equity

Matt  Schley

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In Search of Grunts

Have a well developed concept, FRD, and looking for suggestions where to find highly motivated, experienced entrepreneurial programmer to code, etc in exchange for equity?

Mike Moyer

How to Use a Dynamic Equity Split Program So Everyone Gets What They Deserve

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While there hasn’t been much written about dynamic equity splits they are hands down the most fair way to divide up shares in a start-up company among founders, early employees, partners and anyone else that deserves a slice of the pie. A fixed equity model, no matter how thoughtful and well-intended, is guaranteed to treat one or more people unfairly. A dynamic model, on the other hand, will allow you to determine exactly the right number of shares each person deserves based on (and here is the key) the relative value of their individual inputs.

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Neil Kane

This is a good idea in principle but it seems to me it will cause a lot of tax issues.

Mike Moyer

Hi Neil,

This is a very common reaction to the dynamic split model and one of the reasons that people are hesitant. I find that when I speak to attorney's this is their knee-jerk reaction (are you an attorney?) However, upon a little further investigation they are able to see many, many good ways to manage this. One example is to issue options (which is pretty common when a real investor comes on board). The other is to issue the equity pre-money because most start-up equity is valueless. Even with fixed-split models tax issues exist that are no more or less complex than dynamic models. Don't let the tax issue keep you from exploring this option. Any potential tax issues pale in comparison to the relationship struggles that most fixed models create.

-Mike

Mike Moyer

Slicing Pie: A Guide to Dividing Up Early-Stage Start-up Equity

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Not long ago, I was approached by one of my students at Northwestern, who was distraught over a situation in a fledging company that she had started in my entrepreneurship class. Her group had decided to split the equity in her company equally – 25 percent each. Now that the class was over, the other three partners weren’t pulling their weight. Two of them were pretty much out of the picture, and the third was only doing a little.

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Jeff Weber

Sounds like a good book. It's a great post and I like the Grunt approach.Too many people fall victim to this problem. Glad to see there's a resource.

Mike Moyer

Hi Jeff, I posted another article on BuiltInChicago.org with more detail: http://www.builtinchicago.org/blog/how-use-dynamic-equity-split-program-...

Steve Ankenbrandt

Joel Spolsky wrote a great post about a year and a half ago that a lot of people reference as an answer to this question. You should check it out if you're dealing with this issue.

http://answers.onstartups.com/questions/6949/forming-a-new-software-star...

Mike Moyer

Hi Steve, Joel is on the right track, but his model is a bit confusing and requires pre-determined equity splits which are problematic. I posted a new article about dynamic splits on BuiltInChicago.org

http://www.builtinchicago.org/blog/how-use-dynamic-equity-split-program-...

Ryan  Maus

this doesn't tell me anything - it leaves all of the information in the book itself = advertisement for the book. hmmpfh.

Mike Moyer

Hi Ryan, as promised I've created a more detailed explanation with less promotion of the book. Thank you for calling me out on this!

Here is the new article: http://www.builtinchicago.org/blog/how-use-dynamic-equity-split-program-...

Mike Moyer

Hi Ryan, you're right. I do promote the book in this article. There is too much information for one article, but I wanted to establish the risks of the typical equity split models and propose a new model, called a Dynamic Equity Split, that is far more fair to participants.

My next article will provide more detail.

Jason Shanfield

If these models are meant to be implemented before lawyers get involved, how do you continue them after corporate formation when shares get issued and equity relationships solidified?

Mike Moyer

Hi Jason, there are a number of circumstances that would trigger the actually issuing of shares or options in the company. The initial cap table will be based on how much of the pie each person has received.

Lawyers are an important step in making this happen, but I always urge people to wait until their company gets some real traction before they engage lawyers and spend money on them.

Jason Shanfield

Thanks for the quick response, Mike. I take it by your use of "actually issuing" that your model is meant to informally establish a merit-based split before the company files its articles of incorporation. I can think of ways to implement it after filing essentially as you hinted at. Something like making the initial stock issue and voting rights based on your pie model with additional merit based stock issues, but it seems to me that you'd end up treating your founders like employees rather than stakeholders.

As a lawyer who's set up some startups, handled shareholder oppression litigation, seen a friend's heartache when her co-founders up and split after getting shares without any vesting plan at all, and is just now getting involved in the Chicago tech startup community, I'll reserve my opinion on how soon to get counsel involved for another discussion :-)

Mike Moyer

Yes, an informal (but structured) merit based split is a good description. I posted a more detailed explanation of the model here: http://www.builtinchicago.org/blog/how-use-dynamic-equity-split-program-...

Kevin McKeough

Crain’s Chicago Business writer seeking sources for stories

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I’m a reporter with Crain’s Chicago Business. I’m looking for sources for a group of stories about entrepreneurs who have exchanged equity in their business in return for professional services (consulting, legal work, web development, etc.) or made other alternate payment arrangements (barter, deferred payments, etc.) for services in order to save on cash.

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Jeff Weber

Seeking Developer

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Hello,

As part of the entrepreneurial community I’m reaching out to you and your network to share an opportunity we have to bring an equity partner on board focused on development.  Myself and my cofounder are experienced entrepreneurs leading an exciting project called ZigaVite.  We have an initial MVP that we anticipate would require two months of developer work.  The platform is very unique and I’m confident our team can achieve viability and success.  We are not seeking funding to maximize long term return for all. 

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