Startup Sweat Equity: How much, How soon, What now?

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Starter Studio chat on founders and employee equity issues

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Startup Sweat Equity: How much, How soon, What now?

  1. 1. STARTUP SWEAT EQUITY HOW MUCH? HOW SOON? HOW LONG? (And How Not to Make the Same Mistakes I have made)
  2. 2. We’re talking about ownership Sweat Equity is a just another form of compensation Form usually driven by tax issues (stock, options…) It is art and not science (but not arbitrary) Almost always a negotiation Cannot be viewed in a vacuum It will not look right with 20/20 hindsight
  3. 3. Cofounders are Unique Do you need them?(read blog and comments) Understand Commitment and Priorities Understanding Capabilities Understanding Personality Vest Equity Document the Deal Keep An Open Dialog
  4. 4. Stage is Important
  5. 5. Company Stage Modified from AVC Blog: www.avc.com Now paying salaries & equity is worth more Headcount Founders: 2-3 people Early Employees: 3-5 people Pool Recipients: Up to 50 people How Much? Changes with Stage
  6. 6. Salary/Equity Mix https://blog.wealthfront.com/startup-employee-equity-compensation/ 2011 Data
  7. 7. Equity Amount Founders – Crapshoot Early Key Employees – One offs Later Employees Best to create something objective as a guide for later employees and adjust as equitable. Example from Fred Wilson: Determine market cash comp (not what you actually pay in cash comp) and then multiply by up to 1 And provide equity equal to that value
  8. 8. How Soon? Vesting How long do you have to stay to earn/keep stock? Typical: 25% to vest at the end of the first year remaining 75% to vest monthly over next 3 years Cliff vesting protects from a bad hire Investors may reinitiate vesting
  9. 9. What Now? Investors, Fired, Quit, Mergers, Acquisitions, Performance, Retention Leave or fired? Contract governs but fairness is good Investors expect to see reasonable terms Acceleration? Single/Double Trigger? Full/Partial? Retention Programs
  10. 10. Recommendations Grant equity as early as possible (tax) Make system as objective as possible Use the benefit of 20/20 hindsight to correct inequity Consider retention grants Don’t get greedy – Smaller piece of bigger pie Don’t Negotiate in Percentages
  11. 11. Good Luck!

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