Code for Equity… or not.

27 September 2007

There’s a bit of presumption in giving away equity to participants in a weekend of development. Equal shares for everyone. Unless, of course, you’re special. Apparently, some can be more equal than others… witness Andrew’s observations about Toronto.

“… organizers decided that it would ‘only make sense’ to reward their hard work with a substantial part of the company, without telling me or any other of the founders until the day before the event. They also decided a 20% share of the company was awarded to the person who came up with the company idea that everyone was going to make.”

Then, factor in Andrew’s ambitions as noted by Brill Pappin:

“He showed up for at least several hours each day and did absolutely nothing to help or participate at all. Andrew will get his shares never the less because all who were there, even for a few hours will get them as well… no matter how much work they actually did.”


BESIDES the obvious nature of issues with the allocation of equity, there’s an important legal one. Each lawyer with whom the organizers of Birmingham Startup spoke frowned immediately at the mere mention of 75 shareholders. Even if we could address voting rights, change of control, etc. we’d be running quickly into legal issues with (likely) these shareholders not all being “qualified investors”. The way around this is to treat all of these 75 people as ’employees’… but then, when would we have the time to verify that all of these individuals were free of any encumbrances like pesty employment agreements? If any of these individuals’ work product resulted in the company creating generous profits, who’s to say that that individual’s employer couldn’t pursue their legal rights to the new product/company? This just smells bad.

We did warm back up to the idea of using equity as the carrot to keep everyone committed to the weekend. But, ultimately we believe the winning company could choose to raise venture capital. We don’t know of many VCs in the nation who would be willing to take on a cap table with 75 (or more) shareholders, none of whom have put in cash.

So, for now at least, we’ve shelved the concept of awarding founder’s stock or even stock options to the event organizers or participants. Truly the only people who could leave the weekend with stock are the members of the entrepreneur teams. However, we’re going to discourage this as well since partnership agreements can get complicated and some participants in the first weekend may or may not warrant equity. Instead, we expect to have the winning company form a C-Corp with officers but no equity assigned in order to move through the second weekend. We believe that only upon determining that the team wishes to move forward (after the 2nd weekend) would they engage lawyers to resolve the issues of equity.

I’m curious to hear what other startup weekend efforts are doing along these lines??

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12 Responses to “Code for Equity… or not.”

  1. Its an interesting concept. VoSnap has 56 share holders, and we have had no issues when speaking to potential investors around the number of share holders or the amount of equity dispersed.

    Personally, there has to be some sort of thank you for the weekend, and a couple hundred shares in a company that may not ever go anywhere seems a way to do it. Its almost like having a stock certificate from a dot com, worthless but potentially interesting.

    We put the founding group into a voting trust, and put one person as the voting member of that trust. The move forward team, 5 in all, have the majority of the remaining 50% shares, with a nice chunk set aside for investment.

    Those 56 may have put no money in, but the 5 Move Forward team members are certainly benefiting from their labor.

    Just my $0.02.

  2. We had the exact same problem with VCs and lawyers “frowning” upon the idea of 100 shareholders taking up 50% of the pie.

    … and the Toronto agreement was born…

    In the end we reduced the number of shares to the winning idea by at least 50% and reduced the shares to the pre-event organizers (not sure yet exactly how it will work out, but I know that has been the consensus amongst the organizers, and we’re waiting on the lawyers right now).

    We took a *lot* of flack over our agreement from groups external to the Toronto event and from Andrew but IMO having a rough draft (at least) of how shares will break down is important to have before the weekend. (I’d certainly be asking what I was working for).

    If you don’t want to sort it out until after your event, I would at least come up with something fair and rough as a statement (non binding) on how you intended to decide on the breakdown. People have to know what it is they have to do, to earn those shares.

    In the end, our model worked despite criticism because we found that most people who were not there working tended to collect fairly few hours and therefor fairly few shares (it’s tough to sit there being board when you could be out playing or something).

    As for giving shares for time blocks, we felt that awarding shares solely on performance was too subjective and would lead to a conflict of interest… as it turns out, when your working through the weekend it becomes pretty clear who is contributing and who is not but it’s still subjective.

    Some suggestions on how you might make the distribution fair if you come up with the plan after the weekend(s).

    – Use a vote system. Ask your participants to name the people (excluding themselves) they think contributed the most to your product, in order. You can then award your weekend share block based on frequency of vote.
    – Make a policy that the participants must be present all three days to be eligible (must at least show up for n amount of time). That should remove the need to award shares to whose who show up for a few hours on Friday night and never come back.

    You don’t want to exclude the folks who have families and need to leave earlier in the day however (a lot of our group had that problem, but still made a valuable contribution).

    I’m looking forward to seeing how you folks try this aspect of your event… it was definitely something that we had a hard time with and I’m glad to see the experiment take an alternative approach.

  3. @ Mica… it strikes me as presumptuous to “set aside” shares for future investors in the interest of avoiding dilution. Since I come from the VC world, I believe that most VC’s run clear of any entrepreneur (team, or otherwise) who dictates terms and structure of the deal beforehand. The fund with whom I was employed sought early and seed stage deals and *always* set the initial terms. If future startup weekend efforts truly want VC funding, then it behooves us all to engage our local VC’s (and those lawyers who represent them) in the structuring of the entities we create.

  4. IANAL!
    It seems to me, that this logically breaks up into two different groups, neither of which could exist without the others:

    a) Founding Team
    b) StartupBirmingham

    I suggest that founding team members should receive equity, along with StartupBirmingham. All others should receive equity in StartupBirmingham. Non-Founding members would (potentially) see a measure of reward, either directly from StartupBirmingham, or indirectly through the services it offers.

    This sounds complicated, but would allow StartupBirmingham to maintain a relationship with the companies it helped found, and would allow non-founding participants a measure of indirect participation.

    dhw

  5. As a self funded entreprenuer and idea generator I am very interested in this aspect of the birmingham startup. I even put the disclaimer on the header of my idea that if someone had plans to steal my business and relegate me to a minor role then don’t read the idea. This in no way means I think I will be 100% owner of something that many other contribute to, but I don’t want to be a 5% owner either. In my particular suggestion I will also be a key contributor to the actual value of the material on the website.

    I think it would only be fair to establish the percentages up front and let everyone who participates be aware of the value of their contribution from the beginning. A good project manager should be able to make sure that all members of the team do their part or they can be voted off the team and receive nothing. That way they would be motivated to put forth their best efforts. I am assuming that this will draw in the best in our community – not the worst. I think any business that attempts to start up and has to wade through tons of legalize will not succeed. No company can fund the coffers in law firms and get off the ground. People do not need to arrive thinking thwy will get 10% of Google for a weekend nor should they think that they will put in 20-40 hours of their best effort for a T-shirt either.

    It usually does not matter what the allocation is as long as everyone arriving and deciding to come has some idea what they will get for their contribution.

    This is a good idea but it can be a legal nightmare if it is not handled correctly from day 1. It is quite easy to visualize the idea I submitted as a multibillion dollar idea and when that much potential is on the line people will realize that fractions of a percent in ownership can mean millions.

    I am looking forward to hearing from the group and if not, I will continue developing it on my own.

  6. […] Speaking off the record one of the organisers of the BirminghamStartup – inspired by Hyde but not officially linked to him – said they were ’struck by Hyde’s […]

  7. FYI: The Boston Globe is reporting that Andrew’s company, Startup Weekend, is taking a 5% cut in equity for organizing his events.

    See http://www.boston.com/business/technology/articles/2007/10/29/3_days_to_reality/ before the ‘next’ button to page 2 of the article.

  8. […] made a fundamental decision to discount a Startup Weekend precept… no equity would be allocated in advance for OUR […]

  9. […] the StartupWeekend founder has focused on equity in the startups and community-building, we have (so far) forgone equity, have other revenue streams in mind, and will rely on TechBirmingham for continuing to strengthen […]

  10. John Cook, a Seattle venture capital reporter, recently noted that the Seattle Startup Weekend company (Skillbit, created 3+ months ago) has already begun to shut down and won’t be issuing shares of equity.

    See http://blog.seattlepi.nwsource.com/venture/archives/134989.asp

  11. Brill Pappin said

    That article (John Cook) is interesting. I don’t think we in Toronto thought of it as public shares however (which would have come under a whole new set of laws), but rather ownership, which should not violate your SEC laws (although I don’t know that for sure).

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