Noam Wasserman: Real Lessons in Equity Splits | Summary and Q&A

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November 28, 2012
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Stanford eCorner
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Noam Wasserman: Real Lessons in Equity Splits

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Summary

This video discusses two different teams, Zipcar and Ockham Technologies, and their decisions regarding equity splits and uncertainties. The Zipcar team had a 50-50 split and encountered issues when one founder contributed significantly more than the other. In contrast, the Ockham team had an uneven split and tackled their uncertainties by diving into potential scenarios and creating a flexible founder agreement. This proactive approach allowed them to address their biggest risks and build a stronger team dynamic. The video highlights the importance of considering potential pitfalls and uncertainties early on in order to avoid conflicts and ensure compatibility among co-founders.

Questions & Answers

Q: What was the motivation behind the founding of Zipcar?

Zipcar was founded by two women who were socially acquainted and shared a day-care center for their children. They were inspired by a car-sharing service in Europe and wanted to create a business idea that would not only be profitable but also help the environment by reducing the number of cars on the road.

Q: How did Zipcar founders split the equity?

Robin Chase, one of the founders, proposed a 50-50 split, known as an "One over N" split, as she wanted to avoid the equity split negotiation becoming a hurdle for the team. Her co-founder agreed, and they moved forward with equal ownership.

Q: What was Robin Chase's reaction to the 50-50 equity split?

Robin Chase ultimately felt resentful as she put in significant effort and dedication to build Zipcar while her co-founder was less involved. When discussing this in a class, she referred to the 50-50 split as the "stupidest handshake" she had made.

Q: How did the Ockham Technologies team approach the equity split?

The Ockham team, consisting of three prior co-workers, recognized that they would have varying contributions. They engaged in open dialogue and agreed on an uneven split, settling on a 50-30-20 split as the best estimate of the individual contributions in the long run.

Q: How did the Ockham team address their uncertainties?

The Ockham team identified their biggest uncertainty – the involvement of one member named Ken, who had recently become a first-time father and had a demanding job. They explored different scenarios and created an agreement with if-then-else statements, allowing for different equity splits based on Ken's level of commitment.

Q: Why is focusing on the best-case scenario a common inclination for founders?

Founders often focus on the best-case scenario during the passionate early stages, believing that all team members will be equally committed and contribute their skills. This optimism drives them to lay plans accordingly.

Q: What is a potential pitfall of early equity splits?

One potential pitfall is that these agreements might crumble when encountering unexpected or suboptimal situations. It can lead to resentment or a feeling of unfairness if one founder contributes significantly more than the other.

Q: How does addressing high-tension issues benefit a founding team?

By addressing high-tension issues, teams can foster more productive dynamics, build trust, and navigate challenges together. It allows founders to test their compatibility early on and avoid discovering incompatibility later when it may be more difficult to resolve.

Q: Why is it important to match uncertainties with a dynamic approach?

Matching uncertainties with a dynamic approach means proactively addressing potential risks and having contingency plans. This ensures that the team is prepared for different scenarios and can adapt their agreements and expectations accordingly.

Q: What are the benefits of considering potential pitfalls early on?

Considering potential pitfalls early on allows founders to avoid wasting time and effort by identifying compatibility issues sooner. It enables them to make informed decisions and build a strong foundation for their venture.

Takeaways

The key takeaway from this video is that addressing high-tension issues and uncertainties early on, rather than avoiding or assuming a best-case scenario, leads to a more productive founding team dynamic. By having open dialogues, exploring potential scenarios, and developing flexible agreements, co-founders can mitigate risks, build trust, and prevent conflicts down the line. It is crucial to match uncertainties with dynamic approaches to ensure compatibility and prepare for different outcomes. Taking these steps early on helps founders create a solid foundation for their venture and navigate challenges more effectively.

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