Impact Shares For Speculative Projects

By Elizabeth @ 2022-09-06T21:20 (+20)

This is a linkpost to https://acesounderglass.com/2022/08/31/impact-shares-for-speculative-projects/

Note: this post was cross-posted from Elizabeth's blog, Aceso Under Glass, with the author's permission. The author may not see or respond to comments on this post. You can see the original post here. 

Introduction

Recently I founded a new project with Jasen Murray, a close friend of several years. At founding the project was extremely amorphous (“preparadigmatic science: how does it work?”) and was going to exit that state slowly, if it at all. This made it a bad fit for traditional “apply for a grant, receive money, do work” style funding. The obvious answer is impact certificates, but the current state of the art there wasn’t an easy fit either. In addition to the object-level project, I’m interested in advancing the social tech of funding. With that in mind, Jasen and I negotiated a new system for allocating credit and funding.

This system is extremely experimental, so we have chosen not to make it binding. If we decide to do something different in a few months or a few years, we do not consider ourselves to have broken any promises. 

In the interest of advancing the overall tech, I wanted to share the considerations we have thought of and tentative conclusions. 

Considerations

All of the following made traditional grant-based funding a bad fit:

• Our project is currently very speculative and its outcomes are poorly defined. I expect it to be still speculative but at least a little more defined in a few months.
• I have something that could be called integrity and could be called scrupulosity issues, which makes me feel strongly bound to follow plans I have written down and people have paid me for, to the point it can corrupt my epistemics. This makes accepting money while the project is so amorphous potentially quite harmful, even if the funders are on board with lots of uncertainty.
• When we started, I didn’t think I could put more than a few hours in per week, even if I had the time free, so I’m working more or less my regular freelancing hours and am not cash-constrained.
• The combination of my not being locally cash-constrained, money not speeding me up, and the high risk of corrupting my epistemics, makes me not want to accept money at this stage. But I would still like to get paid for the work eventually.
• Jasen is more cash-constrained and is giving up hours at his regular work in order to further the project, so it would be very beneficial for him to get paid.
• Jasen is much more resistant to epistemic pressure than I am, although still averse to making commitments about outcomes at this stage.

Why Not Impact Certificates?

Impact certificates have been discussed within Effective Altruism for several years, first by Paul Christiano and Katja Grace, who pitched it as “accepting money to metaphorically erase your impact”. Ben Hoffman had a really valuable addition with framing impact certificates as selling funder credits, rather than all of the credit. There is currently a project attempting to get impact certificates off the ground, but it’s aimed at people outside funding trust networks doing very defined work, which is basically the opposite of my problem. 

What my co-founder and I needed is something more like startup equity, where you are given a percentage credit for the project, and that percentage can be sold later, and the price is expected to change as the project bears fruit or fails to do so. If six months from now someone thinks my work is super valuable they are welcome to pay us, but we have not obligated ourselves to a particular person to produce a particular result.

Completely separate from this, I have always found the startup practice of denominating stock grants in “% of company”, distributing all the equity at the beginning but having it vest over time, and being able to dilute it at any time, kind of bullshit. What I consider more honest is distributing shares as you go and everyone recognizes that they don’t know what the total number of shares will be. This still provides a clean metric for comparing yourself to others and arguing about relative contributions, without any of the shadiness around percentages. This is mathematically identical to the standard system but I find the legibility preferable. 

The System

In Short

• Every week Jasen and I accrue n impact shares in the project (“impact shares” is better than the first name we came up with, but probably a better name is out there). n is currently 50 because 100 is a very round number. 1000 felt too big and 10 made anything we gave too anyone else feel too small. This is entirely a sop to human psychology; mathematically it makes no difference.
• Our advisor/first customer accrues a much smaller number, less than 1 per week, although we are still figuring out the exact number.
• Future funders will also receive impact shares, although this is an even more theoretical exercise than the rest of it because we don’t expect them to care about our system or negotiate on it. Funding going to just one of us comes out of that person’s share, funding going to both of us or the project at large, probably gets issued new shares.
• Future employees can negotiate payment in money and impact shares as they choose.
• In the unlikely event we take on a co-founder level collaborator in the future, probably they will accrue impact shares at the same rate we do but will not get retroactive shares.

Details

Founder Shares

One issue we had to deal with was that Jasen would benefit from a salary right away, while I found a salary actively harmful, but wouldn’t mind having funding for expenses (this is not logical but it wasn’t worth the effort to fight it). We have decided that funding that is paying a salary is paid for with impact shares of the person receiving the salary, but funding for project expenses will be paid for either evenly out of both of our shared pools, or with new impact shares. 

We are allowed to have our impact shares go negative, so we can log salary payments in a lump sum, rather than having to deal with it each week.

Initially, we weren’t sure how we should split impact shares between the two of us. Eventually, we decided to fall back on the YCombinator advice that uneven splits between cofounders is always more trouble than it’s worth. But before then we did some thought experiments about what the project would look like with only one of us. I had initially wanted to give him more shares because he was putting in more time than me, but the thought experiments convinced us both that I was more counterfactually crucial and we agreed on 60/40 in my favor before reverting to a YC even split at my suggestion. 

My additional value came primarily from being more practical/applied. Applied work without theory is more useful than theory without application, so that’s one point for me. Additionally all the value comes from convincing people to use our suggestions, and I’m the one with the reputation and connections to do that. That’s in part because I’m more applied, but also because I’ve spent a long time working in public and Jasen had to be coaxed to allow his name on this document at all. I also know and am trusted by more funders, but I feel gross including that in the equation, especially when working with a close friend. 

We both felt like that exercise was very useful and grounding in assessing the project, even if we ultimately didn’t use its results. Jasen and I are very close friends and the relationship could handle the measuring of credit like that. I imagine many can’t, although it seems like a bad sign for a partnership overall. Or maybe we’re both too willing to give credit to other people and that’s easier to solve than wanting too much for ourselves. I think what I recommend is to do the exercise and unless you discover something really weird still split credit evenly, but that feels like a concession to practicality humanity will hopefully overcome. 

We initially discussed being able to give each other impact shares for particular pieces of work (one blog post, one insight, one meeting, etc). Eventually, we decided this was a terrible idea. It’s really easy to picture how we might have the same assessment of the other’s overall or average contribution but still vary widely in how we assess an individual contribution. For me, Jasen thinking one thing was 50% more valuable than I thought it was, did not feel good enough to make up for how bad it would be for him to think another contribution was half as valuable as I thought it was. For Jasen it was even worse because having his work overestimated felt almost as bad as having it underestimated. Plus it’s just a lot of friction and assessment of idea seeds when the whole point of this funding system is getting to wait to see how things turn out. So we agreed we would do occasional reassessments with months in between them, and of course we’re giving each other feedback constantly, but to not do quantified assessments at smaller intervals.

Neither of us wanted to track the hours we were putting into the project, that just seemed very annoying. 

So ultimately we decided to give ourselves the same number of impact shares each week, with the ability to retroactively gift shares or negotiate for a change in distribution going forward, but those should be spaced out by months at a minimum. 

Funding Shares

When we receive funding we credit the funder with impact shares. This will work roughly like startup equity: you assess how valuable the project is now, divide that by the number of outstanding shares, and that gets you a price per share. So if the project is currently $10,000 and we have 100 shares outstanding, the collaborator would have to give up 1 share to get $100.

Of course, startup equity works because the investors are making informed estimates of the value of the startup. We don’t expect initial funders to be very interested in that process with us, so probably we’ll be assessing ourselves on the honor system, maybe polling some other people. This is a pretty big flaw in the plan, but I think overall still a step forward in developing the coordination tech. 

In addition to the lack of outside evaluation, the equity system misses the concept of funder’s credit from Ben Hoffman’s blog post which I think is otherwise very valuable.  Ultimately we decided that impact shares are no worse than the current startup equity model, and that works pretty well. “No worse than startup equity” was a theme in much of our decision-making around this system. 

Advisor Shares

We are still figuring out how many impact shares to give our advisor/first customer. YC has standard advice for this (0.25%-1%), but YC’s advice assumes you will be diluting shares later, so the number is not directly applicable. Advisor mostly doesn’t care right now, because he doesn’t feel that this is taking much effort from him. 

It was very important to Jasen to give credit to people who got him to the starting line of this project, even if they were not directly involved in it. Recognizing them by giving them some of his impact shares felt really good to him, way more tangible than thanking mom after spiking a touchdown.

Closing

This is extremely experimental. I expect both the conventions around this to improve over time and for me and Jasen to improve our personal model as we work.  Some of that improvement will come from saying our current ideas and hearing the response, and I didn’t want to wait on starting that conversation, so here we are. 

Thanks to several people, especially Austin Chen and Raymond Arnold, for discussion on this topic.