Jay Parkhill September 10th, 2007
Vosnap is a project/company that emerged from Startup Weekend in Boulder, Colorado last July. A whole bunch of people locked themselves in an office for a weekend with a goal to launch a product by the end of it.
They still haven’t launched, but that doesn’t mean it’s not a great idea. Talented people working together are fun to behold.
One trick, though, is how to properly reward everyone’s efforts. This is really a question with two parts:
1) How to value each person’s contributions relative to the others; and
2) How to issue equity to each person under US securities laws.
The Sand-Dollar-Hour System
I once heard about an alternative economic system developed in west Marin County, Calif. It involved sand dollars as units of currency, and was completely egalitarian in that each person earned a certain number of sand dollars per hour worked, whether as neurosurgeon or streetsweeper. The idea never caught on much, but it stuck with me, and the Vosnap group seems to have done something similar.
As their blog explains, they have 60 contributors, each offering different sets of skills. Rather than try to make judgments of relative importance among them (a sure recipe for collapse of the project) each person got one “share” for each day at the weekend, up to 3.
Simple enough, though it would have been better if they had been sand dollars or cowrie shells. Nobody gets it perfect, I suppose.
I have written previously about crowdsourcing and securities law issues. The bottom line is that securities laws aren’t conducive to doling out shares to lots of people.
However, some clever soul must have considered that if each participant is “active in the business”, then the contributors can jointly form a limited liability company in which no securities “sale” is involved. That is to say, if the equity earned is all of the “sweat” variety, then there is no securities offering, and no securities compliance issues to worry about. Note that this only applies to LLCs, not corporations.
A Little Ugliness at Tax Season, but it Gets the Job Done
So Vosnap itself is a corporation, which works well for venture funding purposes. The LLC owns 1/2 of Vosnap, Inc., and the Startup Weekend participants own their relative shares of the LLC.
Clever. The tax issues are going to be a little messy when income tax season rolls around (there will be two entities to prepare tax returns/statements for, and each LLC owner will get a K-1 partnership statement to include in their personal returns), but it gets a piece of the business to all participants and gives them some incentive to keep plugging away at it. Nice thinking.