Equity distribution

How much Equity to give to a team member with no salary?

Molly Kline Cofounder. Catalyst. Operations and Strategy at sports themed start up

October 20th, 2020

We have someone who can only work part time for us right now... but would be coming on as a fourth or fifth team member (2 founders, one other person more full time) handling marketing. Any opinions on a fair offer for equity? I don't want to undervalue, or overvalue her!!! SHe would likely grow into a CMO role later... but for now would be part time

Paul Garcia marketing exec & business advisor

October 21st, 2020

No one should be "given" equity. Equity should always be earned. Part-time or not, if you cannot afford to pay someone a base wage that allows them to meet food/shelter needs, then you need to be evaluating your whole business, not looking for "free" help. If your company has insufficient revenue to pay any kind of wages to this person, your equity has a value of zero, so you're still asking the employee to work for free with no guarantees that your stock will ever have value. Totally undervaluing her with equity only. Look at it from the employee's perspective in the amount of risk you're asking them to take, part-time or full-time. There are other methods of compensation that do not rely on equity. Take profit sharing for example. Yes, that's dependent on the team, but it's also pay-for-performance.

Be extra careful with the c-level titles. The first person in a department does not make them a chief. You may shoot yourself in the foot if you put out that carrot and the individual isn't actually capable of the c-level expectations. Remember, it's not just what you call them. When someone has a c-level title, there's a broad expectation that they have SPECIFIC skills and responsibilities. Most heads of marketing will never be a CMO. A CMO is a business role, not a marketing role.

Ross Edwards

November 19th, 2020

It really depends on alot of factors. 100% of equity is worthless unless and until the company gets to the point where someone sees value in the company such as a company or an investor. Also you have to see how much they bring to the table and whether or not they really are as involved as they say they will be and have the skills they said they have.

There are some well known stories about cofounders getting large percentages of startups and then doing nothing but since there is a contract the founders had to give them the equity anyway. Or settle with them.

Also equity is usually given in increments and not all at once.

Tim Krebs CFO, CFA, startup advisor & capital raising

November 20th, 2020

Great question. Paul & Ross had great insight but in my opinion the value of equity in a startup isn't as black and white as they imply. Equity becomes valuable as the company gains traction, which takes a ton of work. I advise a few companies and the over-simplified structure we use is to target the general employee pool being 15-20% of the total management % (i.e. the C-suite and VPs have the other 80-85%). Assuming this employee is in the general pool, I'd think you should offer 1-2% and have it vest over 3-years (1/3 annually). This'll incentivize them to stick w/ you as it is very common to see free help loose interest. But know you should be prepared to explain what expectations you have for of them over this time. If they later-on they earn a C-suite title, that can come w/ more equity.

Dr. Mike Ph.D. level AR/VR expert and serial startup CTO

November 28th, 2020

Molly, I'd keep it simple.

If your company has any revenue at the moment, there can be a rationale for the employee to join in and estimate what her work would bring onto the table and what the prize might be.

If you're at the pre-revenue stage, all the cards in the negotiation are in her hands, since you CANNOT pay. By default, it is a bad deal for the employee which therefore does not guarantee maximum interest, effort, or output. It's just some spare-time thingy.

One thing to note is that the pathway has to be built in the contract. Letting someone hope to become the CMO of a great company can be the attraction point and a deal-maker. Then, some kind of clear steps for earning the full amount in small steps, for example, 1% every quarter.

Giving out equity all at once would be a great deal for her but not to the founders.