The Idea Dude


Friday, October 10, 2008

The Entrepreneur's Dilemma

I hang around startups a lot or maybe they hang around me. Either way, I get dragged in at various stages, day 1, day 30, day 180. And often I get asked to do stuff for free or take a pay cut. At some point, I'm offered a position whether it be a partnership or job and then comes the sticky issue of equity. How much is enough? Take too little and you feel you've left something on the table. Take too much and they ask you to work with a substantial reduction in salary.

Wikipedia defines 'dilemma' as "...a problem offering at least two solutions or possibilities, of which none are practically acceptable...". That's a great way to describe the process of sharing equity in a startup. So here are the usual arguments that accompany the standard line I always seem to get.

  • "It' my idea originally, so I get to keep at least 50%". What if the idea is vague and is more a general concept. Is that worth 51%?
  • "I'm bringing investors to the table, so I get to keep at least 50% otherwise this would not have happened". You can argue to some point that money has equal value regardless of where it comes from although in today's climate, there must be an acknowledgement for the one who brings the moola to the party. But is it 51%?
  • "I'm putting down $50k, I want 51% since it's my money." How do you value a startup that has no revenue and it's all potential and the return in terms of time and money is completely unpredictable. So is $50k worth 5%, 20% or 51%?
  • "Without my technical expertise, there is no product so I want 51%." Investors will tell you programmers are a dime a dozen. Is $50k hard cash worth more than an industry veteran who will make sure you don't blow the wad on a fruitless path?

    The problem is that depending on which shoes you wear, they are all valid points of view. And they are all different shoes. Is a pair of sneakers worth more than a pair of boots? Because no-one has ever figured out the money vs idea vs skills equation. You're not comparing apples to apples and with a clean sheet and no company history, any argument is subjective. But clearly 3 x 51% ain't 100%!

    So the question is really? How much is $500k, $1 million dollars really worth? and how much is that original idea really worth when it is still in its embryonic stage? and how much is each individual's experience worth. A lot. The question is how much relative to each other. Hence the wonderful wiki definition, "problem of offering multiple solutions, none of which are practically acceptable" at least from each point of view.

    The seasoned veterans will argue it is about rewarding risk. And the biggest risk is the loss of money. I would argue that we forget that when we ask people to join a startup they are also at risk of giving up their time and opportunity for something bigger somewhere else. Which is worse, losing $50k or spending 5 years of your life in a failed startup at a reduced salary?

    How about a post-startup scenario?
  • We blew all the money and made no impact. Should the person who brought the money in give the equity back?
  • The idea we had changed significantly after 6 months. Should the person who had the original Eureka moment give the equity back?
  • The business outgrew the solution and because of all the changes in the business and the business model, the technical buildout has to be rewritten. Should the tech guy give his equity back because he didn't prepare enough for the unexpected?

    The bottom line, is life is never fair and equitable and it's up to each individual to decide what he is willing to give and accept.

    But we're all human and as Britney Spears will say, "Gimme, gimme, gimme more..."

    Blogger MV said...

    Great post mr dude.

    10:20 AM  

    Post a Comment

    << Home