Equity · Founder equity

The right team and equity structure for early stage startup with international operations?

Anonymous

Last updated on September 15th, 2017

Preview up front, this situation ended very badly.


Laying out the players involved:


  • Me - A technical founder with an MBA building a web / mobile app plus backend framework. Left job to work on startup full time, living off savings and family contributions
  • Bob - Business guy with previous VC experience. MBA, MPA. Phd Candidate. Had multiple years of experience building business relationships abroad. Met a few months after I left my job. About 7 months after leaving job he said that the platform I was building matched almost exactly what he had been talking about with stakeholders abroad. 3 months after that I paid Bob $1500 to do a business evaluation of the relationships he had and where the product can be placed A month after that we kept working together under the understanding he would be an equity partner in the firm. Later actually went to work abroad as a regional director for a VC firm. Working approx 80 hours a week on his full time job and working on the startup alongside his full time job
  • Sally - Worked 15 years in journalism / Marketing / PR. Later transitioned to political campaigns and then technology. Built considerable network of people in business and industry and investments over the years. No experience working abroad but picked up a good collection of relationships with business leaders abroad. Left college before completing degree to work. Had business idea that roughly coincided with the platform I was building.
  • John - Another software developer with similar idea introduced to me by Sally

Bob and I start working together. He wants to be CEO with me as CTO. I want to set up Slicing Pie / Grunt Fund / Dynamic Equity Split (www.slicingpie.com). Bob insists on 50/50 equity split. His rationale being the value of the relationships he is bringing to the table, his experience working internationally, his full time job giving direct access to additional relationships, and the fact that doing a startup on top of an 80 hr/week full time job is not a trivial commitment. Fights ensue. Later the idea was that the international business would be set up as it's own legal entity as 50/50 split between my company and him. He was under impression that I am the only principal involved in my company. I said that the IP would remain with my company, he insisted that the IP be jointly owned. (This was never fully resolved and no actually agreement was ever signed).


Throughout this I meet Sally and am introduced to John. We talk about becoming partners in my company. Sally takes a long time to warm up to the idea of joining forces. Meanwhile the equity dispute with Bob is taking place.


Sally comes around to the idea of us joining forces. Bob travels back to the US for a week visit. I attempt to introduce Bob and Patty. Bob declines to meet Sally after taking a look at her resume saying that we need to be looking at people with more impressive backgrounds and that VCs would ding us on the team evaluation when we try to go for funding in the future.


Sally, John, and I continue to talk about how to work together with both Sally and John being really skeptical over the value of working with Bob, and with the idea of setting up international work as a separate legal entity just so Bob can have 50%. I try to convince them of the value of the work overseas and how critical Bob is to executing this.


Sally and I continue to discuss company structure, product, and funding opportunities. Sally insists that Bob's involvement be on a trial basis before any kind of permanent status or equity be allocated to Bob.


I propose this business structure. With Slicing Pie Equity. (Pie forecasts assuming Sally and I working 60-80 hours a week, Bob working 5-10 hours a week, John working 20 hours a week, Bob raising $1million within a year, Sally raising $150k within a year, pie start date from when Bob and I started working together)


Myself - CTO, principle developer, and the main product guy. (forecast ~45%)

Sally - Possible CEO or managing directory, leading domestic market, fundraising (forecast~ 30%)

Bob - Handling international business development, operations, fundraising (forecast ~ 15%)

John - Developer/Engineer (forecast ~10%)


Bob and I's communication is usually once or twice a week taking into account the time difference. I'm communicating about this new team and he's insisting on being CEO.


The next time he was stateside another attempt to connect Sally and Bob backfires as Bob still has problems with her resume and does not agree with the proposed team structure at all and that I'm not honoring our agreement about equity being 50/50.


Bob's demand regarding the company being this, with the statement that him being CEO was not negotiable and that he would start a competing company if he was not the CEO. And since he did not know Sally he was not comfortable entering into a business relationship with her, or having her handle business in the US because her background was marketing/PR not business leadership, and it was a "reputational risk" to him because he didn't know her. Furthermore stating that since he's the business guy building a team should be left to him and that I should focus on coding. He also goes on about "backroom deals" and "integrity."


Bob - CEO - 50%

Me - CTO - 50%

Sally - Contractor / Volunteer (if we work with her at all)

John - Contractor / Volunteer


I tell Bob that I want the set up to be that he handle the business with his relationships internationally and leave the rest of the company management to myself and Sally. We spend the next 2 months fighting about this. I tell Bob that I was adding Sally to my existing legal entity as Managing Director so that she would be involved in that capacity. At that point it's a decision of whether the international operations would be a separate entity as Bob and I previously discussed, or us just have one legal entity with all of us as one team. Bob immediately demanded that the international venture be just me and him as a completely separate legal entity and that all business with Sally and John be put on hold with myself having 100% laser focus on the international venture.


Sally tells me that she refuses to work with Bob.


Venture collapses afterwards. Note: Sally and Bob never actually met or interacted with each other at all during this whole affair.


Another Note: No funds were actually raised from overseas (primarily due to all the fighting going on and never agreeing to terms regarding the company).


Questions:


  • Based on the story and people's backgrounds, what was the best company and team structure. My suggestion, Bob's or both? How the IP should've been handled is a good item to comment on as well.
  • Bob was under impression of an agreement in principle of a 50/50 split though no firm agreement was reached. He continued to cultivate relationships internationally during this time. Does Bob have any basis of being upset about me trying to enact a cofounding team for the company with a different split.
  • If Bob were to be made a collaborative partner with the company instead of a co-founder (assuming he would even accept such a deal which is doubtful) how would that look financially and legally?
  • If you were involved in this situation in my place or as a neutral advisor how would you manage this?






Steve Procter Tech entrepreneur seeks cybersecurity startup team

September 15th, 2017

Do you really need our advice!?


I only skim-read this and all I saw flashing before my eyes was "bob hates this" and "bob wants that".


Bob sounds like a pain in the ass. Tell him to do one and then go find someone who you get on with - building a business is about relationships.

Chicke Fitzgerald

September 15th, 2017

Slicing Pie is always the answer. It solves all the problems.


Bob was a problem from the beginning and that negates any contribution that he would have made.

Steve Procter Tech entrepreneur seeks cybersecurity startup team

September 15th, 2017

yeah just to follow Chicke's comment, I think Slicing Pie is the bees knees ;-) Not quite got my first Pie business going yet but totally gonna follow that model.

Anonymous

Last updated on September 15th, 2017

I think the main issue with Bob, assuming that he wasn't just attempting a con job, was that in his mind he was the market expert in this field and thus I needed to follow his lead and trust his judgement on how business should be done:


  • He had the experience to know what type of equity split was appropriate given the international market we are entering into, the relationships that are involved, the work required, and the importance of his role (A slicing pie model giving him in his role a ~15% share was unacceptable and inappropriate)
  • He had the experience both in working internationally and as an experienced VC to know what types of resumes and backgrounds were acceptable for people that would be working with us, particularly anyone that would be a cofounder
  • His relationships and networks were the key competitive advantage that our company would have.

From my point of view our company desperately needed a Sally (and more than likely a good lean startup person also). He however had a completely different idea in regards to the types of people and backgrounds that should be on the team and planned in the future when our company was farther along start recruiting people from his rolodex. He was completely unwilling to allow me to bring in other co-founders that don't fit his view of what the right people to have involved should be if it means having to spend his limited bandwidth to relationship manage, and particularly if it was going to cost him equity.


Given his limited bandwidth, to me it made sense for me to have a cofounding team with Sally that I work with, while Bob drives business with his relationships and inputs into the product direction as appropriate based on the needs of the market. However not being CEO was not an option that Bob was willing to entertain, so the team structure needed to be something that he would be able to able to manage given his bandwidth, only hiring people as he feels we need them as volunteers / contractors.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

September 23rd, 2017

There is no equity structure that would have possibly worked. If you have a situation where you have co-founders that have personality conflicts and cannot work with each other, then absolutely nothing will work.


If I were advising, the first thing to do is to work out the personality conflicts. It is possible that it simply is not possible for you and Bob to work together in a single company, and so at that point if it's necessary then you can look at having separate companies, or just finding other people on the team.


If you are looking at international corporate structures, the important questions are:


1) where are the customers, where are the employees, where are the suppliers

2) the citizenships and tax status of the people involved (i.e. if anyone is a US citizen, then everything changes)


If you are focused on who gets what, then absolutely nothing will work.