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I'm starting a startup and have close to 10 people involved from programers to webmaster, ap designers, by offering them equity in the company.
How much equity should I offer them. I will need angel/vc funding so I don't want to give away too much of the company
Zenrider,
Equity in a company is somewhat limited and thus it is precious.
When using it to pay service providers there are a number of points to ponder including:
Do you really want them as your business partner- for the long term?
Are they committed to providing you and your company with their best - now and in the future?
By far the biggest challenge is reaching an agreement that is a fair exchange. Especially for an early stage business. The typical result I've seen is that the company 'overpays' for the service and the provider comes to a point where they want to cash out before the company is ready.
I'd consider acquiring some early capital so you can hire (and pay) the talent you need. if you are committed to paying for services with stock - consider including some vesting schedule as a protection.
I have a "writeup" that lists about a dozen points to ponder on this subject. If you Pm me your email -I'll send it to you.
Also, if you want to discuss your situation in confidence, feel free to drop me a PM or contact me directly.
Thanks for the response. I would love to read the writeup and I will pm you.
Robert raised a few valid points, especially when he mentioned that many companies offering equity in lieu of cash end up overpaying. It’s probably due to the fact that equity in development-stage companies is notoriously difficult to value and that service providers who accept equity as a form of payment must be prepared to wait for their payday for extended periods of time. Perhaps even more importantly, they must be prepared to assume the risk that the company never lives up to its expectations and thus, their equity share will hold only little or no value.
I’m not sure I’d need “a dozen points to ponder” when exploring a potential partnership with a vendor or services provider. If the service is a big-ticket item, which is critical to the launch or execution of the company’s business plan, and the business lacks the liquidity to pay for the service in cash, it simply becomes a “do or die” type of issue.
I’m also not sure what a service provider could do “to cash out before the company is ready”. Unregistered/restricted stock is illiquid, meaning that even if the provider could find someone who’s willing to purchase the equity stake from him, it will be next to impossible to consummate such a transaction without violating state and federal securities laws.
Depending on your capital requirements, you might be better off reserving a certain tranche of equity for paying services providers (for the argument’s sake, let’s say 15%) and structure these deals as promissory notes, which will accrue interest and mature, let’s say within 12, 18, 24, or even 36 months. As a kicker you could add an option to convert the note into equity at a significant discount and at the discretion of the holder in the event the company contemplates an equity round, merges, or gets acquired. That way the holder of the note would (i) enjoy the more secure status of a creditor of the company, (ii) have a definite timeline within which he can expect to get paid, and (iii) even participate in the company’s upside potential in case of a so-called capital event.
For you this could mean that you don’t have to issue straight equity to your services providers, you can probably pay off some notes when they mature, and the whole process becomes much more manageable because it most likely doesn’t require compliance with state and federal securities laws.
I hope this helps.
Cheers!
Karl
Karl,
Nice to see you here again.
While you are correct that liquidating the restricted stock can be a challenge and might violate some SEC regulations- what I see in these situations its that the service provider becomes "disenchanted" or desperate for the cash. The result is that their support level declines- usually when it is needed.
I also agree that if you have no other choice- then you have "no other choice", but be aware of the pitfalls.
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