I just finished reading the book Grumby which Brad has mentioned reading while in Homer. Its a decent book, fast read, humorous. It covers the rise and fall of an entrepreneur in a really smart kinda way.
There is a section in the book, where the lead character is meeting with his lawyer, and they are discussing corporate structure. To that point, every time he got someone to help him build the product, he gave the person 10,000 shares. He let his first employee / co-founder take 10,000 option slugs almost at will.
Once they run the numbers, he has given away most of his company to his co-founder and the various pseudo-employees that have been helping on the product. All in all, he had granted 1.4 million shares.
“If you only have 2 million shares, then they own the majority of the company.”
“Oh, I didnt realize,” he tells his lawyer.
This is not an uncommon thing among young entrepreneurs. Its just stock. Its just paper. You want everyone to have equity and feel excited about the company and its future. Whats 25,000 or 100,000 shares? Right now nothing. Just numbers on an excel spreadsheet.
Then later financings come. Or acquisition offers. Or any of a hundred different ways for the founders to exit positively. And when the cap table is reviewed, all of a sudden all those option you gave out like candy are staring you in the face.
“I gave Billie 200,000 shares? Jane has 100,000 and she isnt even with the company any more!” Suddenly, bad feelings begin to grow. You resent the people who you gave large share allotments to. You kick yourself for making bad decisions. After all, it was just paper.
Its important as a entrepreneur to understand what stock options are. Similarly to financing. In both cases, you are using YOUR COMPANY as leverage to either get money or get work. The more you sell/give away, the less there is at the end, or to give later stage employees.
My dad used to tell me all the time, “You can always go up; you can never go down.” He wasnt being supportive of my dreams, but rather being observational about the negotiation process. Its a simple thing: you cant take back stock options.
Early on, dont talk in percentages. Over the life of the company, and the financings taken, the percentage that people own (including the founder) shifts. Talk in raw numbers. Let people understand what 10,000 or 1,000,000 share mean. Explain outstanding shares, dilution, etc. Don’t hide what their options are worth today, or what they may be worth in the future. But start small.
Let the option grant grow with the person, as the company, and they themselves grow.
Being fair isnt about providing someone more than they are worth. Being fair is providing someone the ability to prove their worth and be rewarded for it.
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- Issuing stock options? Here’s what you need to know (entrepreneur.venturebeat.com)
- Grumby (feld.com)
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- Founder Agreements – Vesting, Vesting and more Vesting (simeonov.com)
