Starter Studio chat on founders and employee equity issues

1. STARTUP SWEAT EQUITY
HOW MUCH? HOW SOON? HOW LONG?
(And How Not to Make the Same Mistakes I have made)

2. We’re talking about ownership
Sweat Equity is a just another form of compensation
Form usually driven by tax issues (stock, options…)
It is art and not science (but not arbitrary)
Almost always a negotiation
Cannot be viewed in a vacuum
It will not look right with 20/20 hindsight

3. Cofounders are Unique
Do you need them?(read blog and comments)
Understand Commitment and Priorities
Understanding Capabilities
Understanding Personality
Vest Equity
Document the Deal
Keep An Open Dialog

5. Stage is Important

6. Company Stage
Modified from AVC Blog: www.avc.com
Now paying salaries
& equity is worth more
Headcount
Founders: 2-3 people
Early Employees: 3-5 people
Pool Recipients: Up to 50 people
How Much? Changes with Stage

7. Salary/Equity Mix
https://blog.wealthfront.com/startup-employee-equity-compensation/
2011 Data

8. Equity Amount
Founders – Crapshoot
Early Key Employees – One offs
Later Employees
Best to create something objective as a guide for later employees
and adjust as equitable.
Example from Fred Wilson: Determine market cash comp
(not what you actually pay in cash comp) and then multiply by up to 1
And provide equity equal to that value

9. How Soon? Vesting
How long do you have to stay to earn/keep stock?
Typical: 25% to vest at the end of the first year
remaining 75% to vest monthly over next 3 years
Cliff vesting protects from a bad hire
Investors may reinitiate vesting

10. What Now? Investors, Fired, Quit, Mergers,
Acquisitions, Performance, Retention
Leave or fired? Contract governs but fairness is good
Investors expect to see reasonable terms
Acceleration? Single/Double Trigger? Full/Partial?
Retention Programs

11. Recommendations
Grant equity as early as possible (tax)
Make system as objective as possible
Use the benefit of 20/20 hindsight to correct inequity
Consider retention grants
Don’t get greedy – Smaller piece of bigger pie
Don’t Negotiate in Percentages

12. Good Luck!