Founder equity · Incorporation

How to structure equity deal with a new hire in US market?

Richard Pridham Investor, President & CEO at Retina Labs

Last updated on February 26th, 2017

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Susan M.A. Strategy, Organizational Transformation, Talent Consultant, Capital Markets: Author & Presenter.

August 9th, 2016

Really good feedback. Keep Canada as your domicile. One of the most prevalent mistakes entrepreneurs make is forgetting that the vp of sales can change the growth pace and subsequent company image. Treat that individual as a significant partner. Be smart with the structure but be willing to offer 20% of the company at a minimum.  

Gillian Muessig COO, Board Chair at brettapproved, Inc.

August 10th, 2016

It is my experience that salespeople are motivated and get personal satisfaction from the close of the sale and financial remuneration at that time. While not in every case, in the great majority of cases, the finest salespeople prefer to elect where and how to invest or spend that capital themselves, rather than having the capital locked up in stock in the employing company. Something to consider - are you trying to compensate a salesperson in ways that may not meet their emotional and working style? ASK the salesperson how s/he would like to structure an agreement. You may be surprised by the simplicity of the answer. In the event, the salesperson does want stock - many people own stock in foreign corporations. If the salesperson is seriously interested, a call to her/his attorney or even tax accountant will enlighten them as to how that works and what taxes might be involved in order for her/him to determine the sum of shares s/he would like to request in exchange for long term services. Gillian Muessig Outlines Venture Group C: +1-206-930-8133 S: gmuessig @SEOmom

Mike Moyer

August 9th, 2016

You are opening up a new market in partnership with this guy. He is putting his compensation on the line. The new market is a gamble, he is, in effect, betting his compensation on the future outcome of the business.

What are you betting?

The bets will continue until the market becomes profitable. You have no way of knowing, for sure, when this will happen.

So, rather than guess the split (10/90) use the bets to caculcate the split using the Slicing Pie model. Slicing Pie is a formula for determining the right equity split based on the relative fair market value of the contributions of time, money, ideas or any other contributions that are unpaid. It is the only fair way to solve this problem. ALL other methods are guesses (at best).

Perfect-Equity-Splits-for-Startups-Slicing-Pie.jpg

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Giles Crouch Digital Behavioural Economist | Speaker | Writer | Technology Strategist | on Twitter @Webconomist

August 9th, 2016

While I think Mike Moyer proposes an interesting and applicable model, it may not work well for US-Canadian operations. When actual money enters the situation, everything changes. Ideals are nice, money isn't. Having extensive US/Canadian experience with setting up offices in the U.S., a major mistake many Canadian startups make is to move into the U.S. market before they're really ready. The implications are taxes, warranties, guarantees, customer service etc., which few startups consider.

Perhaps ensure you can answer those issues first. When ready, register a Delaware LLC as suggested before. Have you contacted the Canadian Trade Commissioner offices in Silicon Valley, New York etc.? Can you find a U.S. partner (as in a company with actual reach) to partner with in the health care sector? Striking a deal with an individual can bring risk (especially if they ask for exclusivity) when/if things go wrong. I've seen both good and nightmare deals around Canadian startups entering the U.S. before they really understood what was happening. Most fail because the lure of the large market that isn't a monopsony is so tempting.

Richard Pridham Investor, President & CEO at Retina Labs

Last updated on February 26th, 2017

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Richard Reed

August 9th, 2016

An equity based approach can solve a lot of problems for both the company and the external party. A common route for this approach is to do exactly as you say, setup a new entity that you can allocate equity to advisors etc. Unfortunately there is no easy answer from a tax standpoint (either for your company or the advisors). The easiest entity to setup in the US is typically a LLC and allocate profit interests. The problem here is that it is often sub optimal from a tax standpoint during a sales/exit event. As a result, I have seen many groups opt to setup a C-Corp in Delaware (most favorable corporate law for a corporation) and issue some form of stock unit to the advisor. This can take on many forms such as a stock option (but you need to have a 409A friendly service manage this for you to avoid compliance issues) or a restricted stock unit. Whatever unit you select, it is important to have the stock vest on a performance basis so that if you need to part ways with the individual, then they only get equity for work completed. Also, it is common to have a cliff, but this may be a challenge for a purely equity based compensation package. Targeting for 2 or 3 year vesting with a 6 month cliff would be a typical structure for a grant if the advisor is amenable.