How To Use Equity As Fuel To Incentivize, Motivate, And Accelerate Growth

Programmable Equity — A New Framework For Co-Founder Equity Split

Equity can be the strongest motivation for building a strong team and your startup’s long-term success.

Equity represents the percentage of ownership in a startup. Founders, employees, and investors will own stake in a startup. At a typical venture capital-backed startup, the employee equity pool tends to fall somewhere between 10–20% of the total shares outstanding. Startups can offer equity to key hires or not at all. Deciding how to split the ownership and how much your Co-Founder gets can be very messy and challenging.

Frequently, Co-Founders don’t quite understand how much of a time commitment they have to give to the startup, primarily if it works. CEO’s must consider what the team wants even if they’re not thinking about their long-term interests. Y Combinator CEO and Partner, Michael Seibel, has said:

“I don’t want to create a situation where I have to motivate my Co-Founders every day. I want their equity stake in the company to be the thing that gets them to wake up in the middle of the night, gets them to work on the weekends, gets them to recruit their friends, gets them to feel like true owners of the company and not just employees.” — Michael Seibel, How Much Equity to Give Your Co-Founder

How much equity to give your Co-Founder is one of the hardest questions to answer. A safety mechanism for splitting equity is vesting — the rights to future payment and employer-provided assets over time. When splitting equity, it’s best to consider realistic expectations, upfront consensus on the scope of work, and slicing pie between the appropriate amount of people. Most importantly, the motivation to build a successful company for the long-term.

Hyperloop Transportation Technologies (HTT), American research company and transportation system envisioned by Elon Musk in 2013, has always followed a crowd collaboration approach. Rather than employees, HTT uses a share-per-hour system for distributing equity to its contributors. Dirk Ahlborn, the HTT CEO, believes this approach is best for “turning a collective passion into a vision and the vision into a reality.”

With the future of work becoming more distributed, new methods will be used to split the equity. Another more straightforward way to motivate your team and accelerate the growth of your startup is through programmable equity. One startup that’s solving this problem for teams on Ethereum is Quidli. Quidli, backed by ConsenSys Ventures (Tachyon ‘18), helps companies, projects, and communities tokenize company equity, program distribution rules & transfer restrictions directly to tokens and share tokens with contributors as compensation (full-time employees, freelancers, etc…).

I had the pleasure of speaking with Quidli Co-Founder, Justin Ahn. Our lively discussion led to follow-up questions about Quidli and the best approaches he’s seeing for splitting Co-Founder equity. Below are Justin’s responses:

What advice would you give Founders before splitting equity with Co-Founders?

Equity is a touchy subject, particularly between Co-Founders. And there’s no one right way to split it, just like there’s no right way to slice a pie.

Having said that, if you’re at the early startup phase of building your company, I highly recommend considering a dynamic approach to splitting equity between Founders; an approach that doesn’t rely on establishing arbitrary percentages of ownership when you’re not exactly sure who’ll be contributing the most value. If you think about it, starting with an arbitrary ‘I’ll get x%, you’ll get y%’ is a massive bet you’re taking (a person can be ineffective, they can leave, splits can cause resentment, etc…), especially when building a startup is already a massive bet. Ideally, you should be limiting the number of bets you, as a company, are taking.

There’s a lot that goes into setting up a dynamic split system that works for your company/work culture.

What’s the biggest misconception about cap tables?

With the growth of startups, VCs, and VC-backed startups, I see a lot of Founders have a mentality that their cap tables need to be pristine to demonstrate investors will be able to generate ROIs. Unfortunately, business is messy, and trying to reverse engineer a 10x return on paper to attract investors is just added complication for Founders; particularly when the chances of getting VC funding is slim.

A messy cap table isn’t ideal, but Founders shouldn’t fear to share more equity, particularly in early stages when money and interest are low. The reality is most startups that pursue venture capital fail. So isn’t it better to use equity as fuel to incentivize, motivate, and accelerate growth among your team rather than just stagnate because you don’t want to have a weird cap table? A dynamic cap table may look weird to external parties, but if it’s something that can help your work culture, that’s a lot more powerful for a startup to have in place for the long term.

Why should private companies be using Quidli?

I think everyone should be using Quidli!

While there are already templates, software and service providers available to facilitate equity management, these solutions are mainly focused on making cap tables presentable to investors; and are geared towards facilitating “standard” distributions. But as workforce arrangements become more distributed and temporary, and as companies start to lean deeper into engaging with non-traditional stakeholders like customers and community members, the existing solutions aren’t built to be as open-ended. Quidli, on the other hand, is designed for flexible sharing equity with your teams — standard ESOPs, KPI-based distributions, dynamic splits, etc…

Could you give an example of a current customer and how they are using your product?

The first “client” I always like to talk about is ourselves; we are entirely dogfooding Quidli. We started the company, just two Co-Founders, no money, and no workforce. But from the beginning, we set up a dynamic share-per-hour system for core team members with an added mission-based distribution for freelancers to prove to ourselves that the work-for-equity concept works. It takes a lot of work to find the right people, but the advantage is that the people who agree to work with you do so because they believe in what you’re doing. And we were able to bootstrap ourselves with over 20 contributors in our cap table to our first external investment from ConsenSys Ventures.

Another great client is Skylights, the former company of my Co-Founder, Florent. They bootstrapped themselves to become a YC company using a work-for-equity system that they managed manually on spreadsheets; this is a company that completely understands how to use a dynamic equity system. Despite raising two rounds of fundraising, they still require all team members to earn equity on top of their salaries and so Quidli provides them with an interface to track and manage their monthly distributions, all with unique terms for each team member, from a single dashboard.

How can programmable equity motivate Co-Founders, employees, freelancers to build a large, successful company for the long-term?

We’re super motivated in building programmable equity because we see the next wave of new companies being built as worker-oriented. But this concept of worker extends beyond just full-time employees; it also includes freelancers, business partners, community members, clients, and customers, etc… And all these different stakeholders are increasingly seen as invaluable to your business’s success.

So you have all these great tools and services to manage equity today, but they focus on investors and executives, for which the processes are fairly standard. In a time where we’re seeing high employee churn and brand loyalties dipping, equity, even in micro and fractional distributions, can be leveraged to drive more inclusion. But designing custom plans and distributions gets complicated because existing tools and law firms aren’t incentivized to address unique cases unless you pay them enough to pay attention; they prefer one-size-fits-all approaches.

And so at Quidli, we believe enabling founders and CEOs to directly manage and control their distributions, particularly for their teams and communities, is a more practical solution for building more sustainable companies in the long-term. Performance-based equity distributions can be programmed and then managed via smart contracts; different instruments can be built directly from your dashboard so that freelancers get more favorable terms compared to standard arrangements for full-time employees; Co-Founders can determine lock-ups and liquidity terms for each other to keep skin in the game; the bricks are there, so the possibilities are endless.

What excites you the most about decentralized finance (DeFi) and the future of work?

DeFi is exciting because it’s opening up the possibilities of reinventing finance in a way that’s not just reserved for high-net-worth individuals (HNWIs) and institutional investors. For most people, finance is simply money; and all other financial products, instruments, and opportunities are out of reach largely because the service providers in these domains want to cater to prospective clients with a lot of money. What DeFi is setting up is the cutting out a lot of the existing middlemen and expanding financial infrastructure for more people across the wealth spectrum to engage and benefit from systems they’ve traditionally been priced out of. For sure, there’s still a lot more work to be done in terms of improving accessibility, usability. But the overall movement is coming from a much more equal place than what’s in place today.

For Quidli, this is exciting because we define the future of work as more equal in the sense of ‘doers becoming owners.’ While growing startups often get around to offering employee stock options, the financial complications around owning them still mostly benefit investors and executives. And with work and consumer trends shifting towards developing deeper relationships with their stakeholders, we can help companies create more friendly instruments for their holders. And with the digitization of assets, the natural extension is to think about how a more connected network can facilitate more inclusive collateralization, interest, and liquidity to a class of investors that usually wouldn’t have had access to such instruments. This is an aspect that’s difficult for traditional tools like spreadsheets, law firms, or centralized software to provide as they’re not built with this greater DeFi infrastructure in mind.