Here is a puzzle – how do you pay a startup team before you have any money?
Well, the obvious answer is that you can’t – but, nevertheless, the team needs motivation and hence, that is why the conversation begins with equity.
Or does it?
One alternative is to create a debt for hours worked to the company – which can be redeemed at some future stage.
However, a company with no sales but lots of debts quickly becomes unattractive to investors even if it does start to make a few sales.
So, for the early stage startup we find ourselves back with equity and the question of how do we share it?
How do you compute a chunk of equity for effort, sweat, work and ideas/ inspiration?
3 Key Principles
From my work with the idea alive startup accelerator and the Equity Team Tool, we’ve discovered that a transparent and logical process is critical to the success of sharing equity amongst a founding (and usually, a late joining) startup team.
In our view, there are 3 key principles that need to be resolved.
What do you contribute?
How important is the contribution of each team member? Is it ‘important’ or ‘critical’? Important might be defined as ‘making a measurable difference’ whereas critical would be ‘we will fail without this skill delivered at a high level’.
Now, don’t make the mistake of thinking that bookkeeping, for instance, is critical – because without it the business will fail to file accounts and become illegal / get closed down. No, bookkeeping is an example of something that needs to happen – sooner or later – but it can be done quite badly and the business will survive. Equally, an investor joining the business is likely to help you sort this out quickly.
Instead, ask ‘is design important or critical’? So, most people either can or know someone who can knock up a logo and a website – therefore, the design element has to go well beyond what the team might be able to do themselves. Hence, unless the brand is especially important or their is a device that is very sensitive to usability, then design is probably ‘important’ rather than critical.
Where design does become critical is in the area of gaming – or serious gaming – where the usability of the product / service is critical to success of the business. However, at this point we are no longer talking about generic ‘design’ but specific ‘usability design’.
Equally, within a startup teams you need someone to cover each of the roles of visionary, hustler, people matcher, feed back expert, product development expert and fund raiser. These are the roles that we can identify with the eTeamTool – and the capacity to assess who in your startup team has those attributes (or ‘could’ have them with support) and who you might need to add to the team (and pay equity, of course) is critical to solving this equity conundrum.
Clearly, to solve this question you need to be able to identify firstly, what the startup requires and secondly, what attribute each person brings – is it a key entrepreneurial attribute or is it an important (or critical) skill?
2. How long or how much?
The next question to ask is how long will that skill or the commitment be required?
Here again we can distinguish between a founder or startup attribute – such as delivering the vision and the passion – which is required for a good long time or a skill, such as design, that might be required to deliver on a project and then not required again until the next part of the product(s) development cycle.
Of course, in reality, design will require a series of iterations and adjustments – but it is still likely to be a less intense involvement than the person setting out and leading the vision for the business.
3. What stage is the business?
Finally, we can now ask ‘what stage is the business at’? We split this into 3 parts – the not paid, the underpaid and the fully paid parts.
If you have a director joining the business once everyone is paid a market rate salary, should he or she get the same shares as the director who joined at the beginning and work unpaid – and took substantial financial risk as a consequence – or a different amount?
Well, unless you want to risk large scale warfare amongst your core startup team, you must find a way to resolve this.
At this point, you might be tempted to re-calculate the early entrepreneur’s works at a day rate and create a debt. However, this doesn’t resolve the ‘took the risk’ factor that the entrepreneur – working for nothing – had to face the risk that the enterprise would end without paying him anything – and yet he continued.
Business Angels are often dismissive of this point – well, it suits them to be so, because they come in later. However, if you treat the early risk takers harshly, then you are potentially storing up future problems for the team – and those problems can damage growth.
It is far better to create a reasonable mechanism to recognise the risk that the early entrepreneurs took with their start up.
So, where does that leave us?
Where this process leaves us is with a three dimensional model and a requirement to assess each person against both skills (critical and important) as well as startup attributes (again, both critical and important).
You can use a tool like the Equity Team Tool to help you do this – or you can attempt it on your own.
Either way, spending time getting this right – documenting the steps – and getting everyone’s agreement – will significantly improve the motivation of the team and the quality of the working relationships.
Equally, if you are wondering why your startup team isn’t working the way it ought to, then perhaps you need to lift the lid on the roles, contributions and commitments of your startup team.
Want help assessing and agreeing your startup equity structure? Think your team would respond to an independent view and rational process of assessment? Then get in touch with me, Neil Lewis at Media Modo or click here if you want to join a startup accelerator that will help you build your management team and resolve your equity shares.