The sound system was piping in world fusion Christmas music interpretations. Steam rose off a variety of caffeinated beverages as bundled up Boulder folk pursued their favorite Java fixes. Students were studying for finals with textbooks, notes, and laptops in front of them. A few assorted business people were talking shop. Two kids squealed as the barista called their hot chocolates.
We have a lawyer with startup experience who will work for us for free.
Mara was always a little surprised at the preponderance of Apple products scattered throughout the room. Many tables sported iPhones, iPads, and MacBooks. Mara half expected iClouds to roll in over the horizon. She had her requisite double cap extra dry. James had a steaming mug of sencha green tea. Apparently the newly cut tips of the green tea plant offered extra antioxidants, or so he told her.
They found a table in the corner by the window and watched the foot traffic wander past. Mara removed her hat and shook out her hair. The coffee shop was warm once you got settled inside.
“How’d the meeting go?” James asked.
“Jeremy’s offered to help us on the legal side. We’ll need legal support to get our paperwork in order, establish a corporate governance framework, and prepare ourselves to receive outside investment. David’s vouched for us to Jeremy and he and his firm have offered to do some pro bono work on our behalf and then carry forward fees for larger projects so that we can pay them back once we have cash flow.”
“Wow, okay, now you need to slow down a bit with your lawyer-speak,” James laughed.
“Basically we have a lawyer with startup experience who will work for us for free, at least for a while,” she said.
“Definitely. He sent over the initial agreement this morning and I’ll send it in tomorrow with any questions that come up. And there’s a second piece of good news, I talked to your mom on the way back from the meeting and she’s going to be our first paying customer.”
“What?” James’ eyes turned into saucers.
“Yeah, she’s going to have us run a Mozaik analysis on three sets of client financials. She said she would have them uploaded by this afternoon. I told her it would take two weeks.” James coughed but Mara continued on. “And she’s going to pay us a thousand dollars per analysis! That’s three grand in our accounts receivable!”
There’s one more thing that we have to discuss… Equity.
James coughed again. “Holy shit! That’s awesome! But two weeks for three analyses, Mara? I need to get back to work if we’re going to deliver anything half decent.” James flushed and bit his lip.
“I know, I know. It’s going to be crazy, but they need some of these prepped in time for year-end. I think that may be why she’s interested. They’ve got deadlines and this could help reduce the pressure on their team.”
“Okay.” His eyes were vacant, his brain already running in a dozen different directions.
“Look James, before you get back to work there’s one more thing that Jeremy brought up that we have to discuss.”
James frowned. “Okay, what exactly is it about equity that we need to talk about?”
Mara took a sip from her cappuccino, the frothy steamed milk an airy precursor to the earthy bite of the espresso. She took a moment to gather her thoughts.
If we want to make ourselves investable we’ve got to become more formal.
“Between David and Jeremy’s advice I know that if we want to make ourselves investable we’ve got to become more, well, formal,” she said. “We need to incorporate and issue shares of the company to each of us. Jeremy basically said that if we don’t have investors’ boxes checked before we meet with them, many of them will simply write us off.”
“Why?” he asked. “I mean, I get that they want things to generally be in order but… I mean, what’s the point of an early stage investor then anyway? Aren’t they supposed to be investing when things are still informal?”
“I guess they see all early stage companies as super risky. Apparently venture capital firms only have about a one in ten success rate and angel investors usually have much worse odds than that. They just require that the startups they invest in be organized beforehand. Some of these guys see hundreds of deals a year so their standards are high.”
If we’re doing good work and there’s promise, isn’t that enough?
“Still though… I don’t know, I just feel like if we’re doing good work and there’s promise, isn’t that enough?” James took a gulp of tea. “Getting all these things together sounds like it’ll take a lot of time. Wouldn’t our time be better spent improving Mozaik?”
“That’s a fair point. But think about it this way. What if you had five hundred thousand dollars in the bank of your own money? You spent years accruing enough capital that now you’re willing to make a few bets on early stage technology companies like us. One hundred companies pitch you. Ten of them are interesting and show promise. You’re only going to make five investments though. What happens to the company that doesn’t have their paperwork in order?”
“Okay, I get the point. All else equal, companies without their shit together lose out.” A small army of ninjas and a squad of robots battled for world domination on James’ T-shirt.
All else equal, companies without their shit together lose out.
“It’s more than that though. It’s signaling. We’re demonstrating to the potential investor that we’re organized and diligent. If we are over-prepared for the pitch, they’ll see us as more sophisticated than our lack of experience might otherwise dictate.”
James interrupted, “Who cares about experience? The only thing that matters is what we’ll achieve, not how long and dusty our résumés are! Seriously, I mean how many useless people spend decades of their lives indentured to the corporate machine with nothing to show for it!”
Mara rubbed her forehead, trying to stave off the impending headache. “James, you’re not listening to me. Obviously I’m on your side. My resume isn’t any longer or dustier than yours. All I’m trying to do is pass along some advice from Jeremy. This isn’t about corporate versus startup career tracks. This is about getting money in the door so that we can keep Mozaik afloat. It’s great that your mom is now our first customer and I’m going to do everything I can to build a real customer pipeline for us. But at the end of the day, we need more resources in order to do this right. Those resources require outside investment. Outside investors require us to make ourselves look pretty for them. Ultimately we’ll be saving ourselves work in the long run because we will be prepared for growth and won’t need to clean up any messiness left behind by poor initial governance.”
How many useless people spend decades of their lives indentured to the corporate machine with nothing to show for it?
“Fine, we can dress ourselves up if we need to.” James had that pouty look he got when he knew he was wrong. It reminded Mara of the one time she had ever seen him corrected in a high school math class. “But what does this have to do with equity?”
“Right now Mozaik Industries is a sole proprietorship,” she said. “It’s not really a true corporate structure; it’s just a way for an individual person to claim to be a business. We need to establish Mozaik as a corporation and make it a real legal entity. When we do that we need to define our ownership stakes — our equity — in the business. Because we’re cofounders, the simplest way to do this is to split the ownership of the company fifty-fifty.”
James raised his eyebrows. “Fifty-fifty? Are you serious, Mara?”
Mara frowned. “Of course. It’s even and fair.”
“Even maybe…” James’ expression darkened.
“James, what exactly are you trying to say?”
We need to define our ownership stakes — our equity — in the business.
He snorted. “What do you think I’m trying to say? Why would it make sense for us to split Mozaik fifty-fifty? I’ve been working on this for a year now and it was all my idea to begin with. How could it be fair for us to split it down the middle?”
This was not the reaction she had been expecting. She had assumed it wasn’t going to be much of an issue. It just seemed obvious that as cofounders they should naturally split ownership in Mozaik evenly. “Okay then, what do you think would be fair?”
James thought for a moment, his eyes creasing at the corners. “I think eighty-twenty would be much more accurate. Mozaik wouldn’t exist except for the fact that I coded it and the idea itself is the important part.”
Fifty-fifty? Are you serious?!
Mara’s headache called in its reinforcements. “Now it’s my turn to ask if you are serious. James, I obviously respect all the work you’ve put into Mozaik and the idea is a great one. We’re seeing some good early signs and starting to generate some momentum. But c’mon, ideas are worthless. Everyone has business ideas. Usually they don’t end up going any further than an inebriated conversation or two. Nobody’s going to pay for an idea. People pay because we’re solving a problem for them. No investor’s going to invest in an idea. They’re going to invest in something that has enough potential return on investment to justify the enormous risk they’re taking by betting on a startup.”
“Hey, don’t lecture me. Mozaik isn’t just an armchair business idea.” James’ eyes flashed.
She clenched her jaw. “I’m not trying to say it is. I didn’t get involved because this was a neat or original idea. I got involved because I think we can turn it into a real business. That’s always been what I find exciting about it. That’s the reason I’m dropping out of school next semester along with you to make this happen.”
“I never asked you to drop out of school.” James’ pout had returned in full force.
This was not the reaction she had been expecting. It just seemed obvious that as cofounders they should split ownership.
“What the hell, James? Of course you never asked. It’s not your decision to make. I decided to do it myself against the recommendations of my parents and countless others.” Maybe they had been right after all. “I’m doing it because without that level of commitment from both of us, I doubt we’ll be able to build up enough momentum to really get Mozaik off the ground.”
Mara interrupted him. “No buts. Look, despite everything we’ve accomplished already, our work is ahead of, not behind, us. Yes, you had the original idea for Mozaik. But it’s going to take an extended monumental effort to turn this into a business. We’re going to have to be tireless, relentless, and always on the same team. You’re saying you want eighty percent of the equity to start with? What kind of incentive do you think that gives me? How do you think that will make me feel going forward?”
“Mara, I’m sorry, but I came up with Mozaik. I’ve been the one writing the code. I’m the one building this thing. I thought it was obvious that I owned the majority of the business. I mean, come on, it’s been my baby for almost a year. And anyway, this is a tech company. You’re obviously helpful on the business and logistics side of things but seriously, your skills are fungible.”
I think eighty-twenty would be much more accurate.
“What?” She tried not to scream.
James winced at the fire in Mara’s tone but bulldozed on. “This product and this company couldn’t exist without my skills. I’m the only one who can directly build the algorithms. You’re great at talking to people and managing the operational stuff but I just don’t see how that deserves an even split. I could probably get a dozen responses if I put up a post on an MBA forum.”
“What the fuck?” The emphasized expletive drew looks from the other caffeinated denizens but Mara didn’t care. “You think this is simple? You’re the one with the easy job. All you do is sit in front of the computer optimizing things. You’ve done it your whole life. I’m fucking thinking outside the box all the time, trying to figure out how to get us in business. I’m making the connections and building the network we need to get there. Yes, I’m talking to people, people are necessary to our success and you know what? You suck at talking to people, exactly as much as I suck at building algorithms. Part of the reason you came to me in the first place was because you have so few real friends. Your forum troll buddies don’t count. Screw you, James. If you think my skills are so fungible,” she gave the word a sneering twist, “then why the hell were you so persistent about getting me on board in the first place?”
All you do is sit in front of the computer optimizing things. I’m fucking thinking outside the box all the time.
“Mara, I’m sorry,” James said. He was backpedaling fast. “Look, of course I want you on board. I…”
“You know what?” Mara interrupted. “I don’t want to hear it right now. Why don’t you see how far you can get trying to build this by yourself? At best you’ll just flat out fail. But you might take it a step further. Based on how things have gone so far you might just end up in prison.”
“Maybe we can do seventy-thirty instead or something.”
“This isn’t about the equity, James. The equity is the symptom of the disease, not the cause. The problem isn’t the specific split. The problem is that you clearly don’t value my contributions to Mozaik. Building this company is going to require both of our blood, sweat, and tears. If you think I could be so easily replaced by some random MBA dickhead then why did you ask me to be your business partner? Think on that. I need to leave. If I don’t, I may very well bite your goddamn head off.”
This isn’t about the equity. The equity is the symptom of the disease, not the cause.
Mara stood up, grabbed her jacket and headed towards the door.
She zipped up her jacket and stepped out onto the street. Snow was falling lightly. She needed to do something. Climbing, shouting, kickboxing, biking, something. She had too much smoldering inside her and there was no use bottling it up. That kind of fermentation only led to ulcers and it certainly wasn’t going to help with this persistent migraine. She exhaled and her hot breath crystallized in front of her. She needed to vent.
Don’t implode, that’s how most startups fail (ask any VC!). Everyone struggles negotiating equity equitably so that founders with different roles feel validated and motivated. What does “fair” mean when so much of the work lies ahead? Who do you think is being unreasonable, Mara or James? If you were in charge, what equity split would you establish for Mozaik?
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Don’t implode. Everyone struggles negotiating equity. What does “fair” mean when so much of the work lies ahead? Tweet This Quote