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Background:

I and two other colleagues founded a start-up company a number of years ago. We’ve spent a lot of time over the years building our product and the business and we expect to start earning enough profit this year to start earning a small salary.

Each of us also has other jobs as our main source of income:

  • Person A plays poker and has averaged 5 hours a week last year
  • Person B works as a flexible employee for a company and can vary his hours on a weekly basis, he averaged 10 hours per week last year
  • Person C works a fixed 20 hours a week

The company needs a fair and objective system where each of us would be incentivised to spend time on the business without having to compromise on income.

For example, person A has significantly reduced their poker hours in order to dedicate more time to the business, however, this is at a detriment to their poker income. Person A should be fairly incentivised to dedicate time to the business instead of having to play poker for income.

Proposed Solution

The solution that has been proposed is a “negative income tax”. We would have a $1,000 pot each month to pay ourselves. Each of us would have a tax free allowance of $600. For every $1 we earn over the $600, it’s taken off of the $1,000 potential payout. If we earn over $1,600 a month, we would earn $0 from the business.

The $1,000 pot represents around 50% of the potential income. The other 50% would be split equally between the three of us.

This solution also allows for future full-time employment to the start-up where one of us full time would earn the maximum amount from the business.

Issue:

Person C feels that this is unfair as their income is fixed and they would always be over the $1,600 threshold. They also feel that they contribute the same value and hours to the business by making sacrifices in other areas of their life, such as social. Person A and B feel that the system is fair as it reflects the income they are losing from their other job when working on the business.

All three of us contribute roughly the same number of hours each week (35-40), however, there is an argument that the hours' person C contributes a weaker work input to the business due to burnout and tiredness of a 55-60 hour workweek.

We have considered self-reporting timesheets, however, it’s difficult to trust that these will always be accurate when self-reporting is directly tied to income.

Question:

How do I objectively calculate and pay each of us fairly for time spent working on our startup without using timesheets or income earned from external activities?

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    Aside from anything else, you need to resolve the issue of C approaching burn-out. Sacrificing social life and working 60 hours a week is not healthy and not a sustainable approach to your start-up, especially if this person is doing the main amount of work. – Llewellyn Jan 5 at 12:57
  • They are resolving it by looking to rip him off too. – mxyzplk Jan 6 at 13:19
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To answer your question directly, you pay everyone 1/3 of the money available, with the distribution to be re-evaluated if someone quits working roughly as much as the others.

You don’t say what country you’re in, but for the purposes of the rest of this answer I’ll assume that you’re in the US or Canada, since your amounts are given in dollars.

You have two big problems which you’re distracting yourselves from by worrying about how to split this money.

The first and biggest problem is that you and your colleagues—I notice you don’t call them “partners”—don’t trust each other, despite having worked together on this business for years. That’s why for instance you think people ought to track how much they work on the business, because you don’t trust each other to continue to work the 35-40 hours you’ve been doing; but you also don’t believe time sheets are adequate, because you suspect each other might cheat on them.

The second problem you have is you’re wasting time arguing over a tiny amount of money. If I read your post right, you have about $2,000 a month to distribute among three people who are working nearly full time. The total time worked is over 400 hours a month by your reckoning, so that’s less than $5 an hour. Now you want to design a complicated formula so that Person C will make less money an hour because you think they’re overworked due to their other job - what should they get, $4 an hour or $3 an hour?

Instead, the three of you need to establish a stronger relationship where you trust each other to continue to do a good job working on the business and value each other’s contributions, and then figure out how to grow the business so it can pay you at least minimum wage. If one of more of you decides that’s not possible, then you should figure out how to buy out whoever wants to leave, or shut down the business.

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    perfect answer, may i just add that your start-up distribution should have been decided at or close to the beginning – Strader Jan 5 at 21:11
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    +1 Splitting evenly is the only thing that works. That's also my personal experience, but the question you hint at - that also comes to my mind - is really: Aren't you doomed for failure if you already quibble over that tiny amount? What's going to happen, if the company is making millions? – s1lv3r Jan 6 at 16:45
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You are not going to find a solution where everyone is happy. No matter what you do, one or two people will feel like they are not being compensated properly. This is a question that needs to have been answered a "number of years ago" when the business was first getting started. There should have been a "virtual salary" / "virtual stock options" that you paid each person that could now be collected upon. Now, you will have someone unhappy no matter what you do.

At this point, the real question is: what would it take to buy out the unhappy person? Could that person be happy leaving with some "options of future payout"? (Side question, which other person do you want to have unhappy and which person do you want to continue the business with?)

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    Based on what I'm seeing, there's a good chance that if anyone leaves, the entire thing collapses and everyone has just wasted their earlier investments. Coming to an equitable arrangement at this point is not necessarily trivial, but it's also not insurmountable. – Ben Barden Jan 5 at 18:16
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Companies normally pay according to how much work someone does for them, not for how much work they are not doing for someone else. You seem to be trying to devise a formula that pays C less, and constructing an argument to justify it. I'm not surprised that C is unhappy about it.

The fair approach would be to pay each person according to what work they are doing for the business.

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First, we cannot give you an answer. At best we can give you some source of understanding. Hopefully that can lead you to an answer.

So, currently you've all been investing quite a lot personally into this shared thing, and you're finally hitting the point where some money can start coming out. You're not sure how to distribute the money, and there's conflict between the individuals involved. So let's look at what matters.

The first thing that matters is that you need the company to survive in the short term. You've all invested a huge amount of personal resources into this thing, and it's just starting to pay off now... and from the sounds of things you're still not at the "can afford to pay a decent salary for hours worked" level. You need to keep everyone (including yourself) bought into the idea of the company and not feeling bitter about mistreatment. Good luck.

It is a very natural human instinct in situations like this to crave advantage. You need to fight that. Giving yourself a fair deal as you give everyone else a fair deal is important. You're going to be naturally inclined to see reason why your deal should be more fair, however... and if you follow through on that, that's going to lead to resentment, which can very easily poison the company from the inside. Even if it doesn't lead to someone outright leaving, it can do bad, bad things to the company culture, to overall morale, and to the emotional experience of being involved in the whole thing.

The second thing that matters is that you need a long-term solution, rather than a short-term solution. Seriously, you should have had something like this worked out years before - before it mattered, and thus before the pressure was on. You certainly don't want to have to re-fight that fight every time things improve. You need to figure out an answer (ownership percentages, ways of figuring out pay, and so forth) that's going to work for everyone both now and in the future... and you need to listen. This is not the point to be playing for dominance. It doesn't matter whose idea gets picked as long as it's an idea that all three of you can be reasonably happy with.

Beyond that... I think you're trying to optimize on the wrong things right now. Everyone is already working 35-40 hours per week on this thing, with no pay. You don't need to offer further incentives than that. Also, it's not nearly as much income as any of you could get anywhere else working the same number of hours for pay. Incentives of this variety can come later. For now, you need to worry about "we're starting to distribute pay, and we didn't figure it out in advance, and I'm worried it will break the company". That's a much bigger deal here. You want to distribute money because you want to make life a bit easier for the three of you, and because having a company-based income stream will let you start to save time from your other income sources, but it's a matter of enabling, rather than giving incentives. It's pretty clear that everyone involved is motivated enough already.

Finally... what people are doing outside of work for the company? Doesn't matter. What you need here is fairness, and fairness needs to start with what you're each contributing to the company itself, not what you could be getting elsewhere. That's going to be a matter of hours spent, of productivity in those hours, and of unique skills and abilities that you bring to the company. "What you could make playing Poker" doesn't really matter unless those poker skills are somehow directly applicable. The burnout argument is a valid one in this case, but I'll invite you to consider whether or not it's one that's worth making. Is person C really contributing meaningfully less value than A or B?

Really, the entire point of this process is getting to where the company itself can sustain all of you, and make lots of money. You need to have a shared idea of what that is going to look like in terms of who gets paid what. Once you've done that, then the real issue is in getting there, with everyone reasonably happy about the path that you've taken.

/******************/

...but that's not really addressing what your actual issue is. I really didn't understand your "proposed solution" at all the first few times I read it, but I think I get it now. It looks like what's really going on is that A and B are trying to pressure C into getting rid of or at least seriously curtailing their external employment, under the theory that this will result in them being more productive at work. Barring that, A and B want to set up a system where they are advantaged in comparison to C in order to punish C for investing so much time elsewhere. I'll tell you straight up, that's a bad approach to take. C will resent it, and they'll be correct to do so. You're essentially setting things up so that A and B get paid while C does not. There's no way to make that right.

Ideally, the pay would be based on actual productivity, but it's really hard to measure that. In general, though, you want to split the pay up by fractional contribution, however it is that you can figure that out. I guarantee that C is providing more than 0% of the work-value that goes into the company in any given month.

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1/3 Each ? Maybe Depends...

Few issues here but I'll keep it short and sweet. As some of the others have said there is just not enough money here worth calculating what would be in some objective manor considered fair.

If you are all equal business partners keep the 1/3 going. For now everyone can work as much as they want to. Say somebody does not consider if fair they are putting in more work but not getting enough out of it, the other 2 parties can either:

  1. Let them draw a larger salary
  2. Give them some of their shares as a salary
  3. Person doing more work could could offer to buy others shares

If the person doing more work is unhappy they can simply work less. Keep in mind that if you do allow this person to work more. But also keep in mind if you all start arguing over 5$ an hour now this will become dysfunctional.

What would I do I think to I would mention what I would do too. If I believed this business was going to be worth a lot of money in the future, and I had somebody willing to work 5$ an hour whilst I had no time... I'd let them have the money, hell, I'd give them all the revenue now so they'd make 7$/hour, but I make decent money, even if I was working on it too and getting nothing. But I would make sure we all had the proper ownership structure that this was indeed a salary which was agreed upon and voted by all share holders, so when you can get more money, the salary would be voted on again, as well as owner withdraws, say for example everyone withdraws 10k one month, as well of salaries of 3k, 5k & 10k.

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