of equity, they shouldn't form a business. After all, founder breakups are a leading cause of failure.
I really like the fairness and simplicity of this system.
The resolution for not taking a salary could be made fairer by adding interest to the IOU (eg: 5%).
"Now that we have a fair system set out,"
I had to laugh at that line.
Our IT startup model is the poster child for the inequality that defines our age. Founders own 50%, everyone else should be happy on the crumbs....
There's got to be a better way.
Hang on, there is. It's called the partnership model, from the Law Industry. If you work really hard, you can become a joint owner (no matter when you start), and share in the profits. When you leave, you get nothing. That model is fair!
Umm that's a whole bunch of pulling numbers out of thin air. The 50-10-10-10-10-10 progression is proportionate to what exactly? The article would sound just the same if he recommended 75-5-5-5-5-5 or 40-30-20-10 instead.