One team asked, very sensibly: what happens if one of the co-founders leaves the startup somewhere along the way?
Let’s pretend there are three co-founders in your startup.
Plan A. The naïve equity structure looks like this: the company issues three shares of stock. Each founder gets one share. Two weeks after incorporation, one of the founders stabs himself in the left eyeball in a freak toothpick accident. Wracked with headaches and unable to code, he quits working for the company. But he remains a shareholder. Nobody says anything because they all feel really bad about what happened; instead, they adopt Pink Floyd’s <a href=”http://en.wikipedia.org/wiki/Wish_You_Were_Here_(Pink_Floyd_album)”>Wish You Were Here</a> as their official company album, and play it obsessively over the office P.A. This creeps out visiting VCs, so the company never manages to raise further funding and the cap table remains unchanged. Two years later, the company sells to Google for $30 million. Each founder gets $10 million. The poor third founder cashes his check, but malicious net.rumours start to circulate, that he was a free rider on his mates’ success. In a paroxysm of guilt, a year later he stabs himself in his remaining eyeball with a soup spoon.
Let’s avoid that scenario.
Plan B. The company issues three shares of stock, plus twelve stock options. Each founder gets one share of stock and four stock options. The options vest over a period of 2 years. Replay accident with the toothpick. Subsequent to resignation, that unfortunate founder ceases to vest his stock options. He holds only the one share. The other two founders work for two years and their eight options convert to stock. When Google buys them, a total of eleven shares of stock are issued; toothpick guy holds one share of original stock and four worthless stock options that failed to vest. His cheque amounts to 9% of the $30 million, and his co-founders, who did all the work anyway, split the rest.
The net.rumours fail to materialize. Everybody’s happy. He keeps his remaining eye.
The two founders buy a yacht, keeping only $1m in cash, each. They invite the third to sail. Recovered from his headaches, he turns out to be a natural. He loves sailing.
The two founders decide to start another company. Having only $1m each, they turn to the third. The third puts on his “Business Angel” eyepatch, happily writes a $2m cheque, and becomes majority shareholder in the new company. The other two, having discovered they don’t actually like sailing that much, go belowdecks to code, while the third spends his days on the bridge sipping piña coladas and practising his “arrr!” Everybody’s happy.
Thus are karmic debts expiated in the world of startups.