If you build something with a team, then this topic comes up. Heck it comes up when you are just thinking about it. It’s the first test and sometimes the fast end to an idea.
How much do I get? How much do you get?
The faster you can get past this the better. It is the most important conversation you should have. However, it is the most stressful conversation you can have with your team as you divide nothing up between each other. The following is my idea for how you can get past this issue quickly.
BS3 rules (Big Slice, Small Slice)
Think about it like a pie chart. 4% goes to the person who originated the idea. (Yes, seriously, get over yourself it is a good idea but it isn't a company). Then split it into 3 phases. Each phase consist of building an MVP and then operating it to see if you have found a market. If in three phases you haven’t found a product market fit then it is time to call it.
Phase 1 will have 16% portion for building it and 16% for operating it.
Phase 2 will have 16% portion for building it and 16% for operating it.
Phase 3 will have 16% portion for building it and 16% for operating it.
Now go make a spreadsheet like this.
The idea is that you have budgeted these specific 7 activities as the "big slices" of the entire project. What you are going to do is track who contributes to each big slice so that you can figure out their "small slice". Over time those columns under the contributors names will turn into the percentages. The end result is a dynamically created ownership model.
Allocating the small slices
For this part you have to change your thinking so that you represent both the company and your own interest at the same time. As the company, what are you willing to pay the contributors to put some effort into this? Is it $100/hour? Is it $4000 as a fixed amount? Figure that out between each of you for each phase. This is the deal you have with the company.
What you are going to do is track these costs every month and tally it up for that slice. At the end you will have something like this.
When this phase is over, go back and update that first spreadsheet.
If you didn't notice, this gives you the ability to add and remove team members easily. It gives you the ability to budget. It also gives you an idea of how much effort you have put into this so when you are negotiating with your first investor you have a clue of what you have done.
What you are really doing with this model is making up a new currency and then spending it with each other. It is what you will be doing when you raise money. But at that point it is more serious and your board will have something to say.
Remember, the goal of this process is to get you to product market fit without raising capital. It is designed to give you a shot at testing your market three times and to pivot at least twice. You can of course extend the number of phases by following the same pattern.
Questions that have come up.
Why do I want to budget for three MVP?
You are about to form a team and find out if they are dedicated. Some will be and some won’t. It’s surprising when you look at pedigree and what people say about themselves, then you actually work on a project with them and find out what really is in their heart. You find the cynic working long hours while the ivory tower phd guy doesn’t really do anything. This process lets you set expectations for not just the people you start with but also for the people you end with. You can of course do it the other way but you will be having a lot of conversations about delusion as you have to constantly ratchet down expectations. From experience it isn’t fun to tell tell people that their 30% stake is now worth 15%. However if you start out telling them it was only 15% it is way easier.
What if this only takes one phase?
Then delete the lines for the next two phases and equalize the percentages. In this case the idea would still be worth only 4% but the first phase is worth 96%. If you have to add a 4th phase it is the same idea. The general principal is that the idea is fixed value and the phases all have equivalent value.
Do we do this for the whole life of the company?
No, as soon as money is involved stop doing this and file it as a normal company. You can take whatever percentages you ended up at and normalize it to figure out the founders shares for filling the company as a C-Corp.
This event might be raising capital or even better, finding enough revenue to power the company.
Can you put in real money?
Sure, as long as you and the company can agree on the 1 to 1 conversion. You might want to do this so that other contributors can buy someone else’s shares. You might want everyone to pitch in right at the beginning so that there is some capital for tools or resources.
How much time should we expect to take to build the product?
I think at a minimum you should expect 1 year to get through three phases. The max is 4 years because by then you will be absolutely sick of this idea. But, as a team make that decision so that everyone’s expectations are the same.
Should we file something?
No, don’t make this official until the last responsible moment. Appoint someone trustable as the treasurer to handle any money contributions. This really can be just a spreadsheet to keep score.
What if we already have been building this?
Then decide what phase you are in. Most likely it is the first building phase. So just argue out how much everyone has contributed to that point. That still leaves a lot of pie left.
What do you mean by “the faster you get past this the better”? This conversation is super important and needs time to sink in for everyone.
Your biggest priority is finding product market fit. The more time you spend arguing over how much everyone gets the less time you are spending attacking the problem of creating value. This process is designed to involve contributors, see if they are worth their salt, and to get to that product market fit fast. It’s a framework for setting expectations. By simply agreeing to use a process like this you have gotten on the same page and are moving forward. The raw reality is that you will be earning your percentage which ends the debate of who is more important pretty quickly.
Is this for getting to an MVP?
No, it is for budgeting out three MVP’s in advance. You should think of it this way because you don’t know what you don’t know yet. If you are successful in the first attempt then great, ignore the later phases. I also admire your confidence.
Who is governing this process if there isn’t anything formal in place?
These rules are designed to keep the focus on finding the product market fit and setting expectations of everyone who has contributed. They should be enough to get you to that point. It will be evident who is a founder and who just wanted to have some experience. When money starts to get involved you will need to say who the founders are but I bet this will be obvious and you don’t need a process for figuring it out.
Is this an alternative to the traditional process of creating a startup?
It seems like the start story is 2-3 people work hard in a garage after hours to build a prototype and learn something special. They then raise capital, grow a company, and either IPO or get bought to have an amazing exit.
I don’t know any of these people. I know lots of brilliant middle age engineers that have families and can’t risk that. They all have clever ways to solve problems and a limited amount of time to devote toward a dream. This is for that type of person. It is possible to build and sell something without putting your family at risk.
Now go build something so you have a reason to be arguing about this.