Startup Harmony: The Time Based Revenue Model

I recently came across a question on Clarity.fm regarding what to do when co-founders aren’t pulling their weight.

My answer (a variation of this blog post) is about how to pre-empt any resentment that is inevitable in such situations, by putting together a financial model that acknowledges the time that each co-founder is investing into the business.

For the particular CEO who asked the question, I believe they need different co-founders, who are actually capable of fulfilling their assigned roles. However, assuming that the people in your startup have the right skills and/or the capacity to grow into the roles that need filling, I propose a tactical model for income distribution in the early years.

My Advice

I’ve got a tactical model you may find useful to employ to remove the tension and resentment before it escalates.

I’m currently on my second startup, it’s just myself and one co-founder.

A decade ago, I had three other partners. What I learned then was that everyone will go through different challenges in their own lives, at different times. This of course, affects our ability (time, energy) to contribute to the business.

Others (Jason, Ken) have answered your question here from important angles you should consider first. I wanted to add some tactical tips (a model, in fact) that you could put into place; but only after you’ve covered those big-picture topics.

These techniques all assume one thing however: trust. If you don’t have that, then you really shouldn’t be in business with your co-founders.

First, if you have revenue, you can assign everyone the same hourly rate. The income you distribute amongst the team is simply a matter of how many hours everyone worked.

If you don’t have predictable income yet (but you have some), you can split the income that you do generate in the company amongst yourselves, based on the proportion of hours worked in that period. This actually works better than a flat hourly rate, as it provides more incentive for everyone to work on making real revenue with the venture.

Let’s say you choose quarterly as your time period, and your timesheet has you working twice as much as your co-founder. You’d then naturally get 2/3 of the income generated in that quarter.

Even though you might have a 50/50 equity split, you can put in an agreement between yourselves that treats all income generated by the company for the first (or next) x years this way. Perhaps x is five years, by which time, these sorts of issues typically of concern in a startup, won’t be as pressing or even relevant.

Another variation to this is to track company income from inception. The proportion of time each co-founder puts in over the life of the startup to date, is the proportion of its generated income that they are owed. This removes co-founders “surging” their efforts in quarters that are known to bring in a disproportionate amount of revenue (should such a situation be possible in your startup).

Yet another variation that tests everyone’s commitment to the business, is have all work income generated by all partners (whether through other day jobs, contract revenue etc.) put into the company pot, and re-distributed in this model. In that way, the co-founder only participating part time has a bigger role: they are helping bring in income for everyone, and it gets distributed based on how much time everyone is putting in respectively, across all of these activities.

Finally, you can add a time component to this whole formula: time logged in the first year of the company is like the deposit of a financial investment into the company: it earns interest.

It is worth more than the same amount of time deposited into the company in year three, when the company is likely more established. Generally, as time goes on, as there is less risk to pour your time into the company; you should have more clarity about the company’s prospects.

Thought of another way: the Angel takes on more risk than the Series B venture round (a downround being the exception here).

Therefore, the Angel’s investment, dollar for dollar, is going to have a higher percentage of ownership. Similarly, you can treat everyone’s investment of time in the early days this way; it gets seasoned. You incentive co-founders to put in more effort early when it is not as clear that you’ll succeed, and when the company most needs that push.

With these tools in place (you can setup a spreadsheet to track this), you will not resent your partners if they need to take a 6 month sabbatical, or work much fewer hours than you do. It can take the tension out of these critical relationships.

Note that if you don’t yet have any income from the venture, but you expect it will be coming soon, extend the timeframe of the model to cover the point that you would have reached success (and then some) or have ultimately disbanded.

This model is like training wheels. It’s a gentler transition from the standard FTE or solo contract income world into one of shared destiny with your co-founders.

Update: July 9, 2015

A friend on Twitter pointed me to a much more robust model called “Slicing Pie”. You can learn about it at via this excellent presentation done at Stanford.

The only contention I have with Mike Moyer’s model (discussed at time index 37:00) is that he dismisses the concept of relative value based on time, because it is not observable (the way the rest of his model is).

However, I do believe founders can adapt the slicing pie model to use an agreed upon, and self-assigned IRR (internal rate of return) percentage that applies to everyone, across the board, year after year (whether indefinitely, for a fixed number of years only, or until an investment event — such as Series A funding).