Employees · Equity distribution

Equity or share options for first employee

Ivana Petkova entrepreneur

December 12th, 2018

Hello, I am a co-founder of a company and planning to recruit a new employee who will help us with the tech development. I own 85% equity of the company and my partner who is the tech co-founder owns 15%. This is the first company we are starting and although reading a lot about financing at the moment we are feeling a bit overwhelmed when it comes to our options. What will be an appropriate equity to give for the first founding employee? Also , are share options better in this case? If so what is the standard? I am really confused as I don't want our shares to be diluted too much when we go and look for financing in the future as we still want to retain our control. Any pointers will be much appreciated. Thanks in advance

Ed Frazier Vice Chairman of the Board at Rural Media Group

December 13th, 2018

I would avoid giving any equity at this stage of the game. I have a long list after founding over 40 companies of people who cam and went and I had to carry from that day forward. They made no long term contributions but yet participate when we have a liquidating event. So I would suggest you create Phantom Equity. It mirrors equity but can restrict the ability to be carried. In other words to cash in you have to be present in the company when the liquidating event occurs.


I have been a participant in this approach as well as having implemented phantom plans. I set aside a percentage of the stock to fund the plan. My most recent one is 20% I created 100,000 shares of phantom equity and have distributed it over a three year vesting period. If you leave the company you give up your phantom shares. I might give an employee 20,000 phantom shares representing 2% of the company as a start. Leaving 80,000 for future employees.

Andrew Chalk Co-Founder of a startup. CEO of a startup. CTO of a Hedge Fund. Quantitative Researcher. Superb COO.

December 12th, 2018

https://www.angelthebook.com/


One thing -- the employee equity should vest over time. No full drop on the first day at work.

Dane Madsen Organizational and Operational Strategy Consultant

December 12th, 2018

In the US, investors will expect 20% of all equity set aside (not issued yet, but set aside) for future key hires in the form of an option pool or restricted stock units. If this equity is not issued, then it is non-dilutive. There are differences in accounting and execution, but that can be addressed by your lawyers and accounts.


The point is that key hires, particularly if they have accepted below-market compensation will expect equity as part of success that they are key (yes, again "key") with delivering. Giving equity because a person is "Employee #1" with no differential other than timing is not usually done.


As mentioned previously, all equity (even yours and your co-founder) need to be on a vesting schedule. If you elect to have professional investors, they may expect all holding periods to be rest at the time of the investment.


If your only concern is "control" - an issue in the US where investors have allowed that with a founder and come to regret it, you can do that with a multi class cap table. If your real issue i that you want to give very little equity away so to reserve the outcome primarily for you, then it is a different discussion.


You are at a point in your governance structure where you must have abject honesty with yourself and advisors about what is important to you on this subject. If you want to keep controlling ownership, are forced (for obvious reasons - that may occur several times) to sell some to investors, and already have carved 15% out for your co-founder, it is time to start modeling that before you grant any equity to Employee 1 or Employee X.

Murat Can Ozdemir Sensors and cognitive devices do not constitute Intelligence alone, but gets the job done.

December 12th, 2018

85% to 15%? And you both agreed for dilution from both of your shares? I'd like to get into contact with your tech co-founder :)


Jokes aside, without estimating the inital launch cost, initial maintanence cost and what you two guys can spare from your pockets, it is pretty much pointless to go on a hunt for investors. The same goes for taking a loan, or agreeing to give away >40% of your shares for a seed investment. If you are trying to chew more than you can bite in terms of money, it is always good to have yet another co-founder who has connections to good money or first few good customers. Founding a company is about bringing solutions to people's problems first, you can earn money later.

Ayman Barghouti Founder at Jexoy

December 12th, 2018

Oh no, please don't.


I know to save some expenses now, you plan to give shares or options, but it like the bank loan, it will satisfy your needs for now, but you will pay it times in future.


This shares holders employee will make his own decisions for his benefits in your company, you still small company and personal relations play a bigger role rather than medium companies. For example, if you hired a developer, good technical guy, and you will hire like a project manager or CTO over him, he might drop the performance of his work in a way that you can't confront him, like delay your deliverables, claiming that he have technical issues over his capabilities, making bugs in the code to be discovered later, ...


I recommend one of the options below:

1- Have a late co-founder (not employee) or investor who could invest money or technical skills in your business.

2- Go to freelancing, I am in this approach since years with www.upwork.com, there are some other sites, but this one have a big active community and good rates comparing to quality, of course you need find the proper way to protect your ideas and code.

3- Do it yourself, try to help your co-founder, dedicate more time, yes from your family time and rest time, but at the end no one will take from your shares or force his decisions against your direction of moving your business.


Wishing the best in realizing your business.



Regards,

Ayman Barghouti

Franck Barroso Co-founder at Waterpreneurs, 'For-impact' organisation connecting water entrepreneurs to investors

December 12th, 2018

It really depends of what the new person will bring in term of expertise or cash and more important how his expertise can support the development of the company.

Is he asking for shares? You present him as employee. If you give shares then he become associate and he has to share the risk with co-founders. There is also a level of trust involve. Is he really going to stay?

And how did you come up with the 85/15 split with other co-founder?

Krishna Prasad Entrepreneur with an idea that changes the way India retails

December 12th, 2018

Employing a person with a fixed salary is the most common method. But then, of your company is at very budding stage then the commitment might be worrisome. Going for an equity is also fine, but do make sure that the share of the employee doesn't exceed either of the existing shareholder's share in the company. I.e it is safe to employ a tech support employee between 5% to maximum 10% of shares.

James Tucker Director of User Experience

December 12th, 2018

Hi Ivana, there are really no standards but you should look at how much this person will contribute to the overall success of the company. How much risk are they taking? Are they reducing or removing a salary for more equity? Are they simply trading their talent+time for payment or are they going to get you to the promise land?


Advisors often get shares since they help influence the direction of the product and company. Anyone who innovates should also be a part of this incentive.


Essentially, that is what this is: an incentive. If this will motivate the person to feel as passionate as you are then why not share the love? That's why that is there.


I am fortunate and fall in the advisor/innovator role. I am a senior contributor to the innovation of products so it's common for my contracts to have trigger events based on milestones and not a common 4 year vesting schedule. Most of my work is done in the first 10-12 months and fully vested by the acceptance of the last milestone.