It is quite common for the founders to split equity in their company early on in the process and an even-split is the common scenario seen in most of them. Every startup in the world faces “ups and downs” due to equity sharing issues. One thing which creates a big difference between good Startups and ordinary Startups in this matter is transparency. Good startups will always have better sharing equity structure and individual breakdown process. Many startups have failed just because of this sole reason due to lack of knowledge and experience about these structures.
To solve this problem, we would like to introduce you to a startup, Buffer (social media tool and company name). It was founded by Joel and Leo (both are co-founders) in 2010 as a way to easily schedule tweets and other social media posts. Within a few years, Buffer has become one of the leading social media management tools on the web, helping more than 2 million users connecting with their followers every day.
Buffer as a startup, has set an example for early stage startups for making clear structure about sharing equity and salary using great formulas. According to Joel,
In our culture deck, the second value on our list at Buffer is “Default to Transparency.” With this point especially, we started to think about everything we do within the company and how we could change it to something more transparent.
For startups, although, its a crucial point, yet sometimes they hesitate to solve this problem because of complexity of share structure.
According to Buffer, there are two points for equity and salary distributions –
1) Open Equity-
Open equity formula works on Four parameters:
Type of role: Buffer founders decide base percentage of equity as per each key role, so it’s like a more important role will get more equities.
As per example, founder can offer 0.5 – 2% for key roles (In startups, equities are distributed for Developer, Content Head, Senior Operations Head).
Choice: In buffer, they offer two choices on finishing a 2-month “Buffer Bootcamp” period : $10,000 additional salary or ~30% more equity.
In a real scenario most of the startups adopt the salary formula, but during the initial stage, they offer a very small percentage of equity to crucial employees.
Risk Layer: In the buffer’s formula, “risk layer“ reflects employee association with startup as the 1st person versus the 50th, in terms of joining.
In a simple way, person joining 1st receives more advantage in comparison to joining 50th “First come, More deserve”.
Seniority: Buffer defines seniority as a lead and Senior. Lead who will lead a team, deserve more equity than senior, who analyze work of lead.
Lead > Senior – (Equity)
So based on these formulas buffer team decided their equity structure as (remember founder will not include) ,
2) Open Salaries-
Buffer have a simple formula to calculate salaries and they also shared this with the whole team,
Job type = base: This point includes “Define salary” for a particular role. Hard and key work deserve a hefty salary in startups. (CEO salary> Head of Operations salary>Employee salary)
Seniority = base multiplier: Seniority level is defined by the company working structure and it also include salary base hike and percentage of the bonus.
Head of operations (10% hike in base salary), Senior (5% hike in basic salary)
Experience = multiplier: As defined by Buffer, Most senior member gets more X in salary,
- Master: 1.3X
- Advanced: 1.2X
- Intermediate: 1.1X
- Junior: 1X
Location = additional: Cities location define the hike percentage in salary. It matters on city demography and product users. Have a look at buffer salary hike according to locations,
- A: +$22K (e.g. San Francisco, Hong Kong, Sydney, London, Paris, New York)
- B: +$12K (e.g. Nashville, Birmingham, Vienna, Austin, Vegas, Tel Aviv)
- C: +$6K (e.g. Tallinn, Warsaw, Bucharest, Santiago)
- D: +$0K (e.g. Manila, Delhi, Hanoi)
Conclusion:
We hope Buffer formula for Equity and salary will be helpful for budding startups to overcome common scenario of “Even split equity” structure. According to Duke sociologist Martin Ruef, Over 90% of two-person teams and over 87% of four-person teams split equity evenly. This is called a “fixed” split because there is usually no thought to how the split will change over time. An even, fixed split is quick, clean and rarely hurts anyone’s feelings—at first. The problem is that no matter how good the intentions are, when things change—and they always do—a fixed split simply does not work. At best it creates mild frustration; at worst it can destroy the company.