Post on 22-Jan-2015
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STARTUP SWEAT EQUITY
HOW MUCH? HOW SOON? HOW LONG?(And How Not to Make the Same Mistakes I have
made)
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
Cofounders are UniqueDo you need them? (read blog and comments)
Understand Commitment and PrioritiesUnderstanding CapabilitiesUnderstanding Personality
Vest EquityDocument the Deal
Keep An Open Dialog
Stage is Important
Company Stage
Modified from AVC Blog: www.avc.com
Now paying salaries & equity is worth more
HeadcountFounders: 2-3 peopleEarly Employees: 3-5 peoplePool Recipients: Up to 50 people
How Much? Changes with Stage
Salary/Equity Mix
https://blog.wealthfront.com/startup-employee-equity-compensation/
2011 Data
Equity AmountFounders – Crapshoot
Early Key Employees – One offs
Later EmployeesBest 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
How Soon? VestingHow 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 hireInvestors may reinitiate vesting
What Now? Investors, Fired, Quit, Mergers, Acquisitions, Performance, Retention
Leave or fired? Contract governs but fairness is good
Investors expect to see reasonable termsAcceleration? Single/Double Trigger? Full/Partial?
Retention Programs
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 grantsDon’t get greedy – Smaller piece of bigger pie
Don’t Negotiate in Percentages
Good Luck!