Putting All Your Eggs in 3 Baskets

A Startup Breakup Story

💰Why Communism Fails

One of my first startups was set up so that all profits were dividends equally to 4 partners.
We had a company with 3 parts:
- A website dev shop

- A software product lab

- A banner ad design shop

After a couple years our web shop made about $100k a year. The software product lab made $0 because we were just ideating. And the banner ads made $500k a year due to a huge contract we had with AOL.

Not all the partners were working equally on all 3 parts and the one working on banners was like “WTF, I’m subsidizing all this stuff that’s not working.” And felt the comp should somehow reflect the revenue.

👊The Final Straw

It came to a head when she won a banner ad design competition that came with a bonus. She felt she should get the bonus and the rest of us felt it should be distributed equally.

Even today, who is right here? I don’t think there’s a clear answer.

In retrospect a temporary solve would have been to at least give her some or all of the bonus as an extra. Or maybe we could have had separate P&L for each department (we didn’t) where some was shared and some was not. It’s hard to say.

But we were “pennywise and pound-foolish” and said no bonus. She said, ok cool, we don’t have a non-compete so I’m going to start my own agency and take the biggest client. Contracts don’t protect you when the spirit of a business agreement breaks down. There’s ALWAYS a loophole.

🥚Eggs & Baskets

Mediation didn’t cut it so it was time for a [Startup Breakup].

In order to preserve our friendships, one of the founders suggested a fair and kind of genius solution.
We would each have 100 eggs to put in the 3 baskets (each of the 3 departments that would become new companies).

We could keep moving the eggs around til everyone was happy.
Then the equity would be divided by the number of eggs.

So let’s say we had founders: Myself, Designer, CEO, CTO
Each put 1 egg in the Web Agency basket. They would each get 25%.
Fun right?

🤝A Happy-Ish Ending

Web Agency:
Me 10 eggs (25%)
Designer 10 eggs (25%)
CEO 10 eggs (25%)
CTO 10 eggs (25%)

Product Lab:
Me 85 eggs (33%)
Designer 0 eggs (0%)
CEO 85 eggs (33%)
CTO 85 eggs (33%)

Design Agency:
Me 5 eggs (4.5%)
Designer 90 eggs (86%)
CEO 5 eggs (4.5%)
CTO 5 eggs (4.5%)

So what happened after? Well first, our CTO left for mental health reasons and decided to forfeit all his equity & friendships which was really the saddest part of the whole thing.

The web agency went on to hire a new CEO & get acquired for around $250k.
The design agency went on to grow into a 100 person agency and become quite successful.
The product lab turned into ShareFile which sold 7 years later to Citrix for a large undisclosed sum.

So in the end the baskets saved all of our equity in a fair way, and more importantly, our friendship.