Compensation · Equity contracts

ISO Unique Equity Instrument

Amber Pollard Kati.io Founder

Last updated on February 19th, 2018

Some people have been helping my project (for small amounts of time) for no compensation as it's in the pre-funding stage.

Is there a equity instrument that functions as a way to hold stake in my company, but at a decreasing rate as my company's value grows?

Looking for something to give people who are volunteering time to help.

For example, if Bobby programmer devotes 20 hours of work to my startup, that might be worth $3k, but instead of giving him nothing (or giving him stock for his 20 hour investment), can I give him something of value that will increase as my company grows but not at the same rate?

Alternative recommendations welcome.

Thanks!

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RESPONSE TO ANSWERS:

As I'm bootstrapping, I've been advised it's okay to ask people to do me the favor of spending a small amount of time on my project, FOR FREE as it's one that appeals to people's desire to do good for society.

It's a hard ask for me and I'd prefer give them something that results in 2-3x market value when/if I get the cash flow. That make take a year, it may take 5, and--in honesty--I'm thinking my project may take on serious, serious growth, but at this stage giving someone .1% equity is insulting, even if I plan for serious growth.

To me it makes more sense to offer them a higher percent equity that doesn't increase at the same rate.

David M

February 19th, 2018

I am not really understanding what you are proposing. You can certainly do anything, but generally if you are going to ask someone to do work, the idea is that you contract them to equity of which the value hopefully increases as the company has success. And no I can not possibly imagine someone coming on board for .1%. You might attract a good advisor for 1-3% at the beginning. But the end result/hope/goal is that the company grows and that 1% becomes worth several hundred thousand or several million.


As for asking people to work for less or nothing because the venture will "do good." It is one thing if you have no intention to make money as in it is a non profit for which you will draw no payment. But if it is a for profit, the fact that it does good is completely irrelevant to whether you pay them or don't pay them. What is relevant is if parties are going to be making money from this venture, the ethical and moral thing to do is compensate others to financial pro-rata compensation for their contribution to that financial result.


Again anything is possible. For the life of me, I have never heard of nor know anyone who would invest their time for a percentage of equity whose value declines as the growth of the company increases. In fact, one of the most nearsighted mistakes entrepreneurs make is to not have an anti-dilution clause in their contract. What you are suggesting is someone agree to a pro-dilution clause whereby they have a greater portion of equity now, that becomes worth less in proportion to the growth of the company. A. You should not ask someone to do that. B. If you find someone that incompetent to agree you may want to re-think hiring them.


Now, one option you can do is ofter them a specified ROI, with the investment being an agreed upon valuation of their time and work. So for example, if they do $5k worth of work, you can offer them a 25% or 40% or whatever ROI, whereby you agree to pay them as you become cash flow positive. That keeps you away from giving out equity. Busy bee workers might do this. Not sure any high profile individuals will do it, and especially not if you are projecting your company can be worth millions in time.

David M

February 19th, 2018

Why are you wanting your equity stake to decrease as your company valuation grows?

Paul Garcia marketing exec & business coach

March 12th, 2018

I think I understand what you're proposing and why. Here's what I suggest. Be honest with yourself and your friends/family. The reason their investing their time is because they believe in you, not because they believe in your company. They're currently treating it like a donation because they're not willing to give you money itself to do what you really need to do. And it's costing you time to supervise, train, and manage their volunteer time too.


Gracefully accept their donated time as long as it's actually useful to you. They'll be happy if you succeed. And you can gift them a nice thank you letter, perhaps product from your company, or even a small wad of thank you cash once you're making money.


Unless they are resenting the time they're putting in now, their contribution is because they care about you and they're not actually expecting to be paid back. And if they are resenting the time they put in, then you shouldn't be asking them to donate time if you can't pay them for it. Plain and simple.


Think about why people volunteer to help you. Don't abuse it. And always be sure to gracefully thank them and only utilize help that actually will move you forward in a way they can visibly see.


Stop fretting about equity. Clearly you don't want to give any up, so don't pretend like you're willing to do it. The details you propose make it feel icky. Instead, like I said, be honest and gracefully accept donations. And of course a series of small loans would be just as appreciated as volunteer time, probably moreso. When someone asks what they can do to help you, don't be afraid to ask them to invest cash. It costs you more to accept their time than their cash.