startup sweat equity: how much, how soon, what now?
DESCRIPTION
Starter Studio chat on founders and employee equity issuesTRANSCRIPT
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STARTUP SWEAT EQUITY
HOW MUCH? HOW SOON? HOW LONG?(And How Not to Make the Same Mistakes I have
made)
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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
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Cofounders are UniqueDo you need them? (read blog and comments)
Understand Commitment and PrioritiesUnderstanding CapabilitiesUnderstanding Personality
Vest EquityDocument the Deal
Keep An Open Dialog
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Stage is Important
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Company Stage
Modified from AVC Blog: www.avc.com
Now paying salaries & equity is worth more
HeadcountFounders: 2-3 peopleEarly Employees: 3-5 peoplePool Recipients: Up to 50 people
How Much? Changes with Stage
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Salary/Equity Mix
https://blog.wealthfront.com/startup-employee-equity-compensation/
2011 Data
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Equity AmountFounders – Crapshoot
Early Key Employees – One offs
Later EmployeesBest 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
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How Soon? VestingHow 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 hireInvestors may reinitiate vesting
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What Now? Investors, Fired, Quit, Mergers, Acquisitions, Performance, Retention
Leave or fired? Contract governs but fairness is good
Investors expect to see reasonable termsAcceleration? Single/Double Trigger? Full/Partial?
Retention Programs
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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 grantsDon’t get greedy – Smaller piece of bigger pie
Don’t Negotiate in Percentages
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Good Luck!