Hi everyone – great site! I’d love some insight regarding compensating different employees with equity. I have had a web-based product in beta for just over a year. We are completely bootstrap (i.e. no outside funding). We are an LLC, though plan to become an Inc. at the end of the year.
I have 3 different scenarios for potential equity:
- I recently took on an operations person at a small salary. He is interested in working for equity. I want to incentivize him, but am not sure equity makes sense without real metrics. There is some room for him to lead up sales efforts so I was thinking about linking equity to sales performance.
- I also outsource my development. The owner of the development firm has asked for 10% equity in exchange for technical business advice; i.e. he’d be actively conceptualizing our partner integrations and outlining technical proposals, but he does not code.
- The coder I work with is also interested in working for a mix of cash and equity. He is my only programmer right now, and we really enjoy our working dynamic.
I like the idea of not paying out of pocket for a salary, but how do I figure out how much equity to allocate? The amount requested to date by my development firm owner (10%) seems high. Should I wait until we are incorporated to allocate equity? Thanks so much for the help!
by Naomi Kokubo, Cofounder of Founders Space
Yes, I’d wait until you are incorporated. You should also consult with a lawyer and set up a proper stock option plan. You don’t just want to give out equity without proper paperwork in place. You need to have stock options that vest over a period of time, so if the person doesn’t deliver or stops working for some reason, their shares stop vesting.
1. For anyone involved in sales, offering commissions and cash bonuses also works well. If this person is helping bring in business, you can reward him/her with a combination of stock, cash bonuses and commission tied to performance. There is no set amount. A lot depends on how you value this person and what % make sense for your business. I like to structure compensation packages that are tied to actual goals and deliverables. That way if the person is highly effective and really helps grow the business, he/she reaps the benefits.
2. I agree, 10% does seem high for someone who is simply giving advice, rather than doing the work. Typically, an advisor will get around 0.5% in very early stage companies like yours. If this advisor will truly be putting in the time, then you can up the %. It all depends on how much time and resources the advisor is willing to commit to.
3. It’s hard to get any programmers to work for free, so a combination of cash and equity makes sense. Again, if you can tie the equity to actual deliverables and milestones in the project, that’s a smart thing to do. At an early stage, like you’re at, people tend to get a lot of equity, especially if they’re full-time. For any full-time staff, who are taking a serious pay cut, you may consider as high as 5% to 10%, but for a part-time consultant, I’d go much lower.
A good idea is to work out a stock option table, that lists all the employees you plan on hiring in the next 18 months and what stock options each of them will be getting. Most companies allocate 15% to 20% of the company for employee stock options. The 15% to 20% is reserved for paid employees, and usually doesn’t include founders’ shares or employees working for mostly equity. This should give you a rough idea of how to plan things out.
Again, talk to a lawyer when setting up your stock option plan. There’s a lot of paperwork and other details you need to consider.
I hope this helps!