How do I make sure people I bring on are “stakeholders” and not just hanging out until they find a good job?

QUESTION:

I want to take my company (tech consulting) from one-man show to a bigger one. I have my business plan and know I can make it – but not alone. I need to scale. I would like to bring in people (VP Business Development, CTO) to help with business development and project execution. How do I make sure these guys are “stakeholders”, in it for the long run and not just until they find a good job? More generally, how are “stakes” granted? Can you point me to a good resource to help me understand this (fully)?

ANSWER:

Steve Hoffman

Captain Hoff

by Steve Hoffman, Cofounder of Founders Space

I’ve been in your shoes, and I know exactly what you’re saying.

You can never be sure that whomever you hire will not jump ship when the going gets tough. The only thing you can be sure of is that people tend to gravitate towards the best opportunities.

As long as the people you bring on feel that your startup is the best opportunity they have, they’ll stick with it.

One way to grant a stake is through a well-structured stock option plan. I’ll let one of our lawyers give you advice on this, since setting one up is quite involved.

But on practical level, you should worry more about how to get to the next level, than whether people will stick around. If you hire people you feel are “loyal” but who aren’t able to get your business to the next level, it won’t do you any good.

You need to think of who can get you to your next major milestone as effectively as possible and bring that person onboard. Don’t worry about whether or not they’ll stick with your company for years. It doesn’t matter. The typical lifespan of startups is one year. What matters is that you succeed in the next year, and to do that you need people who can make a difference immediately.

Maybe it’s not full-time employees you need. Maybe it’s contractors. Or a combination. Identify exactly the type of talent you need, and go after that talent with a deal that is attractive to them in both the short and long term. But don’t expect that talent to stick around unless they see your company taking off.

I hope this helps!

Comments & Advice:
  1. Steve gives great advice. In a word, give them a real stake in the business — an ownership stake in the form of equity — as well as meaningful responsibility and authority as members of your senior management team. If they believe the company has a bright future and have a significant stake in it, the “keepers” are likely to stick around for the long term, provided it’s a good fit overall.

    The most talented people always have other options, but “golden handcuffs” can be a very effective retention tool. Adopt a stock option plan or issue founders’ stock to these key hires based on the value of the business today. Make it a large enough number of shares to be a significant incentive, vesting over time, provided they remain with the company. It’s common to structure these grants with monthly vesting over a 48-month period, subject to a one-year “cliff,” meaning if the employee leaves or is terminated before a year elapses, he or she doesn’t get to retain any equity. That effectively makes the first year on the job a kind of probationary period before the employee begins accumulating true ownership of the business, while giving credit for his or her work from day one.

    If the business generates significant positive cash flow (as tends to be the case with consulting/services businesses), that may be more significant than equity. Whereas tech startups often retain all of their earnings to reinvest in growing the business (Microsoft went 28 years before paying its first dividend), professional services firms tend to focus more on cash compensation. Depending on the nature of your business plan, a combination of a well-designed bonus plan and equity that vests over time might make the most sense here.

    That said, some people may just turn out to be mismatches for your organization, and no incentive plan will change that. Studies have shown compensation to have little effect as a positive motivator, but strong effects as a demotivator — that is, if people feel they are being paid below-market compensation, it undermines morale and makes them more likely to entertain competing offers.

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