How Startups Should Compensate Partners / Team Members without Cash Money
When you’re at the seed funding stage of a startup and you’re the only member of the team, you’re in a real conundrum. You have a million things you need to do, you don’t really know how to do most of them (although you may not know it yet), you don’t have the cash to delegate the work and you know this is an issue for investors because you’ve learned that investors don’t like to invest in individuals (The Loan Wolves Rarely Get Funded)
Q. So what do you do?
A. You build a team.
Q. How do you compensate the team?
A. Using the only thing you have, equity (shares / stock)
Q. In order to issue shares you need to put a value on the company so a value can be put on the shares. How do you put a value on the company?
A. You don’t. Don’t waste your time, deal in units or percentages. They can be converted to stocks / shares once the company has issued them.
Q. OK, so now we’ve got the unit of compensate worked out, how much should you give.
A. This is a “how long is a piece of string” type of question. But the advice is to tie compensation to results…see below.
Tie Compensation To Results
We advise our clients not to dish out large units of equity upfront, e.g., 5%, 10%, 15%, etc., but rather tie small amounts of equity, e.g., 0.25%, 0.5%, or 1%, etc., to deliverables. And only release the equity once the deliverables have been achieved.
We suggest that our clients create a document, landscape orientation and insert 5 columns. At the bottom of each column record the units of equity, and in each column list the deliverables you both agree need to be accomplishes, starting from the left and moving to the right. Put the deliverables in the sequence they need to be accomplished.
We believe this to be the fairest approach for both parties.
For more information on this topic, see the white paper: How Startups Should Compensate Partners ⁄ Team Members without Cash Money
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