My startup needed to raise $500K to expand our marketing efforts and get the word out. Raising the money was quite easy: I issued some new shares and listed them on StartupIPOs.com. It’s a marketplace for accredited investors. Startups that need funding list their offerings, and people buy their shares. The price is set by the market, which is fine with me.

It works because they force you to use YCombinator’s standard terms, just as if this was Ron Conway investing. So the investors know they are dealing with professional startups and receive all their usual protections: a board seat, preferred shares and so on. But since everything is codified and standardized, we avoid the exhorbitant legal fees (often north of $25K), which really hurt when raising small chunks of money.

Being able to use this service allowed us to continuously raise money. In effect, it’s as if we could IPO for free every time we needed more cash for operations. The need to go through VCs as gatekeeper pretty much disappeared.

It’s pretty cool!

And it’s also a fantasy. Such a site doesn’t exist yet. Partly because it would be illegal in the US of course (you can’t offer equity for sale to the public, and reporting requirements when you have a large number of shareholders are prohibitive). Partly because building a healthy market, where both sellers (the startups) and buyers (the angels) behave properly, free of scams, is not so easy.

Do you know a way to make StartupIPOs.com? If so, please do it, for all startups’ sakes!

I love advising early-stage startups. A question I get frequently is “how to formalize bringing a co-founder on board.” I could write a book on the topic, but it’s really much simpler than that.

Here’s how you do it in one tweet:

@joe I expect this co-founder position to be worth ~30% equity. My goal is to incorporate in about a month, let’s see how it goes by then.

Really, that’s all there is to it. Now if you are curious to know why this is the right way to do it, read on.

You must commit to a number upfront

You need to make the potential co-founder a promise. Something tangible that clearly spells out how much of the company they’ll be getting. You can’t avoid a discussion with a specific number. Am I getting 30% or 5%? That makes a huge difference. By putting it in “writing” (a tweet), you are giving enough rope for the co-founder to sue you if you completely abuse the situation.

You’d be amazed by how many startups I coach that tell me they haven’t discussed equity split yet, although they have been coding along for 6 months or more… The longer you wait to have that discussion, the worse it gets. Be upfront.

You need a way out

Frankly, you should not sign a definitive co-founder agreement with someone you haven’t work with yet. In my experience (confirmed by talking to many entrepreneurs facing the same situation), it takes about a month to know whether it’s going to work out or not. So work together informally for a month, and decide then. Follow your instincts. If after one month, the only contribution of the co-founder are excuses and delay, just stop, don’t try to save the situation and hope that it will get better. It doesn’t.

You need to be fair

While you committed in writing to an equity split, a tweet is clearly not as strong as a legal contract, so in case where the relationship doesn’t work out, there is no additional paperwork needed.

But if you ripped-off the co-founder, the tweet gives them a (small) basis for a lawsuit. So it forces you to do the right thing. It’s a good trade-off, fair for both sides, without getting all lawyerly.

After the one month, if everyone is happy and super-excited about the startup, incorporate. That will make the tweet official. That’s it!

PS: did I mention that if you construe this post as legal advice, you deserve the mess you’ll get into? Of course you should talk to a real lawyer. Just do your own research as well.

I’ll happily take comments from lawyers and others about whether this approach is sound or not.

By popular demand, we are happy to announce that your FairSoftware virtual startup can now share revenue from subscription services.

When you create a product, you can now choose between the usual PayPal “Buy Now” button, or the “Subscribe” button. You can specify the length of the subscription in days, weeks, months or even years.

The screenshot below shows an example of a subscription that will bill users $3.99 every month.

As usual, we use PayPal as the payment processor. Your customer will be billed regularly for their subscription and the money will be shared automatically among the shareholders of your virtual startup.

This feature is in beta. If you encounter any issues with it, let us know.

Today we are excited to announce an enhancement to the way you create projects with FairSoftware.

Many of you asked us for a more flexible way to add co-founders early on and offer more flexibility on the allocation of shares, since you haven’t always found all your co-founders by the time you have your initial idea.

Therefore, creating a Fair Project is now split in two parts. First, you setup your project, with a very simple one-page form. At that stage, all you really need is a name and some idea of what you want to build.

You can leave your project in that stage for as long as you want. You an start adding co-founders from friends you know, advertise your project to the rest of our community, and also crowdsource your idea by gathering feedback.

During that setup phase, you can freely add or remove co-founders and modify the share allocation as many times as you want until you are happy with the results.

Invite Co-Founder

Edit Shares Split

Once you have settled on a founding team, you activate the project. That’s when each co-founder has to agree to the deal by approving the Software Bill of Rights. From then on, co-founders can start contributing, write code, and so on. Everyone is protected legally. As before, you can grow your project and bring more contributors on board.

We hope this improvement will make it even easier than before to start working on apps, even if you haven’t found a team yet.

As always, feel free to send us feedback and requests for more improvements.

TechCrunch’s coverage of our new Fair Blogs has generated quite a bit of discussion on the best way to compensate a bloggers network.

My Page, My Ads

A popular view is that each blogger should be paid for the pages they write. Essentially, if you wrote the entry, the ads on that page are yours. It makes sense and is easy to understand. If you write great content, you are immediately rewarded.

This approach has a drawback: there is no feeling of being on the same team. You are not building a destination site together. You could almost wonder why bloggers would team up this way, since for all practical purposes, it looks like a collection of separate blogs.

Who Pays The Editors?

Taking your blog to the next level requires more than individual bloggers. Look at TechCrunch’s staff. Not everyone is a writer, but I’m sure that each is needed for a reason.

For instance, the role of a good editor is critical: shortening blog posts, forcing authors to go to the point quickly, removing spelling and grammatical mistakes, etc. Such functions are performed for all blog entries and increase the value of the site as a whole.

Hybrid Approach

Some revenue sharing of the entire site’s content thus becomes necessary. You know that at FairSoftware we are biased toward equity-based revenue sharing. If you think of your blog as a company, then it makes sense that you pay the writers from the pool of money that is coming in.

It’s smart, so of course you will pay the best writers more. But you recognize that there is some human side to the decision of who gets what. Done well, it can be extremely motivating and fair. Left to machines and pageview counters, you run the risk of people gaming the system.

Do you think a hybrid approach would be in order, a compromise between getting paid for your pages but also receiving some share of what others on the same site are generating?