Equity and Team Structure Dispute

Recounting the story of a management and equity dispute I had with a cofounder.

Me: Tech founder who is a developer who went to full time work on the startup.  Works up to 80 hour weeks on the startup.  Sometimes more.

Bob: Senior business guy with international and investment experience who I partnered with pursue international opportunities that he felt my product was a fit for.  Worked 80 weeks at full time job and ~10 hrs/week on startup.

Sally: Second co-founder I tried to onboard.  Would basically work full time on startup 40-80hr weeks or more. I was working with Bob before I met Sally.

Team: Rest of the team I tried to onboard.

Slicing Pie: Dynamic equity split model that tracks ongoing labor/investment/sales contributions from company inception to Series A funding to break down equity between startup principals and employees.  Simplified synopsis of the model is equity % = person’s slices / total slices of all participants  (https://slicingpie.com)

Dispute was between me and Bob.

My position was that myself, Sally and Team would be the core team of the company and be responsible for the product, have it’s own management structure that we decide (and thus have most of the equity.) Bob’s role was to facilitate business opportunities, fundraising, and deal flow to the company and manage international business relationships and operations.  His equity via the Slicing Pie method would give him equity based on his time, unreiumbursed expenses (related to business travel mainly), and deal flow and funding secured.  (With Slicing Pie, you don’t get fixed chunks of equity but slices that get allocated as inputs are made, but if we forecasted the equity split and expected deal flow he would be able to bring, he would have 5-10% equity.)

Bob’s position was that he be the companies CEO, with a 50% equity stake.  He was not interested in Sally being a part of the company because he didn’t like her qualifications and resume.  Furthermore he wasn’t comfortable with the team Sally and I was trying to onboard.  He wanted the product dev to be outsourced to a firm with proven track record.  His rationale is that since the key relationships and the work to generate deal flow is coming from him, and we are doing business in a market where he is the expert, and the company without him is still in concept stage with limited traction to date, there is no reason for him to have less than 50% and not be the CEO.

(BTW: In the Slicing Pie, myself, Sally, and the rest of the team would get equity credit for deal flow that they bring in.  It’s only more important in Bob’s case since he would not be getting much equity for his time since he is only working 10 hrs a week on the startup.  While the rest of us will be working much longer hours)

Huge dispute ensues.  It was clear to me (and Sally) that Bob was not fit to be involved in management of the company outside of the dealflow facilitation and relationship management.  Bob’s non-negotiable position is that he be the CEO.  And Bob’s terms was that if Sally and team would be a part of the company any equity they get would come out of my share while he gets 50%.

Eventually had to part ways with Bob, and walk away from all business the company was working with him on for the previous year.  Sally and Bob never met or talked to each other since Bob was opposed to the very idea of Sally being on our team and the time I was hoping to spend doing those introductions and building our company/product was spent in a co-founder dispute with him.

If you were a startup founder in this situation (if you were in my position, Bob’s position, or Sally’s position) who would you handle it?

  • I think that you clearly know the answer to this one. Just the fact that he was putting 10 hrs/week, asking for CEO and 50% equity is a huge red flag. You did the right thing to part ways with Bob. He would have ruined any chance for you, Sally and the rest of the Team any chance of real success.

    Dynamic Equity split (slicing pie) is good approach and you should stay away from people who can’t (or don’t want to) see its fairness.

    • From my conversations with him, he felt that how central his role was to executing on the international opportunities, warranted a 50% stake. And in his mind it was a “no-brainer” that he should be the CEO.

      From his point of view, I (nor any of the people I was trying to work with) were coming to the table with anything of value that warranted him conceding on his terms.

    • Also his business philosophy was “laser focus” and total unwillingness to tolerate anything that he considered to be “distracting.” Part of that was motivated by the fact that he worked 80 hour weeks on his full time job and had only 10 hours or less on the startup. So he was unwilling for his limited bandwidth to spent on distractions.

      He felt Sally didn’t bring anything to the table that warranted working with her so he fought tooth and nail against forming a new team. Saying that that was “distracting.”

      Naturally we spent almost 2 months fighting about the issue.

  • The slicing pie method, applied correctly, would most probably have given him a much higher hourly rate (or a higher number of shares per hour).

    To save the situation, in addition to the above, I would have proposed to Bob a percentage of the deals he can seal.

    • In my case though even with the slicing pie giving him an hourly rate that is higher and equity for deals he could seal (the model already accommodates this) he would still have ended up with significantly less equity than 50%, I would’ve have a much bigger percentage than him, and if Sally joined the team she would’ve had more equity than Bob.

      Those terms were simply not acceptable to Bob. He wasn’t willing to accept less than 50%, less equity than me, and certainly no less equity than Sally whom he considered to have weak professional and business qualifications.

  • Slicing Pie will always give you the fair answer, Bob’s carve out of 50% is arbitrary and he either doesn’t understand the Slicing Pie model or, if he does, he is eager to benefit at the expense of others. Separating was the right move…there are other Bob’s in this world!

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