McStartup

Thomas wrote:

Four of us just graduated college, and have started a video game company together. One guy's dad is putting in up to $50k to help us get our first title out there. Who knows if we'll make revenue from it, but it should be enough to get us to publisher financing or potentially other investors next.

BTW, we are an S-Corp, I believe we have 10,000 shares setup, and the dad financing would be for 20% in shares or a convertible note (still don't know enough to decide).

Everyone on the team but me has a full time job, with the plan to work on our company during the evenings and weekends.

I'm only working part-time at my other job, so I'll be putting in at least 20 hours a week into our company, plus any possible evenings and weekends too.

I need to get paid at least for the 20 hours to be able to eat and pay student loans. But, in order to save capital, the other guys feel strongly about getting stock in exchange for their hours. Setting up an option pool is a bit confusing, but I don't feel good about just saying "You worked 10 hours, normally paying $15 an hour, so here take $250 in stock".

Would it be wise to sync the founder share vesting to some minimum amount 'off-time' hours worked?

I would say that rather than try to track "hours for shares" is that you should probably take a stab at how much time each of you will put in between now and getting the game out the door, and divide up the stock that way.  Then, as time goes on, if things aren't progressing with one team member as planned, you guys need to have a chat about expectations vs. delivery.

The reason I say this is because there should be a known piece of accountability before you get started.  If you are "paying by the hour" then the expectation is "if I work this much, I get this much".  While a bit of nuance, I'm sure you can feel the difference between that and "the guys are expecting me to work this much, so I'd better get cracking". 

As for the $50k financing, I would definitely structure that as a convertible note, probably with a pretty big discount into the next round, given that there is a tremendous amount of risk between now and then.  However, $50k is not really enough of an investment to warrant setting a valuation for the company -- in fact, the company is probably worth far less than $50k right now, so if you wanted to set the fair valuation, $50k would essentially buy the whole thing.

As proof, you might consider what would happen if I called you up and said "Hey, I heard you had an interesting idea for a new video game.  I'll give you $50k to tell me about it now and never mention it again".  I'm guessing you'd take that deal, unless you've already spent hundreds of hours developing code and plans. 

Something simple - maybe to say a $50k note, that earns 10% interest per year (added to the note), and converts into equity at a 50% discount.  So, for example, if you raise money 1 year from now, the $50k + interest is now $55k, and that would "buy him" $110k worth of equity at the next round valuation.  By setting the discount, you are effectively saying "we don't know what the company is worth today, but it's probably half of what it will be worth when we raise money".  It's not unreasonable to say the discount should be more than that, but that's the basic structure and thought process.

Now, onto a slightly bigger topic...

I often advice people that if they are starting a company, to do it full time, starting right now.  The feedback I've received from those that followed my advice has been tremendous, and I can't tell you how strongly I encourage you to think about getting you and your team to focus on this full time.  To illustrate, here are two scenarios:

Scenario 1:  You all quit your jobs and do this full time.

So, what happens here is that your entire future earnings is based on how much you start working on this thing, and so you get up, hit the "office" which could be your bedroom, your parents basement, or whatever, by 7 or 8am, and start cranking away.  There are no distractions - no bosses checking on reports, no co-workers coming in for chit chat, no girlfriends calling to go out (she's at work, right?), none of that.  Just you guys working away.  At 5pm, you probably don't even notice the time, you keep on working, have a frozen pizza, and work until 8 or 9pm.  The next day, you do it again.

Ok, so...

Scenario 2:  You keep your jobs and work on this "part-time".

So, you hit the office at 8am, you're going through your daily tasks doing whatever it is, half distracted by the thought of getting to work on your own business that night, and half distracted by what you are really supposed to be working on.  All the stresses of the day come in, compounded by the fact that your mind is only half-committed to doing a good job, which adds to the stress.  By the time the day ends, you head home, have dinner, and your brain is fried.  If you start working you'll only get 2-3 hours into before you go to bed, which is about the amount of time that, in my experience, it takes to really just get rolling and hit your stride.  So now you aren't doing your best work at your job, or at your own business, and that's if you have the strength to work in the evening at all.

You said you are just out of college.  If you have the option to live at home, or live with a friend, take advantage of not having a whole lot of life's financial baggage (school costs for kids, mortgage payments, car payments, etc), and find a way to get by on hot dogs and pizza while you pursue your dream.

I realize that is not an easy decision to make.  However, those that have done it, have all told me how shocked they were at the amount of work they got done once they made the full time commitment.  If you have any way to make it happen, think about doing it.

Best of luck to you!

Follow me on twitter.