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Summary:

Google has paid notoriously low salaries, in exchange for stock options, to its rank and file long since before the stock was north of $600 a share. Well, today’s Question of the Day is about such employee compensation, from a would-be founder named Alex. Alex would […]

Google has paid notoriously low salaries, in exchange for stock options, to its rank and file long since before the stock was north of $600 a share. Well, today’s Question of the Day is about such employee compensation, from a would-be founder named Alex. Alex would like to know whether it’s wise for him to give away equity so he can pay early employees an attractive salary, OR if — following the Google model — he should only hire those employees who’d take equity in lieu of a nice paycheck?

How will this compensation decision influence Alex’s company culture early on? And what should be worth more to him at this stage: cash to pay his staff, or keeping his equity “in house”?

Dear Found|READ,
I am a considering a startup and it’s just me at the moment. I think that I’ll need 2 others — both developers — to start. The only funds I have are my savings. Whilst I known I can live on savings for a year or so, I obviously don’t know whether the others can. So should I:

a) Get seed funding, and loose X% of the firm to the financier straight off, and then pay a “normal salary” to the others?

OR

b) Offer that same X% to the employees, splitting between them what I would’ve given the investor, and save my cash, paying each employee next to zero salary?

Similarly, if I’m going to give away my equity, what is the best way to go: loose an equity stake to a single seed financier, or give that equity stake to 2 or 3 early joiners?

I don’t think I’ve seen these questions asked before and it would be good to know what your readers think please?
— Alex

  1. There are several questions he needs to answer before any answer to his question will be meaningful:

    1) Is he looking to add these two developers to the company? or just get them to do work for hire?

    2) What’s the purpose of the development? To have a prototype that will then be used to raise funds? An initial product release for sale?

    3) Why TWO developers? where did that estimate come from? Speaking of estimates, has anyone whose a pro at it estimated the development time needed to satisfy the initial set of requirements?

    The phrasing of the question makes me nervous too… An unwillingness to give people equity is a problem in small startups. No one goes to a startup for the stability… they go there to build something great and, hopefully, to see the company be successful. No one wants to be the person who actually write the software… but not have a stake in the company.

    If you can find developers who are as passionate as you and will lilve off their savings, then you need to give them substantial equity. Right now, all you have is an idea – which is worth nothing without execution.

    If you have clear requirements and know exactly what you want… what about offshoring the development or doing it onshore as a contract job? You won’t have a technical co-founder, but if you’re after a working prototype, perhaps that’s the way to go.

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  2. This is a question my business partner and I always ponder during our new start-up’s. I’m looking forward to see which model works best in varying situations.

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  3. From what i know/understand, and speaking as an employee, i would not accept equity (i.e: a low percentage) because the market to resell is just you (the owner) unless the company is public (and this last thing is, in general, unlikely to happen).

    What i would accept is a more equal part in a society (as i will be investing too), but depending on the company, plans, etc and there is the human co-existence factor (as things are not allways easy), so this last one is a very risky proposition to you too.

    Maybe is better to think of getting early/angel investment… or, if you know something about development, try to bootstrap with a very basic first version and grow slow from there…

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  4. I’ve found this (http://www.coghead.com/) that apparently is a “do it yourself” web development environment that is aimed to be easy to use by newbies to development.

    Never used it (and the site is not responding to me right now), but in case you try to bootstrap…

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  5. I’ve worked and hired at a couple of start-ups, been offered jobs at three others, and have many friends working at startups. IMO, you aren’t going to find a decent employee willing to take equity in lieu of compensation. A talented person is going to be able to get both or is going to be a founding partner.

    If you’re not capable of building V1, I would recommend finding a reputable dev shop to build the first version. Finding, hiring, and managing developers is hard. The odds are, your first hire is going to be a dud, especially if you’re trying to do it on the cheap.

    If you are capable, forget two more employees. Build V1 yourself.

    Once you have a V1 product, you will get much better terms for financing which will put you in a much better position to recruit good people.

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  6. As an employer, you ought to think of the motivation you’re giving to your employees and the type of employee you’d attract.

    If you give a large amount of equity, and a small salary you’ll get either (a) students or young developers who don’t have the experience but don’t need a big paycheck, or (b) experienced developers who don’t need the paycheck, but are smart enough to see whether your company can be liquidated in the future (sale or IPO).

    So, if you’re looking for a partner, then I’d say the big equity / low paycheck is a good way to go, but don’t settle for just anyone. Make sure you want to basically be business partners with them.

    But, if you’re just looking for a code monkey (albeit an important one), then you could probably get away with a smart student.

    Both of these types should work pretty hard at their jobs for different reasons. And, you should know the reasons and play towards them, help them, at any chance you can get.

    If you don’t want either of these types of people, then you should take the money from an investor and hire the best possible team you can get for it (people who are motivated to simply build awesome things). Give them all the flexibility you can, because building awesome stuff will be (or should be) their motivation through and through.

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  7. Yogi Muranjan Monday, January 14, 2008

    I would suggest a combination of equity and cash rather than just equity. With just equity they will start with a bang and after some time their enthusiasm will go down the drain. You can always look for some renowned companies which provide these kind of services. Speaking of the companies, try taking a look at http://www.zigron.com/tech_startup_solutions.html, you may find it interesting.

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  8. Alex,

    Without getting too bogged down, there are a lot of potential issues with equity offerings which you should be aware of as you develop your capital structure. Speaking with an (tax) accountant and a lawyer would be a very good idea should you decide to go down that route as any choices you may could have considerable impacts.

    Have you considered straight debt financing?

    Also, are you absolutely sure you need two full time developers? Is piece-meal, or contracting not an option? In this way, you can pay for a specific deliverable (and ongoing support) as needed without incurring full-time employees.

    A “pay-per-piece” method of development, in addition to straight debt financing would allow you to control your initial start-up costs in a much more predictable and controlled manner then any type of equity offering you could come up with.

    There are of course other consideration with this, but this is just one potential option.

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  10. Thanks to all for your comments – very interesting and also clearly I’ve got some more things to think about.
    Alex

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  11. As a co-founder at a startup, we offer options to our new hires so they can choose between market salary and equity or below market salary and above market equity. My preference is to see the employees take the higher equity package because they are then more vested in the company.

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