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??