You had a neat idea. You’ve built on it, and now started to turn it into a commercial reality. It doesn’t matter if you’ve the best product or service in the universe, if it’s not developed, marketed, sold, and delivered in the best possible way you’re falling short of your potential, and will flounder. You can’t do it all on your own of course, so now the success for your venture hinges almost entirely on the team you build. It should be noted this is not a discussion on co-founders, just employees to be brought in after you have an ongoing concern that’s largely bootstrapped. For any employee, there are huge potential down-sides to working in a start-up. Transitioning from a larger company, there’s a dramatic shift. From lack of well-defined roles and functions and having to wear many hats, palpably volatile job security, and loss of (substantial) benefits including a considerable pay drop, it’s hard to see on the surface why anyone would jump into the start-up world. Despite how excited you are about the future, that doesn’t mean anyone else should instantly be. So, what does attract the right types to a start-up? The answer, of course, is opportunity…
Growing organically, you will likely be slower by necessity when hiring. This pace when bootstrapping means you can be more deliberate and selective, but you don’t have the reach or resources to engage with the top talent in the market without a great deal of blind luck – not a recommended strategy. So, you end up posting ads and reaching out to people you know to come on board. The best people, however you come across them, demand higher salaries which you can’t possibly hope to meet. That’s when equity can become an important point of discussion.
The benefits of using equity as part of the compensation on offer are two-fold; 1. It allows you to secure killer talent that you wouldn’t be able to afford on standard remuneration alone, 2. When equity-holding employees come on board they will be much more likely to be invested in the success of your company as they have skin in the game, and tend to out-perform people on a standard salary package. So, if you are willing to throw equity on the table as part of negotiations, the question becomes to whom and how much. Early on with tight budgets, cornerstone employees that need a push over the edge to come on board are obvious candidates and certainly where you should be allotting some of your equity pool.
While there isn’t a standard formula for determining the ‘right’ amount, you need a repeatable way to demonstrate consistency to all employees, and a firm line in the sand during any negotiations. Your equity pool should be divided into separate sub-categories for hiring, retention, and reward, and you should seek expert advice when laying the groundwork early on. Slicing The Pie is one of the go-to’s we recommend. It’s fair, and there’s enough governance and not too much effort to hammer something out. The Foundrs model also has it’s merits and advocates, but regardless of where you land, doing the typical 50/50 split is a recipe for later frustration – ‘an ounce of prevention is worth a pound of cure’ after all.
The caveat is, of course, that your company is creating something that is genuinely exciting and seems to have legs. A company that prima facie ‘is a dud’ even if equity is on the table, won’t be able to secure the right people to grow. Assuming you know in your bones that there is a commercial light at the end of the start-up tunnel, you will really need to focus on the EVP of your organisation – how you market your company as an employer – and then equity again becomes a valuable tool you can leverage when hiring. This is when you need to really invest time and effort into the growth strategy of your business as it pertains to headcount – it’s an area rife with pitfalls. Successful entrepreneurs and start-up veterans, consulting houses that understand tech start-ups, and even VC’s can provide valuable input into this integral part of your success. However you go about it, just don’t shoot from the hip or the next world-changer might never succeed. If you’re growing backed by venture capital or any external investment, there’s a real risk of trying to increase your headcount hurriedly, and mistakes in calculations are further magnified compared to bootstrapping. You can assuredly get someone in to help you!