How much equity should you give?
It’s all about pie
Tell me if you’ve heard this one before?
“I would rather have a smaller piece of a larger pie.” Or, “100% of nothing is nothing.”
Great, but that doesn’t really help when you’re a startup and need money to get you product, service, or clinic off the ground. Sage bromides don’t pay the bills.
The common questions are: How much do we give up and for how much?
The less common question is: Who is about to live on our cap table?
Let’s talk about it.
Who?
In the early days, while you may have a great product, you may not have the desire, rolodex, or skillset to sell. So, you think, how about we hire a VP of sales.
Great, do you have $200K base, plus commission, plus benefits?
If you do, awesome.
If not, then you might think, ooh, let’s give them equity.
The main thing to remember is: It can be less about the equity and more about the person you are giving it to.
Try to imagine well down the road, not about if you are comfortable owning 2% or 5% less, but if you want that person being an owner along side you.
How?
Outside of going on a three week vacation in a remote area to really get to know someone, what can you do to protect yourself from giving equity to someone who turns out to be less than awesome?
1/ Get an attorney to write a contract that protects your long term interests.
2/ Vesting schedule.
Since you don’t come here for legal advice this education only zone, let’s talk vesting schedule for two seconds.
This is just a cool guy way to say the person gets chunks of their equity award over time, usually at the end of year 1, year 2, year 3, and year 4.
So, if 9 months down the road you’re like, yikes, then you have a way out.
It also aligns the person to long-term success.
Why?
Other than not having any money and not wanting a second mortgage, equity can help align interests. When the company does well, the people with equity do well.
It’s why you often see employee equity pools in startups. Founders will reserve something like 10% of equity as an employee pool for those early hires.
Wrapping up
Equity is a powerful tool. But use it wisely. An important aspect of the cap table is “who” is on that cap table. Investors are one thing, but early key hires can be a totally different animal.
Take the emotion out and protect your downside.
See you out there!
Disclaimer: The content provided is intended for educational purposes only and does not constitute financial or legal advice. This content is not intended to create, and receipt of the launch guide does not constitute, an attorney-client relationship. While efforts have been made to ensure the accuracy of the information presented, it may not necessarily reflect the most current legal developments or regulations and does not provide a complete representation of all associated legal and compliance considerations for any given topic. Therefore, readers are encouraged to seek professional legal advice or consult with appropriate professionals regarding specific legal issues or concerns related to their individual circumstances.