Idiotopedia: The Art of Fairness

Disclaimer: This is not a financial recommendation. Equity splits are complicated and should only be discussed with real experts!

Some people say that business is just another way of fighting. When working for a startup, the fight for equity can be worse than any boardroom coup. Forget about the romantic idea of equal shares. The real world is a brutal place where power, rules, and values are subjective. Over the question of who gets what piece of the pie, I've seen partnerships fall apart, friendships break up, and goals put off. Well, I just talked to an old friend who asked, "How do we slice this pie fairly?" Expect a berserker if you think sharing equity is as simple as dividing founders by 100; the truth is much more complicated.

Let me simplify: count the founders, divide by 100, and make the equity split! If 2 founders? Each gets 50%. 3 founders? A comfortable 33.3% each. Wait!!!! This simple approach might cause a disaster faster than you can say "burn rate." Why? It ignores each founder's unique contributions. Equity should represent value production, not headcount, in practice. Why should all founders earn the same share of the pie if one brings industry experience, another risks their life savings, and another brings a nebulous idea? No, they shouldn't.

Let me share my friend's case: a startup with 3 founders, each with their own strengths. But first, I need to come up with a way to measure the score's weight from 1 to 10, and I'll break it down into a few key steps to create a distribution valuation model. The goal is for the equity split to reflect the real value that each founder brings to the table based on the different things they've done to help the business.

I used to make a simple common group based on the following:

1. Idea Generation: Originality and viability of the business idea.

2. Business Plan Development: How hard an effort it was to make the business plan.

3. Domain Expertise: The relevant abilities and knowledge each founder brings to the business.

4. Commitment and Risk: The amount of risk, money, and time each founder is willing to put into the business.

5. Responsibilities and Execution: Putting the idea into action and keeping the business going.

To be clear, not each type is as important as the others. You need to give each category a weight based on its importance to the business's success. Here is my simple distribution model:

1. Idea Generation: 30% weight

2. Business Plan Development: 10% weight

3. Domain Expertise: 20% weight

4. Commitment and Risk: 30% weight

5. Responsibilities and Execution: 10% weight

These weights should always add up to 100%. Then, how you score your addition to the business is up to you, but try to be honest and fair with yourself. (1 = minimal contribution; and 10 = maximum contribution); Let me play a bit:

- Founder 1: 7 in Idea, 6 in Business Plan, 5 in Domain Expertise, 8 in Commitment, 6 in Responsibilities.

- Founder 2: 5 in Idea, 8 in Business Plan, 6 in Domain Expertise, 9 in Commitment, 7 in Responsibilities.

- Founder 3: 8 in Idea, 5 in Business Plan, 7 in Domain Expertise, 4 in Commitment, 5 in Responsibilities.

For each founder, multiply their score by the category's weight. This will give you the weighted input for each group.

Founder 1:

1. Idea Generation: 7 (Score) * 30% (Weight) = 2.1

2. Business Plan: 6 (Score) * 10% (Weight) = 0.6

3. Domain Expertise: 5 (Score) * 20% (Weight) = 1.0

4. Commitment and Risk: 8 (Score) * 30% (Weight) = 2.4

5. Responsibilities: 6 (Score) * 10% (Weight) = 0.6

Total for Founder 1 = 2.1 + 0.6 + 1.0 + 2.4 + 0.6 = 6.7

As the above model,

- Founder 1: 6.7

- Founder 2: 7.8

- Founder 3: 6.5

From here, I can get the total weighted score = 6.7 + 7.8 + 6.5 = 21.0

Finally, calculate each founder's equity based on their contribution to the total weighted score.

Founder 1: Equity % = (6.7 / 21.0) x 100 = 31.9%

Founder 2: Equity % = (7.8 / 21.0) x 100 = 37.1%

Founder 3's Equity % =(6.5 / 21.0) x 100 = 31.0%

While I believe that this approach to dividing control is a smart move, it is essential that everyone else also agree. Yes, it's important that everyone agrees that it's fair and shows how much work each of us has put into the business. We all need to feel good about it, you know? We can all work together better and make something cool that way.

In my simple closing, there are rules, models, and ideas. But in real life, these are just fancy napkins for business school grads' dreams. The startup ecosystem is not a playground; it's a jungle. Every leaf and plant is fighting to stay alive.

• Helping Hands? Essential, of course. But let's be clear: value is personal, and the people who control the story decide what it's worth. It's not checkers, it's chess.
• Being flexible? A trendy word for people who aren't brave enough to make choices. Equity should change along with the company as it grows and changes. Let's not fool ourselves, though: this kind of freedom is often used to stroke egos rather than fix problems.
• Also, don't discuss the false idea that everyone is fair. Fairness is a luxury that few can afford in this challenging area. Equity is a prize that can be earned by being smart, cruel, and lucky all at once. It comes down to who yells loudest, hides their cards the best, and has the cash to back up what they say.

Again, don't think of founders sharing pizza and goals as the perfect picture. It's not a bake-off; this is a battleground where relationships can quickly change faster than market trends. The startup world is a demanding boss that rewards people who play the game very well. A lot of the time, idealism and the cold, hard realities meet there. Don't forget that the person who gives the most isn't always the hero. They are sometimes just the lamb that is killed. So, dreams are important, but they're not enough. You'll need tough skin, a smart mind, and a strong will to stay alive. Welcome to the real world!

Everyone is like a hamster on a wheel, chasing the faintest hints of success. If you don't break away from the crowd, it will always crush you! #Alfred2024

Any other thoughts?