Sunday 30 August 2009

A better way to manage equity?

When we get together to start a new venture, the structure of the equity is always an early topic. The usual format is something along the lines of 'you do X for 20%, he does Y for 10%, and I do Z for 30%' and then we carve up the company up front.

The problem with this approach is that it doesn't easily cater for all the things that really happen during the course of a startup. For example, you can't always predict who's going to stick with it or how many people are ultimately going to be involved. As the idea evolves (because you almost never end up with the same plan you started out on) the bias of work can shift to a point where the equity split no longer reflects the effort split, and of course the value of effort to a business changes over time.

I don't think there is such a thing as a flawless mechanism for this, however I think I might be onto something a little more elegant. Here's how it works...

Break all the work - this same approach works for commercial and marketing tasks just as well as it does for the technical stuff - required to bring your idea to market into tasks or jobs which can be done individually by the members of your team. Decide on a number of points for each task, based on a sensible blend of value to the business and effort required to deliver. Points are the key to the whole thing; do the task -> earn the points -> exchange the points for shares.

Because you haven't fixed the equity allocations up front, it doesn't matter if you gain or lose co-founders and you minimise those 'who isn't pulling their weight' discussions, as you only get the shares you directly earn.

But why points when you could just do the same thing with the shares themselves?

Points give you a couple of extra controls you might not have if you immediately issued the shares; for example you can set an exchange rate between points and shares, allowing you to increase the relative value of tasks not being picked up, or offer individuals a better exchange rate once they have accumulated a large number of points (thus encouraging fewer greater contributors which makes for a more coherent project and a simpler shareholders register).

Setting specific milestones (for example beta launch or first partner signed up) at which points can be exchanged for equity ensures that everyone still focuses on bringing together an overall business delivery as well as their own contributions.

Forming your company with a healthy allocation of shares and some fairly accurate record keeping on tasks and points (I can recommend zen if you're an agile/lean thinker) is all that's required administratively.

There are a number of more subtle points to this, such as making sure you've got strong enough acceptance criteria on each of these tasks, but that's the meat of it. I'm running a project using this method now and - while we're not done yet - it's going pretty well and has already afforded us some flexibility we wouldn't otherwise have had.

Wednesday 19 August 2009

Doing it on the side

Something new managers often struggle with is what their response should be when members of their team are involved (or are considering being involved) in external, perhaps even related, business activities. I encourage it wholeheartedly, with a small number of key caveats, on personal development grounds.

Trying out "their own thing" will teach your guys about responsibilities well beyond those that you can reasonable expect to expose them to in their role, and give them some insight into the difficulties of running a business, taking care of finance, marketing to customers, and making product decisions. There is so much to the operational side of an organisation (even a tiny fledgling one) that they would otherwise not have many chances to experience first hand. This can help your team members develop their creative, entrepreneurial side and give them a much better appreciation of the challenges their colleagues elsewhere in the business face. This is so beneficial that I'm even found guilty of supporting such ventures with advice and coaching from time to time.

The caveats? There are only 2 key things that must be true to qualify what I’ve said above:

1 - You still have a job. Outside interests should not impinge on the quality, quantity, or timeliness of work, and if they do then one of these things must go. My policy is to provide a flexible working environment, but I'm not here to subsidise your startup either.

2 - You shouldn't compete with your employer. For most people in our industry, our roles come with a duty to innovate and develop new product to further the companies interests. Whenever something extracurricular can be even slightly interpreted as related, it needs to be raised with management and explicitly categorised into 'company IP' or 'fair game' for everyones benefit.

Regardless of which side of the employer/employee relationship you sit on it is always worth finding out what your company policies are on this kind of thing before getting underway. Being uninformed might mean you start out with the best intentions and end up having to make difficult choices later.