Tuesday, December 18, 2007

Agreements, Contracts, Stock

Sorry for the week off. I've been pretty sick. I guess it's flu season or at least that's what my body was saying.

I've decided it's better to be prepared than to be faced with uncertainty down the road. So I've been listening to our lawyers. They recently told us that we need to get the people who are working with us under contract. It determines that what is made for Vyoo, is owned by Vyoo.

We've sent out some of our contracts - and in doing so, we had to determine what we were going to compensate our employees with. One of the great things about being a startup with a potential upside is that people are willing to work for equity. We have 6 people working with us right now, albeit part time, but they are all taking equity in exchange for work. This is where it becomes difficult. How do we figure out what makes sense from an equity perspective - both for the company and for each of them?

There are some guidelines. For example, a CEO is expected to get between 6-8% pre Series A. Executives and directors have their own guidelines. But how do you figure out how to compensate people who are giving part time work and in a different capacity, such as development?

We've determined that a good place to start is your cap table. The cap table is your market capitalization based on your outstanding shares * share price. I won't go into the details of our cap table, but it allows you to understand what shares are worth. And it's good to plug in numbers to see what different agreements amount to.

A good benchmark is to determine the value add that someone is providing. And then to add a certain component for the risk they are taking on. The risk factor should be reasonable. And everyone has a different risk factor. Is it a full time commitment? Is it their only source of income? What is the opportunity cost, etc?

I struggled mightily with this subject when I started working for Justarrive back in 2000. I came on early, worked full time, and worked without a contract or a pay check for quite a while. What was that worth? It was a debate that raged on and it usually is, regardless of the circumstance. It's a touchy subject. We're going through it right now. I'll update how things progress - but this is our starting point.

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