You need to think of EVERYONE at this stage as co-founders and owners OR merely consultants (formally contracted with VERY clear terms, requirements, deliverables, and ownership).
Trust me. You do not want to be in a situation where you are committing anything to anyone hired, an agency, or freelance professional – such people either need to be committed to YOU or they can go pound sand for now because you are starting up and likely to pivot and fail – if they aren’t on board for that, they are NOT helpful.
Ideally, people on your team are ready to get married. In sickness and in health, till death do you part… that’s what it really takes to make something work and so with these two considerations in mind (co-founders or consultants GIVING you help and focused on your success), how might you think of building a team? Either…
- Getting married and starting a family
- Or all the wedding guests who are bringing gifts and wishing for your success and happiness.
Anyone crashing the wedding reception just to get dinner and free booze, needs to be kicked out.
Sounds harsh? You’re just trying to make it work and whom ever shows up to help is worthwhile? No, they’re not. They’re distractions, legal headaches, and lost time/focus when THEY shift gears or priorities on you.
“But I can’t give equity to …. !”
That’s the reaction I get when pointing out the need for equity. No, not those: consultants, admin, short order cooks, interns… the list goes on. Your TEAM.
Invariably, if you believe that someone on your team doesn’t deserve a piece of the success, they aren’t a part of your team. Everyone, in a startup, should be motivated with shares.
I got a job in college and was given 250 shares. What does a college kid know about shares and their value? What did I know of how much (how little) ownership that meant I had in the business? Nothing.
The owner sat down with me my first day and did the math on the shares… Here’s what they are worth today (but you can’t cash them in), look what happens when the company doubles in value, now here are our plans and why we need you. I was blown away. I was part of the team and not just a hire, I was an owner. Are your hourly staff not just as much a part of your brand and its success? You want exceptional quality, smiles, and passion do you not? You want motivated employees and trust me, paying $12 per hour doesn’t motivate many, no matter much you pat them on the back. Motivation is no different because they are hourly than CXO so why, AFTER you’ve determined that your company culture is indeed fun, rewarding, challenging, and exciting, why aren’t you enabling your team to truly be a part of the team?
If you are to actually have what you might consider a successful venture, a business, it starts there – in determining that you actually have a business. Let me throw for you a loop though… don’t yet worry about an LLC, accounting, patents, a website, nor coding if you’re diving into an web based venture – you don’t yet have anything! Let’s start at the very beginning: Do you know the market intimately?
Competitors, history, potential partners, costs, revenue models, what potential customers think they want – and what they might actually want? It doesn’t matter that you think you know, do you?
That’s your job. That’s the half of a business that creates the value. So let’s start, right now, with 4 simple things:
ONE: Get a notebook. Head to your favorite coffee shop and start ONE of 500, sit down, face-to-face, one-on-one interviews to figure out what not to do and to build a foundation of people to whom to turn with the initial solution. Yes, FIVE HUNDRED. Start spending your days caffeinated – you’re going to need it anyway.
TWO: Start marketing, constantly. Not promotion! We don’t have anything to promote yet. Start Marketing – The work of knowing and developing the market.
This is not the same as step #1, talking to potential customers, nor is it promotion. This is market research, competitive analysis, studying from where you might get funding, learning how such things exit, investigating what works and what doesn’t, etc. We do this to such a great degree as this is how we figure out what to do
insider secret: because customers are usually wrong – you do the interviews to figure out what NOT to do and you do marketing to figure out what TO do
THREE: Establish some market share by building out some industry assets: a Facebook group, a twitter, a mailing list, a newsletter… build some assets that are NOT consistent with your company name. We’re not yet building a brand as we don’t have that yet either– build some potential market share through industry related assets from where you’ll find an audience, fans, and early customers.
FOUR: Build a team. No startup in the history of startups is the success of one person. No investor in the history of investors funds one person.
Figure out your gaps and fill them with experience in a team that can succeed. Build a relevant, committed, capable team and you can accomplish anything: startups really only fail when the team quits.
And thus the next key question: How to Determine the Equity to Give Your Startup Team
We’re a family, yes? We all own in the wins and the losses.
Venture capital investors tend to hate when I suggest this but what you want to is think of those team members as investors.
Not literally, obviously, but the fact is that you are all investing your time, experience, network, and other opportunities, into one another. For that you, you deserve an ROI (return on that investment).
How do you perceive their contribution? Consider the fact that nothing makes a formal investor any more an investor by definition than the mere fact that they gave you money in exchange for equity. Money, they earned, through employment (unless they have family wealth or won a lottery). What makes your initial team any different? Rather than investing their money directly, they are doing it indirectly, with their time and experience; often in the sense that you are underpaying what they are really worth as professionals for the simple reason that they want to invest in and contribute to the success of this venture.
What do they get for that investment?
Do you value that investment of their time? Perhaps even if you don’t value it, are you paying them less than market for their work? These are important questions that drive at your personality, your psychology, and the culture and organization that you’re building. Think of it simply this way before we really explore how you determine the equity to grant:
- Employees are paid a market rate for their work. You have no investment in them, as such, and you are both financially free and clear to part ways at any time. You’ve paid them a fair wage, their value. You have no other obligation to them but be clear about the implications of that: they have no other obligation to you.
- Investors give you something of value that you need in exchange for ownership in the business relative to the value of the business, their contribution, and the risk involved. Are people working with you not investing something? You are investing in them by way of their gaining ownership and they in turn are more committed, passionate, and involved in the success of the business because they own a piece of it through blood, sweat, and tears.
The critical importance of this question of equity is evident in those two distinctions: what commitment are you making to your team and how passionate and committed do you want them to be in what you’re doing?
Determining the Equity to Give Your Startup Team
Start by appreciating that the equity due someone has less (but not nothing) to do with their job and more to do with your stage, their role, their value, and the potential valuation of the company with which they can consider equity vs. compensation.
If you are seed stage or even earlier, the person gets more than were the case at a later stage. They are taking more risk and have a greater impact at this stage and thus, deserve more.
Disagree? I think you treat your team like employees and that has implications to their passion, commitment, and contribution. So, instead, are you paying them well enough? No? You’re just starting? Then….?? You’re VERY likely to fail and the team contributing to your success is making a greater investment in that success than would be the case when you are more established. You are likely to completely fail under which circumstances, you all lose everything. You walk away with nothing. That’s a risky proposition for anyone contributing to your success and that risk warrants more investment in THEM to ensure they benefit in some way should you see any degree of success. If you aren’t paying them a market rate, they deserve more because they are investing their opportunity cost in you.
Are they considered a founder? C-level? Part time? Consulting or freelance? More to less, relative to my list. It has nothing to do with the job. The developer or marketing person doesn’t get more or less because of what they do, it’s the level of their involvement, their role, that matters.
If you’re outsourcing consider that the right answer is that they get no equity unless you aren’t paying them at all. Individuals who are building a company of their own are making their own investment, in their company. It’s a subtle distinction from consultants and freelancers who are investing in you but will forever remain free from you; individuals can be committed to you (and you to them), they get paid and earn ownership (though to a lesser degree, obviously, than full time employees) – outsourced companies are only committed to their business and you don’t want to mis-perceive ‘partnership,’ or non-compete as suggesting that they indeed care about your success as they are building their own company and will focus on the success of that first.
Their value is as a person with an industry standard compensation. That’s what they are worth. I appreciate that you think they are worth what you think your app is worth or what you are willing to pay to get something done but you can’t think that way when dealing with equity. A job that earns $300k is a person valued at $300k a year.
So, how do you deal with equity if you are only paying them $250k? What if you’re only paying them $100k? Now contrast that against the person who earns, given what they do and their experience, only $150k per year. They are intrinsically worth half as much so under paying them, paying our second hire only $100k when they are worth $150k is proportionally distinct from paying our $300k person only $200k. In both cases, we’re paying 60% of what they are worth but the higher paid individual, the person worth more is sacrificing much more of that value to invest in you.
The POTENTIAL Value of the Company
Having establish who is working with you and their value relative to your stage, the next decision is contingent upon what your company COULD be worth.
That’s a critical path to dealing with equity effectively. It is NOT based on what your company is worth. It’s not based on a perception of future valuation, alone. It is contingent upon being able to liquidate that value and if in the future you can’t exit in some way that they can get cash money for their ownership, their ownership isn’t worth much is it?
Is the company’s equity likely to be worth anything, when, and how much? This requires an exit (or IPO).
If your company won’t likely get acquired, can’t IPO, or you simply never want out, then equity doesn’t really have financial value, it has value in ownership. Be clear, might your company get acquired at any point in the future? Then it has financial value and you can you determine the value of the equity you are granting someone relative to that future value. The distinction is simply that instead of having equity worth something, they are effectively a partner. Begging the questions, do they get a say relative to their ownership?! If the answer is that it’s not likely worth anything and they aren’t considered an owner with an opinion, why would they want equity??
Balance all of those questions
Notice we haven’t even talked about what you are willing to pay them, what you can afford, nor vesting and the risk of committing to someone. Before you can even start the conversation about how much to actually give them, you have to agree on your stage, their role, their value, and the potential valuation of the company in the future when it can be liquidated.
Now consider how much they should be paid for their job (cash money) and balance/negotiate with the equity. More equity if you’re underpaying, less equity if paying well.
Whew. That’s a lot.
Here’s the thing… total $ spent to create all that?
That’s how you start a startup
That’s how you build a team
You get married. You make that commitment to one another, no matter what, share what you create, and you invest in your future. Any anyone else showing up at the wedding party just looking for a good time at your expense? You ask them to come back later.