Is it a good idea to give candidates several salary/equity options?

Anonymous

August 8th, 2015

We've been giving candidates that we make an offer to three different options on Salary/Equity where for a small drop in salary there is a substantial bump in equity. The idea is both to empower them and also to ensure they are excited enough about the company to want more equity. Would love to hear if others do this and if you think it's a good idea?

Matthew Barmash Consultant, MEB Consulting

August 8th, 2015

In my humble opinion, not really. While I think it makes sense to trade salary for equity, you will find over time that employees forget the deals they made when they started. When you offer everyone equity over cash, this works fine, but when you have different deals, this tends to all fall apart. For starters, employees talk. They always will. Secondly, you topline motivation triggers won't be consistent and when you do have more on had cashflow, it will be harder to normalize. You end up in a meeting saying, "yeah but Jonny and Jane have more stock and they will do well in the end". Different deals and a lack of transparency kills culture.

I know it seems small now but when you have more employees it matters. I never think of the business today, only what it will be.

If you are constantly offering stock for cash, you will be fine. If the other way, also fine.

Hope that helps.

Charlie Graham Entrepreneur & Executive With 15+ Yrs Exp. Building Successful Consumer & SaaS Businesses

August 10th, 2015

We did this at my first company for the first 10 hires or so and I think it worked well. Some quick findings:

* Giving someone 3 options about equity / salary can often take the edge out of any negotiation. Rather than having someone ask you for more equity or more salary, they will spend the time debating the 3 options and are more inclined to choose one of them.

* From our experience, that almost no one will choose the high salary option. Most will choose the mid salary and a few the no-salary.

* Once the employee decides, we found less resentment later about lack of equity (since they made the initial decision to forgo extra equity for salary).

Once the company got bigger it became less efficient - mainly because you won't be as willing to part with as much equity - and you'll want to standardize but for your first few employees it can work well.

Paul O'Brien

August 10th, 2015

Respectfully, I disagree with Matthew on his first point though we reach some of the same conclusion; I suggest, vehemently so, yes offer several options. Within reason. Equity is merely a form of compensation, a form that has value relative to your future outcome, present value, and the expectations being set with the potential hire.

That last part is critical to consider and wherein MOST startup founders fail to build good teams. Equity matters. Equity says something. It's not just money; it can mean more or less depending on all of those variables.

So...

Is there potential future value in the equity and if so, what?
What is that relative to present value?
How much do you value this person? Are they part of the team or just a hire?

More here on equity for employees so I don't have to get into it all here.

Having answered all of that, you arrive at a % allocation the hire should be offered. You may not want to offer that much; regardless, the industry has a vague standard to equity grants and if you don't meet those standards, relative to the answers to those questions, you aren't compensating that person fairly and frankly, they should consider work elsewhere.

Now, whether or not you offer the hire that much equity is up to you but if the industry effectively gives someone at a given stage, value, and consideration to their being more than just an employee, 3%, that's part of their standard compensation and offering less is akin to underpaying.

Why should you then offer some options? Because you're negotiating and the value of that equity can be considered relative to what you're paying and how you BOTH negotiate says a lot about your respective expectations. But to reiterate: within reason. You don't offer 1%, 3% or 6%. Think of it this way:

2.5% and $100k per year
3% and $90k per year
3.5% and $70k per year

Consider all of the messages sent. More equity = greater commitment on your part. More interest in hiring this person as part of your core team. It also suggests you can and perhaps should pay less.

You can offer more equity and less comp outright but why not give them candidate options as where they are drawn says a lot about them too. Perhaps they want more comp so does that mean a) they need more money b) they don't value the equity as much ? Now you can explore that with them and build a stronger team by meeting BOTH the expectations and the needs of your employees.

Lack of transparency kills culture so create a culture in which what's transparent is that everyone is there on their terms and not just yours. Everyone has slightly different grants and salaries based on their needs and expectations and that's OKAY, that's a good thing, you're in business for everyone, not just yourself by way of some equity granted to people privately to commit them to your team.

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