Windward V1.5 from Howell Legal
A monthly newsletter from the team at Howell Legal for founders and leaders of ventures on the rise
📣 Rallying Cry: Innovating with Atoms
The tech boom cycle that spanned roughly 2010-2022 was undoubtedly driven by software. The common critique was that we were innovating in the world of “bits,” but not in the world of “atoms”—that is, in the physical world. The trend’s been cited as part of a longer Great Stagnation, in which American technological innovation has been on a plateau since the 1970s.
I won’t declare the Great Stagnation over, but 2023 has already delivered some thrilling developments in the world of atoms:
Nuclear fusion research achieved a critical milestone
A breakthrough cancer-fight drug began Phase I trials
To be sure, these are all preliminary developments that haven’t quite reached fruition. I prefer to think of them like little appetizers preceding a feast of progress in the physical world.
The Great Stagnation may not be over, but it’s showing its vulnerability. Let’s go!
-Ryan
1. 🤓 Frequently Given Advice
Obligatory Disclaimer: Even if we are your lawyers, the following does not constitute legal advice and is for informational purposes only.
Dividing the Pie 🔪🥧
One of the first issues that we work through with many founders is how to divide equity among members of the founding team. There are basically two schools of thought:
Total equality
Tailored division
Let’s discuss both approaches and their pros and cons in turn.
Total Equality
The idea here is that you’ll give each founder a share of the company’s equity equal to 100%, divided by the number of founders. Two Founders = 50%/50%. Three Founders = 33.33%/33.33%/33.33%. Easy.
Pros:
Simplicity: You do some quick math, and you’re done.
Conflict-avoidance: You avoid hard conversations.
Objectivity: There’s nothing subjective to consider.
Short-term fairness: Everyone’s getting the same thing up front.
Cons:
Under-rewarding some: Inevitably, one or more founders have an outsized impact on the company; equal splits can misalign their incentives and cause resentment.
Over-rewarding others: On the other hand, one or more founders usually contributes much less to the team than expected; rewarding them with too much equity can also cause infighting.
Deadlocks: Equal splits, especially when there are an even number of founders can cause deadlocked decision making and prevent the company from moving forward on important steps like setting financing terms or terminating a co-founder.
Tailored Division
With this approach, the founders agree to a customized split, where the slices of the pie aren’t equal.
Pros:
Motivating leaders: Founders with a larger share of the pie have an incentive to commit to the venture.
Forcing hard conversations: Agreeing to a custom equity split forces founders to have a difficult conversation about what they’re bringing to the team, their commitment, and their roles.
Cons:
Complexity: If you’re going to go through the exercise of splitting equity unevenly, you’ve got to do it carefully and avoid arbitrary decisions. This takes time and energy away from building.
Early controversy: The difficult conversation about how equity should be split can trigger resentment from founders getting a lower initial share.
Misalignment: After going through the hard word of agreeing to split equity, the split won’t always accurately reflect the value that the founders wind up adding.
Our Suggestion
There’s no one-size-fits all right answer here. We’ve seen plenty of successful startups follow both approaches, and we’ve seen both approaches cause serious problems. We think that the balance tips slightly in favor of Tailored Division. The difficult conversation that it forces is usually healthy to have up front. If a founding team can’t make it through that conversation stronger, they’re probably not fit to face the plethora of challenges that lie ahead. On the other hand, plenty of folks, including our friends at Y Combinator, take the opposite perspective.
In the end, we suggest that you carefully consider the pros and cons of each approach and pick the one that feels best for your team. If you decide to work through a Tailored Division, set aside time over a week or more to consider it and talk it through, potentially with outside advisors. Make sure that you don’t give too much weight to past contributions, because almost all of the value creation lies ahead.
2. 📅 Reminders and Deadlines
Tax Extension Deadline: ⏰ Wake up from your Summer tax hibernation! If you got an extension to file your business taxes in Rhode Island or federal partnership or S-corp returns, they’re due on September 15th.
3. 📰 Team News
We spent the last few months overhauling our new client onboarding process, and we’re thrilled to be rolling out our changes in August. Highlights from the overhaul include:
An updated, user-friendly engagement letter
Back-end automations to shepherd attorneys through the process
Streamlined client questionnaires to collect helpful information
A Howell Legal User Guide to help clients optimize their experience
In designing our updated process, we balanced several goals:
Creating a delightful, low-friction, human experience for clients
Preserving attorney time and energy
Developing insight on business development trends
Collecting information from clients to be used during the engagement
Empowering clients to get the most value from our services
In typical Howell Legal fashion, our onboarding process folds in a number of tools, carefully patched together, including:
Asana, for process and task management
Airtable, for data collection and organization
Fillout, for client-facing questionnaires
Zapier, for automation across apps
Guru, for knowledge management
And, of course, Gmail, for email templates and client communication
Building new things while running a cash-flow positive service business IS HARD. There’s always the pull to allocate resources to collecting golden eggs (i.e. servicing customers), rather than investing in your golden goose. This initiative has been on our list for at least a year, and it took a month longer to wrap up than planned. Still, we’re excited to cross the finish line, see how it impacts our business, and move on to the next mission.
4. ⚓RI Happenings
This month we wanted to showcase the Rhode Island Innovation Ecosystem, which our friend at RIHub launched this month. It’s the “one place to find all resources in Rhode Island to help you to build your innovation driven Startup Business,” including a well-curated list of local events, which you should definitely check out.
If you’re free, Tuesday, August 29th, head to Innovate Newport 🗺️ for the next Open Coffee from 8:30a-10:00a. It’s our favorite, low-key setting to connect with builders and the people who support them.