Hi there! I’ve been building tech startups for 30+ years. I’m doing a bit of mentoring to early stage startups through my local incubator and local university. I feel I need to give you guys a little advice on what is by far the most common regret I hear from first time founders.
Don’t blindly give away equity to advisors and co-founders you never actually worked with. Create a schedule with blocks (or %) of equity (ideally stock options) to be awarded over time based on crystal clear, measurable milestones for that person to accomplish. If that person does not deliver then you will not have to fight to get underserved equity back. Trust me, I have seen plenty of grown men (and women) in tears because the other cofounders were not giving themselves to the cause like they were. It can be soul crushing.
If your other cofounders don’t think it is fair, you can apply that mechanism to yourself too… You will give yourself to the cause, right?
also… if you have been recruited as a cofounder or a founding employee and have been promised equity, you have that in writing, right? RIGHT?!? Don’t be a fool.
Business broker here.
I occasionally talk to startup founders who made foolish mistakes giving away equity and are now looking to buy it back.
A common grift to watch out for in the startup space are advisors or fractional executives looking to weasel their way into the equity of startups.
The advisor offers to help the naive founders with his wisdom and connections in exchange for a modest salary plus equity. When the startup cannot afford the salary, the advisor settles on the equity.
Turns out, an hour phone call each week, worth at most $100, is a pretty good trade for 5 or 10% of a promising new tech company.
What you are referring to is good management practices, not necessarily an equity allocation model. People often shy away from “managing” employees, cofounders, advisors, etc. because they are working “for free”. But, nobody wants to work for free.
If you were paying people out of your pocket you would be much more likely to monitor their work and you’d be constantly assessing its value. The same should hold true when using equity.
u/submittomemeow2 asks about the value of the feeling you get when someone has your back. That feeling can be really important. And, in his comment he quantified the fair market value of the advice provided at $4,800. In other words the tangible and intangible benefits can be purchased for a known value. This is true for litterally every input a business can consume. Everything…I mean everything…has a knowable fair market value.
If your company is bootstrapped it means that it cannot pay for contributions from people because it does not have enough cash. So, the unpaid amounts are essentially bets on the future success of the company. An advisor who would otherwise charge $4,800 for her advice and agrees not to accept cash payment is betting exactly $4,800 in unpaid compensation.
Everyone’s unpaid compensation and unreimbursed expenses should be treated the same way. The unpaid portion of the fair market value represents what each person bets on the future outcome of the company.
A person’s share of the equity, therefore, should be based on that person’s share of the bets.
This equity allocation model is known as Slicing Pie and it’s used by startups all over the world. It is the only way to calculate exactly what each person deserves in a company.
Knowing that not getting paid isn’t the same as working for free should cast the participation of any one person in a new light. Specifically, that person should be managed as if he or she is getting paid.
Good management means setting a clear vision and clear goals and clear milestones and then holding people accountable. In the case of the advisor, if the $100 phone calls stop being productive the manager can then take steps to separate from the individual and limiting future bets which would count towards equity. (https://slicingpie.com/the-good-way-to-say-good-bye/)
Contrast this with a fixed or static percentage of the company. Say, 1% for the advisor. This means the advisor gets the same amount whether they do one phone call or 48 calls and whether the time is productive or not. This is what it means to “blindy” give away equity.
The Slicing Pie model is the opposite of blind because it realies on easily observable fair market values.
No equity model will replace good management practices.
RSUs with vesting periods And tied to performance PSUs. Too many advisors and consultants with cheap paper hurt the share price when you get to ipo stage.