It’s a common scenario in the startup world…
You and your team are just getting the ball rolling on a new business idea. Everyone is excited about it. Everyone wants ownership.
Not everyone can be a co-founder – or at least not everyone should be a co-founder. But Joel Abraham of the Milwaukee-based startup accelerator program, Gener8tor, says all too often there ends up being too many people with that title.
Joel calls it “Startup Weekend syndrome.”
“When Startup Weekend started, everyone wanted to be a co-founder. And during that process, some companies had seven co-founders. Those ultimately failed because you can’t have seven CEOs,” he explains.
So if you can’t give out co-founder titles to everyone on your team, what can you do to reward them for being there from the beginning and keep them motivated?
Joel Abraham says the answer is equity.
Joel plans to deliver a presentation to the Digital Fertilizer community on Monday, May 12th that will focus on the State of Startups in Wisconsin.
As part of Gener8tor, Joel has had the chance to observe a variety of different startups and entrepreneurs. He’s watched the startup community in the state evolve over the past couple years, and as some of those businesses move forward, he’s noticed a potential problem. He says it happens because sometimes working relationships don’t work out.
“There’s a lot of horror stories out there about divorces – divorces between founders, divorces with first-hires. And there’s a natural state right now where startup founders are cringing – holding on to all their equity, and not wanting to share equity and having some resentment to giving equity out.”
Joel says that’s somewhat understandable. Entrepreneurs are worried that a co-founder won’t work out or an early hire will perform poorly – and then the situation gets ugly. Now someone you no longer want to work with has a piece of the pie.
But on the flip-side, offering equity can be a powerful tool when you are trying to build the right team. Joel believes it can help you find the best people while inspiring them to do their best work.
“It’s not only a motivator but it’s a way to attract and incentivize top talent. You want talent that’s just as excited about your business as you are. You want to have that carrot so they’re consistently performing and shooting for the end result. And that’s a successful business.”
The Smart Way to Give Out Equity to Employees
Joel says the right time to start making a plan for granting equity would be when you are choosing your business structure or taking steps to incorporate.
“There’s always one or two founders that are giving it their all,” he says. “The risk-takers up front are going to have to negotiate for themselves.”
After that, Joel thinks it’s wise to start laying out a strategy for how equity will be divvied up to additional employees and future hires.
Normally – when equity is given out – it comes out of the owners’ percentage. But Joel is seeing more companies carving out stock option pools for employees early on. In this situation, a percentage of equity is set aside for early hires as well as people who come on board further down the road.
“That way it kind of makes it less emotional and more facts based than having the founders give out of their pool,” Joel says.
You’ll want to consider a plan for vesting as well as setting up cliffs for different employes – depending on what they do, when they are hired and how much personal risk they are taking.
Vesting simply means that a co-founder or employee is awarded equity over a period of time. So you might offer someone 12% equity – starting with 3% in their first year with your company, up to 6% in the second year, and so on until the employee is fully vested after four years.
If that employee parted ways with your company after three years, they’d have earned 9% equity.
Setting a cliff for when a new hire can begin earning equity allows founders to find out if that hire is actually going to live up to expectations before handing over a percentage of the company. It is sort of like a trial period.
So perhaps that employee to whom you offered 12% equity won’t receive anything until after they’ve been with your company for at least two years. That person would receive no equity if they left (or you got rid of them) before the “cliff period” was over.
Joel Abraham has seen cliffs work well for a lot of startups. In fact, he says even founders should have cliff periods – because everyone needs to be held responsible.
“When there’s a cliff, then equity is obviously important, and it’s a goal to be strived for and the performance of that startup also grows. Everyone is trying to achieve the same objectives and help the company grow, because if they do that then they earn all of their equity.”
Startup Talent – Supply and Demand
It’s not easy to find good employees – even harder to find good employees who also have the same passion for a project as you do.
Joel thinks that is one of the biggest reasons for being less stingy with equity.
“There’s always a shortage of excellence for talent. I don’t care what kind of market that you’re in,” he says. “Companies need to start taking a look at what their strengths and weaknesses are from a founder’s perspective. Find excellent talent to be able to pull into their companies, and find those people who share the same passion about their ideas.”
Joel reminds us that some companies out there may want to buy your team as much or even more than your actual company. Having an outstanding group of employees could be the aspect that makes or breaks a deal. For that reason, Joel thinks offering equity, at the right time and to the right people, can help you bring those all-stars onto your team.
“If they’re going to take the risk, they want to be rewarded,” he adds.
You can hear more of Joel Abraham’s thoughts on equity, the current state of startups in Wisconsin, and learn about opportunities with Gener8tor at The Green Room Lounge in De Pere on Monday, May 12th.
Plus, you’ll also hear from Brian Davis of Fixit Sticks. He’ll talk about how to launch and market a successful Kickstarter campaign.
Additional Articles and Resources on Equity
- Equity basics: vesting, cliffs, acceleration, and exits – from Startuptoolkit.com
- Figuring Out How to Divvy Up Startup Equity – from Entrepreneur.com
- Understanding Employee Equity: Every Startup’s Secret Weapon – from Forbes.com
- Sharing Equity in a Startup – from The National Center for Employee Ownership