Shortly after forming the company, Tim and I had a conversation about the level of transparency we wanted to strive for within Zenlike. At the time, Buffer was receiving a lot of press about their thoughts on being a completely transparent company. There’s plenty of opinions favouring transparency, as well as those criticizing it as a publicity stunt. Both sides of the conversation are worth reading.
After thinking about it, and consulting others, Tim and I decided that we wanted to set the goal of being Canada’s most transparent tech company and give Buffer a run for their money. Since then, we’ve done things like share our budget, our equity split, and disclosed some pretty nasty bugs that we’d have normally gotten away with.
We had a lot of smart people, including lawyers, tell us we should ease off of this stance, but ultimately our decision to favor transparency came down to 3 reasons:
It’s important for our users to trust us. All startups require this, but ours perhaps more than others based on the nature of our product. We feel like being transparent will help build trust between our users and us. That said, we realize that trust is earned; and the best way to earn it is to not screw up. But being transparent is a start.
Public companies have to disclose information such as executive salaries to protect public shareholders. But the requirement to be transparent results in a certain accountability for the company. Simply put, public companies exposing themselves make themselves accountable to their shareholders. In a weird way, we view our users as our shareholders, so want to make sure we’re accountable to them.
3. To help startups
Building a startup and a company is hard. And most all advice that you get is wrong. I blogged at length about why that is here. But what does help startups is data. Every situation is different but hearing how other companies handled situations helps business leaders and entrepreneurs make decisions. I’ll never take advice cart blanche, but hearing more and more examples helps me make better decisions. So when we blog about how we decided to split equity, we’re hoping that a few entrepreneurs will be able to pull relevant information from our thought process and apply it to their startup, rather than adopting the entire algorithm.
We don’t want to do this as a publicity stunt so we’re trying to avoid sharing something just for the sake of sharing it. As such, for us to “share” something, we’ve set up the following standards:
We’ll share something as long as 1. we’re not breaking the law, 2. We’re not deeply offending someone, 3. We’re not putting ourselves at a significant competitive disadvantage, 4. We’re not hurting anyone else, 5. We’re actually providing value to others by sharing.
Ultimately, we think being transparent will help our startup succeed, and help other entrepreneurs in the process.
We’d love to hear your thoughts on the process.
We believe in transparency and helping other startups by sharing our experiences as transparently as possible. We blog about it here.
Deciding how to split founder equity is hard. There’s no “right” answer, and ultimately we think the best way to decide is to talk to as many startups to hear how they did it and decide what makes sense for your startup. That’s why we’re sharing our split and how we arrived at it. We hope it’ll be useful to other entrepreneurs.
Before we talk about our split, I wanted to mention my two favorite articles about the subject. Incidentally, they take completely conflicting views.
The first by Joel Spolsky suggests that the fair thing to do is split equity 50/50. Read the full answer here. It’s well worth the read.
The second article by Dan Shapiro via Geekwire argues that if you’ve decided on 50/50, you’ve taken the easy way out.
I could argue for either of these models but ultimately we settled somewhere between the two and just followed our gut and justified it with a formula. I realize that sounds a bit like a cop out, but your instincts are truly the best judge. Splitting 50/50 isn’t taking the easy way out. Listening to a formula when your gut disagrees is.
Below is how Tim and I arrived at an equity split that felt right. Hopefully this will help future entrepreneurs make equity decisions.
Progress: When Tim and I first started working together, I’d been iterating on the idea of leveraging artificial intelligence and the crowd to accomplish online and offline tasks for a while. But I’d only been working on Zenlike for about 2 months. I’d done a bunch of customer development, built a prototype, had a user engaged, and had some basic assets like a logo and a website.
Past experience: I’m lucky enough to have had an exit with my last startup Attassa. It was acquired by Yousendit in 2010. Prior to that, I’d led mobile product for YC alumn Zumodrive before they were acquired by Motorola. Because of that, I’m fortunate to have become decently connected in the Bay Area and Canada.
On paper, Tim’s not as experienced with startups but he did cofound monogr.am where he built a really slick product. He built it all and prior to that was programming at Lift interactive. He’s one of the most highly regarded developers in Edmonton, well connected to the Python and Ruby communities.
I’d like to think that both Tim and I are great developers – his background is in web applications, mine in mobile applications.
Cash investment: I’d seeded 25K into Zenlike which I planned to use for office, legal, some design, and anything else that might give us a kickstart. When Tim joined up, about 1K of that was spent (IIRC on Legal and some 99designs work ended up throwing away).
Ultimately Tim and I played around with a few formulas and had a few discussions until we found a number that felt right.
We agreed to a 55/45 split.
The spirit of the decision was that we BOTH have an equal opportunity to impact the success of our company, and this fact should be reflected in our ownership. That said, I felt it was fair to be compensated for extra cash and time I’d invested. We did end up using a formula as seen below … mostly to justify our engineering habits to pretend at least that we were using a formula.
The pseudo formula
The idea: 0% extra for either of us. I hate the saying that “ideas are cheap.” That’s BS. Crappy ideas are cheap … good ideas are worth a lot. To be more precise … good ideas in good markets are worth their weight in gold. So why wouldn’t I deserve more equity for having “come up” with the idea? Quite simply, when Tim joined we weren’t very close to knowing if it was a good … or terrible idea. We had a long ways, and a lot of iterating to go. I wouldn’t be shocked if the idea changes a half dozen times over the next 3 years.
The network / resume: 0% extra for either of us. I probably have a stronger network than Tim at this point, but there’s no reason he can’t build his up past mine quickly. There *is* value in having a cofounder already having built trust with a lot of other startups, investors and advisors. That can save you valuable time (the most precious asset to any startup). Tim actually felt stronger about compensating me for this. But it didn’t feel right. We both value execution over everything else, so we thought that by not bumping up my equity, that value is made explicit.
Our titles: 0% extra for either of us. While it’s important to be up front and discuss what your eventual titles might be, I think that titles are ridiculous when it’s 2 guys hacking away trying to find product market fit. Until startups have that, they have nothing, and are generalists doing anything and everything we can to get to product market fit. Forcing titles on ourselves forces us to start behaving as something other than generalists. Some will disagree, but even when we do have C level titles, they won’t bring with them any elevated ability to ensure company success.
My extra 2 months on the project: We agreed that a 3 year vesting schedule made sense. So 12 months/year * 3 years * 2 founders = 72 man months of vesting. I’d put in an extra 2 dedicated months, so I had 38/74 = ~51.3% and Tim had 36/74 = ~ 48.6%. We used this as a baseline.
My 25K investment: There’s a lot of talk about how to handle founder investment. Ultimately we thought it was fair to treat the investment the same was as an angel investment at a 700K pre. 700 was a bit arbitrary. We think we’d get more in the market but largely due to track record, so that didn’t seem fair. There’s a good article about pricing rounds here for anyone interested. But we ultimately decided on 700K pre. So 25,000/725,000 = 3.4% extra for me.
Combining my extra 2 months, and my 25K investment, meant that I received 51.3 + 3.4 =54.7%. We rounded and agreed to 55/45
Ultimately, I believe Tim and I are taking equal risk, and have an equal opportunity to impact the success of our startup. Regardless of any formula, 55-45 felt right to us. And having some formula made our inner nerdy and scientific selves content with the decision.
We finished a version of our pitch deck 4 months before we considering fundraising.
1. It forced us to set real targets. If you “see how it goes” … you’ll always succeed. So setting some metrics for what success meant really helped us articulate meaningful milestones early.
2. When we drafted our deck, we didn’t need money. That made it way easier for us to create a deck that’s less about optics and vanity metrics.
3. It allowed us to evolve the vision of the company while at the same time remain somewhat grounded. Startups evolve. Always. But having our pitch deck drafted early allowed us the ability to constantly be *checking in* to the vision. Sometimes you’re evolving. Sometimes you’re drifting. A deck helps us do the former.
4. Our deck is almost like a lightweight business plan. Business plans are stupid for startups; but having a few living hypothesis about market, business model, go to market strategy, and competition is smart. A pitch deck is a good, low cost way to capture this.
We’ve never “pitched” using our deck. But it’s been one of our most valuable documents so far.
At Zenlike, we decided to share company details – salaries, ownership, operations, bugs, etc. So long as …
We’re not breaking the law
We’re not deeply offending someone.
We’re not putting ourselves at a significant competitive disadvantage
We’re not hurting anyone else
We’re providing value to others
You can read more about what we’ve shared here
The freedom at a startup is exhilarating but can be feared at the same time. Work happens everywhere, on the bus, on the street, while taking a dump. My work desk is anywhere there is Internet. This isn’t by any measure a traditional job.
The first few days were very exciting. As the days wore on, the excitement remained but anxiety began to develop. At a startup, it seems like the fastest way to deliver solid value is to code, help complete milestones or design something cool. I didn’t know how to do any of the above, so the pressure to prove my worth began to grow. I tried to do 100 different tasks at once, but it got me nowhere. Trying to compensate a lack of tech skills with quantity wasn’t the answer.
Was my last four years in University a complete waste of time? The School of Business must have taught me something. So I consulted a previous business professor and he told me to,
Remember to breathe and focus on the small victories.
Simple but very effective advice that has helped me focus and take it one step at a time. Also remembering why I was hired in the first place certainly helped. I wasn’t brought in to code or design; it was to focus on marketing and developing consumer relationships.
It was so easy to get distracted by what I couldn’t do, which caused me to forget what I was good at. Delivering value at a startup isn’t about matching the skills that are already present within the team; it’s about filling in what is missing. At the same time, it never hurts to learn something new, especially if it can help the team in someway. I have begun digesting Code academy and Photoshop tutorials out of curiosity and to develop a better understanding of what the team is trying to accomplish.
This is just the start of my journey at Zenlike. I look forward to doing some crazy experiments in the pursuit of Zen in the Zenlike labs and also sharing my adventures and lessons learned at a startup.
I’m still trying to find the appropriate word to describe the whooping I gave him. Crushed, destroyed, dominated. None of them seem to do it justice.
If you stare long enough at this photo you’ll notice “David 20:58″ and “Tim 21:05″. Yup. I crushed him by a whole 7 seconds.
* If you were able to look at the complete list of times, you’d also see that we had the 2 fastest times in the gym that day for guys (there were several women that wooped both our butts). But not bad for 2 computer nerds!
But I digress. Despite feeling somewhat bad about destroying Tim so badly at his first workout, it was pretty awesome to get a great workout in together and compete. It seems so obvious why entrepreneurs are so attracted to crossfit.
 Earlier in the workout we did shuttle (suicide) runs. Tim and I went head to head and he beat me by a half a foot. I really think he false started though.
For those interested ….
The workout catered to a couple guys that run as much as they do lift (I for one would have been destroyed if it emphasized weights):
- 800 meter run
- 30 push ups
- 30 sit ups
- 800 meter run
- 30 pull ups
- 30 sut ups
- 800 meter run
- 30 dips
- 30 pull ups