Founders are often hesitant to give large equity stakes to even the earliest stage employees. The motivation is usually to protect your ownership but that’s a false economy. Instead, giving significant equity stakes to employees offers many advantages. Here’s why:
1. More Equity = More Runway: Giving your employees more equity allows to you to balance their compensation with lower salaries. The less money you spend on employee salaries, the more time your company has to find product market fit.
2. Aligns Founder/Employee Incentives: As a founder, you only make money if the company does very well and that payoff is statistically years out. You want your employees to have the same goal as you, i.e. a billion dollar exit.
3. Big Return on Investment: The fourth person to join the SendHub team was coming from a well-paid, corporate role at Intuit. We would never have been able to hire him without the lure of a big equity stake, but that investment paid huge dividends. His individual skills and leadership of engineering, built out our entire technology platform.
4. Less Fundraising Pressure: Given your team’s large equity stakes they’ll want to minimize dilution from subsequent funding rounds. This translates into less pressure from the team to fundraise early, as everybody wants to wait for a time of maximum strength.
5. Weed Out Mercenaries: Startup work is about investing time now for a potential payoff later. Contractors looking for a quick paycheck are the exact opposite of this ethos. In addition, anyone that needs you to match their prior corporate salary isn’t fully committed to the join the team, yet.
6. Equity Payments are Delayed: The standard for startup equity compensation is a stock option plan with a 1-year cliff on a 4-year vesting period. Thus, Founders aren’t giving up any equity until at least a year of working with the employee. And remember, if it’s not working out you can part ways after a few months with no equity used at all.
7. The Best Companies Do It: Both Facebook and Google have employees who’ve made over $1 Billion from the companies, despite not being founders. Sheryl Sandberg joined Facebook in 2008 and got a large stake, even though they’d already raised over $400M. This is how top companies hire and retain the best talent.
Owning 100% of nothing, is still nothing. Giving up significant ownership in your company is a critical part of creating something valuable, so stop thinking about ‘your’ startup and start building a big company.
This article is part of a series on Startup Hiring & HR.
Where to Find the Best People
How to Hire Great People
How Interview Projects Stop Bad Hires
How Startups Make Offers People Sign
7 Reasons to Give Employees More Equity
Why You Have to Fire Fast
How to Cut Your Startup’s Costs Without Layoffs
Doing Layoffs the Right Way
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: firstname.lastname@example.org
Thanks to Kaego Rust and David Smooke for reading drafts of this.