This neatly fits into two posts by Guy Kawasaki ( The Art of Recruiting and a follow-on confusingly titled The Art of Recruiting. Both were written from an employer point of view but he includes a riposte Nine Questions to Ask a Startup.
The bit that was interesting was the part about equity percentages. Most notable was that no-one who was in the company before the VC-supplied CEO has more than 3% according to this table.
Giving equity is like giving trust. It’s for when someone can’t be bought with money but you know you need them. If you don’t fall into this category then you shouldn’t expect equity. If you’re getting equity rather than the salary you think you deserve then you know one of two things:
- The company may not have enough money to pay good salaries.
- You’re a crucial part of the company.
Please note that only one of these need be true and you should really examine whether it’s #2 (no-matter how much you may like to think it is).
Employing someone is always a matter of trust. You’re paying them for their loyalty as well as their work. You’re going to be giving them passwords. Access to your premises. Access to your IT systems. Access to communications systems. Think – you’re a software startup. What are you giving out when you hire a coder and you give him access to your subversion repository? Sure, contracts will help you but unless you have cash to pay lawyers, it’s not going to be particulaly effective and once the code is out there, well, the cat is out of the bag along with your blazing business idea.
So, say you’ve gone through the efforts of staring your own company, you’ve got a VC backing you and you’re on your way to building a million dollar company. 3% of a million is only $30 000. Small change these days. So you want to be a BILLION dollar company which will pay out $30 million when you cash out. Heh heh. Of course, becoming a BILLION dollar company takes YEARS. There’s been a lot of mileage recently in the blogosphere about how “building to flip is building to flop”. That means, building a company hoping that GMY will buy you, is probably going to leave you penniless with some angry VCs. But we all know that, right?
My personal opinion on equity and working for hire?
- Hire people for good old green if you can
- Equity is something you give out when you’d trust someone with your passwords and keys
- Be realistic when giving out equity. Don’t promise 3% of a Billion
- Despite the fact Bubble 2.0 is building, don’t be tempted by geeks bearing gifts.
- Once you invite the VCs and superstar programmers in, be happy with 3% of your own company especially if the company is still a million dollars in hock to a VC.