How should these three people divide equity?
So let me give you a second to think about it.
So I actually post this question to my MBA students.
And I want to give you a little bit of Cisco breakdown of the typical answers.
So about 40% of perouty of
the class tends to want to divide equity evenly, which makes sense.
All three of these groups of people have made some important choices about
what to do with their startup, they're all doing their jobs to make this happen,
they're all investing equal amounts of money, they all came here together.
So based on the material that's happened so
far, it isn't an even even equity split, so that's what people tend to pick.
A smaller group tends to do even with some sort of caveats.
So they will do some sort of equity or vesting provision, which we'll talk about
in a second or some other provision that will make the division equal,
but with some sort of asterisk and some sort of potential change.
We'll talk about some of those in a moment.
And then for some reason, about 20% of the class just picked something else.
So they think the CTO should get more equity or the CEO should get more equity
or there should be some sort of trial by combat where the winner decides things.
Some sort of unusual pattern, and as you could see,
I actually agree with the plurality here.
Based on the facts that we've seen so far, it makes sense to split the equity evenly.
But the problem is that you're basing it on what's happened in the past.
And what's the danger in start ups is not what's happened in the past, but
what happens in the future.
So a lot of things can happen in companies, and
I've seen all of these happen among student start ups over time.
So changes happen in the direction of the company.
So what happens if you no longer need a CFO because the organization no longer has
that financial component.
You can have new hires.
You bring someone else on who's new and important in your organization and
they need an equity stake and maybe they're more senior.
What do they get or what role do they have?
There can be changes in personal circumstances.
Someone can get sick,
someone can decide to leave the job because they're having emotional issues.
There could be a crisis of some sort that happened inside the organization,
and it could be inter-group politics.
It turns out that two out of three founders may end up turning on
the third one.
So these are all issues that can happen inside organizations and do happen.
These are the uncertainties that can cause major concerns.
So you need to think about not just what's happened in the past and
what you're planning on doing in the future.
But also what might happen that's going to change direction of your company and
we call this uncertainty.
And I think it's worth hearing about someone who may not know a lot about
a lot of topics, but certainly knows something about uncertainty and
getting their impressions about what the categories are we have to worry about are.
>> There are known knowns, there are things we know, we know.
We also know there are known unknowns.
That is to say, we know there's some things we do not know, but
there are also unknown unknowns.
The ones we don't know, we don't know.
>> [LAUGH] >> So that is of course,
Donald Rumsfeld who was the US Department of Defense Secretary during the Gulf War,
or the second Gulf War.
The invasion of Iraq, and he famously said,
when answering the question about what's going to happen in the future and
we got a big laugh at the time, the statement that you just saw.
But I think all else aside,
this is one of the most profound epistemological statements about
uncertainty that you're likely to get outside of philosophy course.
So let's look at what Rumsfeld actually said here.
He said, there are no unknowns.
These are things we know, we know.
So what do we call known knowns?
We call those things facts.
Known knowns are things that we actually have certainty around.
So in that little example that I gave you about the founding team,
what are the known knowns that the team all came with the idea together,
that the team decided to divide the roles evenly at that point.
That they had all put in $10,000.
Those are facts and definitely important in making the decision about
how you're going to divide equity.
But then there are also known unknowns, things that we know we don't know.
So what are things we know we don't know?
Well, there's a lot of things that happen in organizations.
We know that people who may or many not end up deciding to take a full time job or
quit their job to join your startup.
You know that you may need to raise funds from the organization from some
organization, but you don't know who it is going to be from or at what point.
These are known unknowns.
You know that these are uncertainties in your organization, but
you know that something is going to answer these questions.
You have to figure out how you're going to get fundraising.
People have to quit their job to join your startup or not.
So you can design systems and we call this continuous improvisations
like vesting that help address these sets of issues.
So vesting would give you difference to amounts of equity
if you decide to leave your organization versus not.
If you decide to keep working for your start up or not.
So you can write contracts around these sort of known and unknowns and
address these kinds of uncertainties.
That found we have unknown unknowns, things we don't know we don't know.
And those are some of the examples I gave you earlier.
What if somebody has a family and decides to leave your organization?
What if the direction of your company changes radically?
What if a natural disaster occurs?
All of these things can radically change the direction of your company and yet,
they're not taken into account if you simply divide equity evenly.
So you need to think about all three categories of knowledge, known knowns,
facts, known unknowns, uncertainties and unknown unknowns that are risks.
So these three categories of knowledge are actually very important
when you create a founding agreement.
If you want to know the details of a nitty gritty equity division,
professor Karl Ulrich has a talk on that that you can also view.
But I want you to think about the terms that go into a founding agreement and
the ways that you're going to divide founding responsibilities.
So first you want to think about your knowns knowns.
These are the facts and again, in our mini example,
this is the $10,000 everyone put in, the fact they all generated the idea together.
These you deal with standard provisions in a contract.
So everyone gets 5% equity in your company,
because they all played an equal role in coming up with the idea.
Then you have known unknowns, these are those uncertainties.
Are people going to leave their job to join your company?
Are you going to raise fundraising from the brother of one of the founders you're
bringing in for that reason?