What percentage of equity to give to first employee?
Discussion
Hi,
I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
topgunkos said:
Hi,
I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
What is his role going to be?I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
Impossible to say what equity you should offer in exchange for a 50k drop in salary without any figures.
Have you got any forecasts/valuations?
50k and a large chunk of equity? Tell him to start his own business..
What you need is a proper job description ,flow chart and tick list and regulating the performance. Fact is even brain surgery could be performed by a spotty kid in mc Donald with this for little money. Business isn't rocket science!
What you need is a proper job description ,flow chart and tick list and regulating the performance. Fact is even brain surgery could be performed by a spotty kid in mc Donald with this for little money. Business isn't rocket science!
topgunkos said:
Hi,
I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
What is his role? Is he generating sales, writing software, managing content? If he's adding value you could discuss a bonus package dependent on performance. Given the success (or lack of) for most mobile apps, even a 50K salary looks like a big hole in your finances.I am ready to launch a new startup in a few months which will be a mobile app. I am in talks with a potential employee who I am very very keen on but is out of my reach financially at the moment. He would like 100k a year but is willing to drop salary significantly if equity is available. How much equity would you offer in exchange for a drop in salary to 50K?
It is just me at the moment, and the persons role will be crucial.
CornishRob said:
What about a percentage of profit as a bonus. The more you make, the more he gets.
Obviously the % you give him is the next question.
Isn't that essentially similar but worse than giving him a percentage of equity? If he's taking the profit, you can't even keep it in the business.Obviously the % you give him is the next question.
AyBee said:
Isn't that essentially similar but worse than giving him a percentage of equity? If he's taking the profit, you can't even keep it in the business.
The opposite surely. A bonus is a direct incentive to improve sales/profits and helps grow a startup business quickly. Bonuses can be adjusted in subsequent years (far more easily than equity) and last only as long as the employee is performing. Finally, you don't want to dilute equity early in a company just because you can't afford a particular employee (who has not yet proven they can perform as well as you'd wish in their assigned role).StevieBee said:
southendpier said:
None. Never give away equity. Work harder at finding a replacement.
This. And this again.You can't just say "Find someone else" when his budget appears to be about half the market rate for that person.
OP, will this person realistically earn £100k elsewhere? If so, effectively he is putting in £50k to the company. Perhaps £100k if it will take 2 years to get any return.
How does this compare with your own investment?
Is the app the actual business i.e. you are trying to make an app to sell on iTunes, or is the app just a part of another business (like a takeaway for example)
blindswelledrat said:
StevieBee said:
southendpier said:
None. Never give away equity. Work harder at finding a replacement.
This. And this again.You can't just say "Find someone else" when his budget appears to be about half the market rate for that person.
Every few weeks on these pages are people moaning about certain shareholders getting more than they deserve or walking away with mega bucks when they've apparently contributed little to the business and almost always its down to the fact that equity was given away in lieu of payment of some kind. It's easy to be generous when equity has zero value. Different when it accrues some.
Equity should be earned (and hard earned at that) and there as an incentive or to retain someone who is absolutely vital to the well being of the organisation (which, again IMO) is a a very rare individual.
In respect to the OP's situation, if this chap accepts a salary of £50k with the remainder of his requirement being given as equity, what this shows is that the chap can live on £50k a year - you can't buy shopping with equity, only cash. What i'd be doing is setting out defined and timed objectives which, if met (individually and corporately) small chunks of equity are then offered, or a cash bonus. Most people would go for the cash (as most people who understand the value of equity are already in business anyway). This way the chap could well earn more than his required £100k, the OP retains the equity - as he should; it's his baby - and the OP also gets to see whether this chap is as good and effective as he says he is. If he does go for the equity, then at least he's earned it and the OP manages the risk.
The other angle is that if £100k is what it costs for the expertise then that should be included in the business plan and if the business plan stacks up, then any shortfall should be reasonably easy to finance.
As I say, exceptions and opinions vary. It's just that I feel that if someone has put in the blood, sweat, tears and effort and risk, then they deserve as much as a possible from the venture as possible.
Tuna said:
AyBee said:
Isn't that essentially similar but worse than giving him a percentage of equity? If he's taking the profit, you can't even keep it in the business.
The opposite surely. A bonus is a direct incentive to improve sales/profits and helps grow a startup business quickly. Bonuses can be adjusted in subsequent years (far more easily than equity) and last only as long as the employee is performing. Finally, you don't want to dilute equity early in a company just because you can't afford a particular employee (who has not yet proven they can perform as well as you'd wish in their assigned role).AyBee said:
I skimmed over "bonus", apologies. As an employee, I'd be unlikely to go for that though because something out of my control could happen that would result in me getting much less than my requested salary. At least equity incentive is within control and can't be taken away.
Having walked away from a very large equity offer (I could have retired on it..), I'd say most equity in small businesses is nearly worthless. There are various ways it can be diluted or reduced, and you are utterly dependent on the company 'cashing out' at some point. If you've got equity in a company that is essentially a 'lifestyle business', you're never going to see a penny. The first question you have to ask yourself when offered equity is what is the plan for equity release.We've still not established what this employee does that makes him worth 100K a year though, so discussions on how his pay is made up are a little pointless.
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