There Is No One „Fair” Deal (published in Proseed Magazine June 2012)

If none of your team have the money you need to start, and if you cannot find a way of bootstrapping (or an investor), your team will collapse – says Richard Lucas in an article that originally appeared here .

The format in the magazine is that entrepreneurs write to me with their questions, and I answer them

"Dear Richard

Our team (we met during Startup Weekend Krakow) is currently dealing with formalities. We would like to sign a paper about who is responsible for what, that nobody will do our idea on the side and most of all – how we divide our startup.

Could you give me some tips about dividing shares of a startup among multiple team members? We have me (idea founder, mobile developer), one designer, one web developer, one PR specialist and one business person. In my opinion they are all very important to our team.
Another problem is that we can work different amount of hours (for example I can work about 40h a week, but others have their day jobs). I don’t want to make problems with my team, but I want to be fair to everyone, including myself.

"

My answer

Dear Start Up Team Builder,

This is complex, and it is smart to get advice. There is a large amount of advice in English on this topic on line. Try this .

Remember that if the business is not solving someone’s problem or meeting their needs in a way that you can potentially make money from, you are wasting your time negotiating. If you don’t believe this, why should anyone else (customer or investor)?

There is no one „fair” deal.

Felix Dennis, one of the UK’s richest men, described in his book “How to get rich” deciding to fire his top four managers, after they demanded 5% of the business each. He goes on to write that his book is called “How to get rich” not “How to be nice”!
Lesson: if you ask for too much you may get nothing, and if you don’t negotiate well you may be screwed.

Here is a checklist of things to consider:

Is your team complete, or are there gaps?
If there are gaps leave some shares for “key new people”. If you want people more talented than your current team (and of course you do), then leave plenty. Why should someone with more experience than you leave a good salary to join your team later ?

Whose idea is it? How much is it worth?
I used to overestimate the value of my good ideas, thinking it was 25-50% of the value. It isn’t. Michael Dell said “it’s 99% down to execution”. 5-10% for the idea is a lot. Anyone can have the idea of starting a bar, but how many people can make it happen?

How much money do you have and need?
If none of your team have the money you need to get started, and you cannot find a way of bootstrapping (or an investor), your team will collapse. Capital is scarce, and most startups fail. The person who contributes risks the first few thousands is taking a bigger risk than those who invest later when there are clients.

Nice-ness, character and values
You will spend a lot of time working with your startup team so make sure they are the right type of people. Do they share your values? Do you like them? At the Krakow Network we decided to share our values (goo.gl/58Z6D). Guy Kawasaki of Garage.com and Apple talks about the "Shopping Mall" test (if you see someone in a shopping centre and they haven’t seen you, do you hide so they don’t see you, or are you pleased to see them and say “hello”?).

UK doctors’ partnerships sometimes have a “green socks” clause, saying that any partner can be expelled at any time if “they don’t like the colour of his/her socks” (IE for no reason), if all the other partners agree. It’s a powerful incentive not to include (or be) an arsehole in the team. Make sure that you are on the same page in your attitudes to corruption, racism, and respect for other people. Not everyone is on the same page.

Be clear about what you want from the other team members
Most important is: are they really committed? If yes, how much time/money are they ready to commit? I wouldn’t want a shareholder if they were not fully committed. Think of some reasonable test. For example: if you work on this in way that I/most of the team thinks is great, then in x months when we form a company, you are entitled (but not obliged) to invest up to xxxx, get yyyy % of the shares.

Ask the others to consider putting money in
Even if they have “no money”, they should be able to find 1000 zł/US$/GBP from someone. It is a test (but remember that 10K/US$/GBP zloty from a young person with “nouveau riche” parents maybe “less” commitment than 1000 zl/US$/GBP from someone whose parents are pessimistic cynics, who never trust anyone, or were any role model (or a kid with no parents at all). Anyone who can write code should be putting in more money than average because they will have had plenty of earning opportunities. (unless they are lazy, spoiled, incapable of managing money, stupid, or demotivated – and do you want that?).

Roles, skills and responsibilities
These need to be discussed, defined, agreed, and modified if need be. Marketing, sales, PR, developers, legal, finance. Think about the core skills you need, and who is going to fill them. Note that the best leaders often have few skills, just are good at listening, taking decisions and getting everyone working well together. The way you take decisions is important, and you need to communicate what you expect to happen when there are disagreements. You may find there are inexperienced people in the team who are not used to modern ways of working, and have to educate them.
It is good to have “test” questions, like “would you be happy to live in Warsaw (or Korea or somewhere really nasty) for a time  we open an office there?”. If they say “I’d love to” that is great. If they say, “if I have to”, that is OK. If they look shocked and say “no way”, it rules them out of some positions, and shows a lack of commitment.

Do “gap analysis” – see who else is or will be needed in the team. Save some shares for new people or get agreement from the others about giving some shares away for new people.

Leadership and alignment of goals
Leadership is not taught in Polish (and many other) schools. Allow a few hours on Youtube and Google to make sure you know what it means. A leader is able to get a group of people working towards a goal willingly. You have to know and develop a vision for your startup with your team, communicate it and make sure they share it. If you want to work like crazy and build a global company, and someone in your team wants to take it easy and spend more time with their boyfriend, kids, or wife, or shopping, it limits what roles you can offer. Of course you don’t know everything, but it is important to discuss and get a feel for longer term ambitions. Is your team aligned with your vision? If someone does have kids and a housing credit – be open in discussions about how far that impacts on their ability to take risks and be mobile. A good rule is to say to everyone “there are no bad questions. We should all ask each other anything we like”.

What happens if it goes wrong?
If you met at a Startup Weekend, the risk is not trivial. You need to consider “buy back” provisions if someone quits. You don’t want 5-10% of the company in non-working shareholder hands, if they quit or you part company for some other reason. Discussions about this can be very revealing about whether you trust each other. Poland is known as a “low trust” society. In my experience most people here are honest, being cheated is the exception, and trust is efficient.

Sweat equity issues. If some of your team have jobs and cannot afford to quit. Putting a value on your time – say it is equal for everyone to make it less difficult: 20 euros/hour whatever. If you work 2000 hours in the first year and the others work 200 then you have invested 20K sweat equity, the others 2K so it should be 20/22 for you, 2/28 for other team members. Obviously if one of you feels your time is much more valuable than the others, maybe you have to negotiate. It is better to have a discussion up front than not. Use some time management software, like TimeCamp, and online project management tools like Basecamp, so everyone can see what everyone is doing.

Non-compete, drag and tag along agreements are important
It should not be a problem among founders. Later, when you are telling new employees to sign non competition agreements, you can say “we all have already”. They are very hard to enforce, but most people feel a moral obligation to honour them. It makes your company more valuable. Drag along and tag along are for the shareholders only.

Business plan
Someone has to write the business plan. What needs to be done? By who? By when? How much it is going to cost? How are we going to make sure it is done as planned? This is probably your job as a leader.

Investor and team appeal
If you need an external funding, it is a great idea to have someone in the team who will impress potential sources of capital. Investors tend to invest in people more than ideas. Having impressive people is also essential when hiring. So if you have someone with that magical star quality, be ready to offer them something extra.

Wages and benefits
Talk about this before you meet investors, if you are going to have them. Investors will need to see that you are doing this not to make a salary, but to build a great company. In Poland, there are no real rules. It is unusual to make more than 50% of your “normal market salary” in a startup.
Quite often investors will be looking for evidence of entrepreneur skills that mean you have made and saved a bit of cash in the past. Life is relatively easy when you are building a startup team. If you fall out, have arguments and cannot manage at the start, then you won’t manage later.

RICHARD LUCAS (Richardlucas.com)
Angel investor, entrepreneur. 6 companies, 400 employees, 20 years in Poland, Cambridge University, Economics, TEDxKrakow speaker, and supporter. Interested in getting involved in startups as coach, mentor, minority investor, in business projects that are: better, cheaper, faster and more fun that the existing way of doing things. Active in supporting the pro enterprise culture in Poland in schools and universities. Notably through znaniabsolwenci.pl and Global Entrepreneurship Week. And the Krakow Network. Awarded a Pro Memoria medal for his work promoting projects associated with Wojtek the Soldier Bear