Founder equity · Legal structures

Stock options or founders equity? What's better in our case?

Richard Pridham Investor, President & CEO at Retina Labs

Last updated on June 13th, 2017


Alan Matthews Entrepreneur

February 25th, 2017

Offer cash not equity, and lots of it. Like 40% of sales minus draw of $80K.

Salespeople (good ones) are driven by cash now, not equity later. They can control the cash part but not the equity part. But it's not expensive... consider it a six month commitment... if they're not selling after six months you've got no salary to worry about!

Sales is the lifeblood of a company... get that going early because it takes time to evolve and if you have no sales.... then you have no revenue! You have to fund it though.

You say you're an established telehealth company and you want to enter the US market but you have no money... not a great business plan really.

Richard Pridham Investor, President & CEO at Retina Labs

February 25th, 2017

Alan, thanks for your suggestions. I hear what you're saying and agree with you. I just wish it was that simple in this case. Firstly, when I say "established" I meant that we are not a new born start-up. We have mature products and customers in Canada. However, the company has struggled to find is way for different reasons. I have only recently gotten involved recently as an investor and I'm trying to lead the company down a path towards growth. The potential is there, it's just that the company has been focusing on the wrong market. We're a company of 6 people now and we don't have a lot of financial resources to throw at a couple of senior sales people in the US as I'm trying to stabilize things as they are.

We are a diagnostic service for chronic eye disease. In order to execute our US business model, we need to be credentialed by commercial health insurance companies one by one. This is a very time consuming, arduous and costly endeavor (6-12 months+). There are firms out there that help companies like ours get credentialed but they charge quite a bit with no grantee for success. Once credentialed by enough insurance carriers, the model works tremendously well and there is high demand for the service we offer.

Giving a sales rep 6 months from today is meaningless. They cannot sell anything until we get credentialed. So I need to hold onto these guys for at least 12 more months until we start getting credentialed and to give them runway to sell.

Steve Owens

February 24th, 2017

First, run anything you do by a lawyer.

If I was advising them - I would say they get the salary in the form of a note (with interest) that must be paid back after the company raises >$X (and/or $X revenue) AND they get warrants equal to the max balance on the loan to any equity round you do.

I would never take common stock, and I would certainly never take stock in the subsidiary.

Richard Pridham Investor, President & CEO at Retina Labs

February 24th, 2017

Thanks Steve. I think your idea makes sense. Only tricky part is how you calculate the salary if they are not dedicating 100% of their time to the company as they need other incomes to survive. So if the annual full-time salary was $150K and they worked 50% for the company, would you pro-rate it to $75K? What if either a) we don't raise money or b) they don't generate revenues? Does the company still owe them the unpaid salary? It would be great to tie this to actual performance. If they were to generate revenues, they'd earn commission for which they'd get paid. As for accepting stock in a subsidiary, the US company, if plans go as hoped, would be the engine of growth for the company, not the other way around.

Paul Shustak Entrepreneur | Advisor | Product Geek

Last updated on February 26th, 2017

Richard, I've had good success in these situations using deferred payment. Your biz dev folks act as consultants, accruing fees until payment is triggered by a qualifying raise. If you would like a copy of an agreement, contact me privately.

John Currie ITERATE Ventures - Accelerating Science & Technology Ventures

February 26th, 2017

Richard, I do this type of work on a daily basis. Your question should be, "How do we compensate good sales/mktg. people before funding?" (details of equity structure are not the issue, imho). VALUATION of Founders equity is the key question here, as well as your believed Cap table upon Series A. investment. Options are a great way of helping out the tax burden. Vesting is a standard practice that all parties should be familiar with and OK with.

Alan M. answers this bigger question of how to compensate. Cash is the best motivator for most sales people. But what you have to understand deeply is your current sales/mktg bottleneck. Is it really sales? Or is it leads? Can marketing automation do more to advance the co.? "Keeping people around" should not be the objective. Keeping productive people around, who can figure out this S&M model is what you need. What's that worth?

Summay - for any senior exec hire, not just sales, you are enticing them with the value of your shares TODAY. You are (probably) offering execs to buy into your today's share price, and you can structure that compensation in several ways.

Bel glad to have a convo about it.