[jean_valjean]

I disagree with his assessment that it's fair for some founders to take cash now and others to receive only IOUs payable later.

The second group face not only a time value of money problem, but they're also accepting the risk of default (which is fairly likely in startups). They deserve substantial additional compensation for their willingness to leave capital in the company during early growth. One potentially fair way to do this would be to give them convertible notes with the same terms as whatever your first external angels get.

After all, leaving $100,000 in the startup's bank account has the same net effect as drawing the salary, then investing $100,000 in the startup.

[bradleyland]

We literally lost two founders over the "time value of money" argument. Some founders fell in the "cash is king" camp, while others felt that they were providing great value for the investment.

The best advice I can give is to make sure you have agreement on the terms up front. If someone seems uneasy, don't move ahead. Find a way to agree. In our case, one of the founders who exited:

* Continually brought up the fact that he had loaned the company money as a leverage point

* After some time (over a year) decided to make an issue over the terms he agreed to

We managed to negotiate an amicable exit, but boy was it tough.

[amirmc]

Thanks for sharing. I'm not sure what the lesson here is though. You suggest having an agreement on terms upfront but that the person who exited made an issue over the terms later on.

On balance do you think you (all) did the right thing at the time (for the company) or could you have done something different earlier on?

Also, had you worked with this person before?

[bradleyland]

Happy to share. I'll enumerate some of my views (which I'm sure not everyone will agree with), as well as some direct answers to your questions.

An uneasy consensus is not a consensus. When founding a company, consensus is critical in matters of finance.

I think we could have done something different, but I'm not sure I'd trade our current circumstances on an unknown. I think that ultimately, losing those two founders was the right thing. They probably shouldn't have been a part of the company to begin with. Maybe I should revise my statement of "find a way to agree" to "find a way to agree completely, or don't move ahead". Finding the line between uneasy and unworkable is something you learn with experience.

I worked with the person before, but only in terms of work. My working contractual relationship was with his employer, with me acting as a third-party contractor. I found myself positioned as a moderate between two extreme fiscal viewpoints, one that placed a high value on the time value of money, and one that placed hardly any value there. I did not recognize at the time that this is a "founder smell" (vis-à-vis, a code smell). I thought that the two fiscally conservative members could bring discipline to the group.

What I later realized is that the behavior of a group is not equivalent to an average of the individual members' personalities. This seems obvious, but you'd be amazed how often people act on this very premise.

[brudgers]

Agreement to the terms does not mean that one perceives them as fair or will continue to do so under stress in the future.

The problem with negotiating little details of ownership early is that anyone who believes they did not negotiate well is likely to feel taken advantage of.

[jackowayed]

I agree, it seems crazy to say that it's fair to pay $n now and another people $n in a year or two if we're still around. Maybe he thinks that feels more fair than any solution that compensates with equity, but it doesn't seem like that's objectively fair.

I wonder if issuing convertible debt would be a good solution. So then you are giving equity to reward the founder for taking on the high risk of not being repaid, but you let future investment determine how much they should get.

[amirmc]

Spolsky's premise is that people are not trying to get investment.

If founders want to fundraise then the question of equity vs salary is likely to be moot.

[amirmc]

I think Spolsky's point is that it's more unfair to redistribute equity when one person has decided not to draw salary. 'Salary' might give the wrong impression since I assume it's just enough money so that you don't starve.

The point about the risk of default is real but I wouldn't say that 'deserves substantial additional compensation'. If they're putting in substantial funds then yes, that's more like investment but if we're talking about comparatively small sums (as I believe Spolsky was referring to) then I see it as less of an issue. Presumably, all founders have aligned interests. Also, you could argue that founders still have the opportunity cost of not taking those high-paying job in MegaCorp.

[philwelch]

Time value of money can be solved by adjusting later payouts, and risk of default is meaningless because equity in a failed startup will be worth the same 0 that IOU's from a failed startup would be.

[pash]

Meanwhile, the X > 0 dollars in salary your partner drew are still worth X > 0. That's the point.

[jean_valjean]

The goal of the equity adjustments is to keep the expected value (at time of compensation) roughly equal.

The expected value of a $100k IOU from a startup is likely $10-20k.

The expected value of $100k in equity is (if priced reasonably) roughly $100k even though the value in case of default is $0.

If somebody was really adamant with me about IOUs being treated equivalent to cash, I'd ask if we could simplify and just pay all the founders equally, at the same time to get rid of the discussion.

[philwelch]

It's not a useful argument anyway. It's like arguing about what's the best sexual position: what you and your partner can agree on means infinitely more than what a bunch of total strangers on Hacker News think anyway.

[jean_valjean]

This isn't some search for objective truth. It's me sharing my opinions and the supporting rationale in the hopes that somebody might find them useful when they run into this situation in the future.

[philwelch]

And I'm just saying the opinions of people not personally involved in these kinds of equity decisions are of limited value, and that our discussion has easily reached that limit.

[brudgers]

If you don't agree it is fair, then the author's method will never work for you. The perception of fairness always comes first and prior to the details of share distribution.

The challenge, however, is not to identify the time value of money and the inherent risks of not taking a salary. The problem is to quantify those risks and costs in a way which all the cofounders will consider fair...all the while recognizing that forty percent of a startup is probably worth just as much as sixty percent, i.e. Nothing.