Equity · Founder equity

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

Anonymous

Last updated on October 4th, 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 Sally. 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 if we work with Sally.


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.

Anonymous

Last updated on October 1st, 2017

Regarding the internal corporate structure. The proposed structure of having a separate entity for the international operations was motivated entirely by Bob wanting a 50/50 split. For information, Bob is a US citizen that has experience working in the international markets but is not a foreign national.


So the proposed structure would be my core company with an international company owned 50% by my company and 50% by Bob. Sally did not see the point of having a completely separate entity or any rationale for Bob having a 50% share. There was still the issue about what entity owns the IP. In any event Bob was under the impression that I would be the sole owner of my company and that he would have say regarding any other people involved. The minute I tried to add Sally and John as co-founders of my company, Bob flipped out.


Another thing was Bob did not think the progress on the tech side was going fast enough so in virtually any discussions we had about equity, team structure, etc he felt that there wasn't any reason for him to concede on anything that he was demanding. HE wasn't receiving enough in value to justify in his mind, accepting the company structure, team, and the Slicing Pie equity split.

Anonymous

October 8th, 2017

One other question I have though is this.


Bob's takeaway from this whole affair is that I am someone that is lacking in integrity and business ethics and that I can't be trusted to keep my word or honor agreements.


He was under the impression that we agreed in principle to a 50/50 split with him as CEO, so bringing together the new team with Sally with new roles based on the new team, he considered that to be an integrity issue. The minute I told him about how I wanted to do the team with Sally without even mentioning anything about equity, HE started mentioning about the 50/50 split, over and over and over again.


Sally from her point of view was not going to be willing to do business with Bob without him being subject to a trial period where she evaluates his contributions. She was not interested in Bob being in any principal role in the company if he's going to end up being a problem person.


What's your take on that?

Edith Sola, APR Marketing and Management Consultant

October 8th, 2017

Bob, from the start showed a one sided traction, he was closed minded and was bordering on a selfish goal . Why did you have to waste so much time on him. Collapse of the partnership was forthcoming. If I were you, I would have looked beyond Bob and others with proven record of international success. I would keep Sally and John. Never underestimate Kelly's communications background, it is most essential in business. Communications and Management skills combined makes A formidable business . Add John's technical expertise to the equation and you have a good team running sans greed and ego.

Anonymous

Last updated on October 6th, 2017

Re: Max.


The whole $1500 thinking back should not have been done, but he said it was to make sure I was really serious and that I had "skin in the game."


The problem with the IP remaining with the company is that it would make Bob's equity worthless if we did the international portion as a separate company. Bob's a VC he's knowledgable about this stuff that he would never accept such a deal.


I wanted to implement Slicing Pie from the beginning, but Bob was convinced that that did not reflect his value. And that he was far too senior a business guy to have his equity decided that way, and was convinced that any top caliber person we would try to work with would feel the same way. He felt that I wasn't being serious about things by proposing the slicing pie split and that other business savvy people would feel the same way.


I proposed that he get 10% and the rest of the 90% of the equity be managed via Slicing Pie. He flat out rejected that. I said he could get 20%, he said that that was not going to cut it for him. Regarding attaching his equity to milestones he rejected that too saying that it didn't make sense for him to be subject to those terms when the only thing I'm bringing to the table is a product that is still in the concept stage.


He flat out told me that "You are operating under the mistaken impression that you are the one with the leverage, you are not the one with the leverage. I can do this without you, there are plenty of other people that can do what you do. It doesn't make any sense for us to be operating a business where I am the expert and have the relationships, with my role being raising seed and series round funding, while I'm also working a full time job, while you only have a concept stage product and not have a 50/50 equity split. I don't know who you get your startup advice from, but when you have a chance to work with people of my caliber you should be less concerned about equity models and more concerned with making sure someone like me is not disgruntled"


Regarding Sally, the discussion of whether Sally had the qualifications to be CEO and what the right management structure was needed to be had as a team (provided we actually succeeded in coming together as a team). From Bob's perspective Sally's resume and qualifications were not strong enough to warrant even us considering her to be a part of the team. At best as a temporary contractor.


Sally and Bob never met, but the more Bob was being difficult, the more that Sally insisted that Bob's involvement in the company be on a trial basis, and that she did not trust Bob to make any kind of final decisions for our company in the overseas market. Everything goes through her. Furthermore Sally did not trust Bob to represent our company or brand internationally, and was saying that she would be bringing in her own people that knew these markets, and that Bob can be one of the resources we utilize but he would not our sole representative.


As the original post explained, that did not end well.

Rob Roberts Entrepreneur / Product Manager / Professor

October 8th, 2017

This formation period always has lots of challenges. Some sort of ongoing reward of equity based on actual performance is crucial...slicingpie or otherwise. If someone is asking for their equity up-front, that is a red flag. If someone won't be able to commit time and attention to the effort due to other priorities, that is a red flag.


If Bob had great connections, then he should be willing to show some results that would justify a huge equity stake (btw I would never agree to 50/50 even in the best situations, that just guarantees conflict forever...someone should have the majority).


If it were me, I wouldn't be willing to work with Bob. 1-He's remote, 2- He's working more-than-full-time on something higher priority to him, 3- He's talking about markets you don't understand (which makes it hard for you to evaluate) 4- He's demanding commitment from you without results from him


Sally, not sure. Some of the best performers I've worked with have been people that started off unproven. Sometimes they are the hungriest and most talented people that just need a chance. If she were willing to work to justify her equity stake, may be worth it.


In terms of "best company and team structure" this is hard to answer with what you've laid out here. Is there a prototype? Is there a validated customer need and actual customers? What business model hypotheses have been validated? The team and structure to me is very malleable and should be formed around the answers to some of these questions.

Anonymous

Last updated on November 3rd, 2017

One other piece.


From Bob's point of view, the international business opportunities and the relationships involved were HIS deal, and he was bringing me into it as a favor.


That was a major component of his decision calculus around equity, company structure, etc.


Now the Slicing Pie model doesn't care about any of those details. It is based on relative risk and fair market rates.


But Bob didn't feel he had to accept a lesser share than 50% when he could find other ways to build a product of equivalent functionality to what I was building. It was increasingly coming like that in practice I was HIS developer rather than him being apart of our company leading international business opportunities. Furthermore Sally didn't provide anything that he needs, and he would rather work with an established development firm than work with John to do engineering and development.


Furthermore he felt that building a team with Sally and John was a distraction to the task at hand, being getting a production ready app to market. His offered "compromise" was get the product to market first and then he can evaluate working with Sally and John afterwards.

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.