Every entrepreneur I've ever met has found themself at this crossroads at least once: You have a killer idea for a business. You have the skills and the experience to get it started. You might already be enjoying some green shoots of success.
What you don't have is a certain set of skills to be able to take the next big step. It could be technical talent, sales and marketing talent--or any number of targeted skills that you desperately need to fill the gaps in your plan. And those skills don't come cheap.
No problem, you think to yourself--you have equity you can hand out.
But here's the truth about how the startup equity equation plays out. There's you on one side, asking, "How can I hire the best talent for the least amount of cash outlay?" On the other side, there's someone asking, "How can I get in on the ground floor of a company but also be able to financially survive the journey?"
In all my years of startup experience, that tug of war is what it boils down to. Every time. And for that equation to work, a compromise must be reached, one that leverages a series of tradeoffs to fill the financial gaps on each side. The most valuable salary tradeoff might not be what you think. It sure as heck isn't equity.
So let's go over each tradeoff, why it works, and when it doesn't.
1. Startup equity has never been a panacea.
I've been down this road dozens of times, as either the giver and receiver of equity. And while it has indeed been a windfall for me in the past, those moments were lightning-in-a-bottle, one-in-a-million shots.
Why it works: It's those outliers that are the lure.
Equity options offer, somewhat, the promise of sacrificing now for a big reward later. There's also a general lack of understanding as to how options work. Thus, it can work, but it rarely works the way most option holders think it will when they sign on.
When it doesn't work: Most of the time.
Striking it rich with options is lottery odds, pumped up with once-a-blue-moon stories like Amazon, Facebook, Google, and so on. Outside of those rarities, however, the story ends a little differently. When you have the right leadership team, and it is smart about how it doles out options, and it's careful with dilution, there's a chance some of the people on the team might get rich. Those odds are a hard sell and easy to walk away from in bad times.
2. Avoid the equity-plus-co-founder double dip.
When you're recruiting the initial team, you can't hire with no money unless you make everyone a co-founder. This is a popular move, and it's probably the one I hate the most, because I've heard too many horror stories about disgruntled co-founders with way too much equity, vested way too early, actively working against the success of the company.
Why it works: Ownership is a powerful thing.
Also, conventional wisdom will tell you that investors prefer teams over solos, even if that's not the setup most primed for success.
When it doesn't work: Any time the future looks bleak.
Remember, by adding co-founders, you're not just giving up equity, you're giving up control. This can be harmonious in good times, but the passion can quickly deteriorate when high levels of effort are required just to keep the business afloat.
3. Let the investors pay for it.
I'm hearing this a lot more often lately. Founders will promise early employees a competitive salary as soon as that first investment round comes in. It's a take on a traditional early stage tactic--using part of a fundraise to get the early folks compensation up to a more livable wage.
Why it works: It's (mostly) honest.
When you're transparent about needing funding to pay for talent, you can be more reasonable about promises, timelines, and expectations.
When it doesn't work: When those expectations aren't set correctly.
This is always a risky move because investors don't like to do this, and they certainly don't like doing it early. Investors invest in your company so it can grow, not survive. So they'll want to extend your runway, not roll a red carpet down it.
4. Profit sharing is smart, provided there are profits to share.
In the early days of any startup, everyone should either be making the product or selling the product, so everyone deserves part of the profits.
Why it works: It's a great way to get buy-in and have everyone on the same page.
When it doesn't work: Whenever you're not making a lot of money.
If there's a lull, a low-period, even a dip in the revenue, the lack of reward becomes blatantly and painfully obvious. It's also really hard to grow when everyone is eating the profits as revenue comes in.
5. The most valuable tradeoff is belief.
This may sound a little stale, but I can tell you from decades of experience that people will go to great lengths for something they believe in.
So here's what you do.
You've got to sell the company to employees just like you sell it to customers and investors.
You need to get them to believe in your idea, the path to get your goals, and in you.
You need to make them understand what their contributions will be and how their talents will make a positive impact on reaching those goals.
You need to show them that the ride is going to be rewarding and fun.
When you've got people who believe in you, you can do anything. Now, belief alone won't get someone to work for you for free, but that's what cash and equity options and profit sharing is for. So use those tradeoffs sparingly. And wisely.