One of the biggest problems many startups face is finding qualified, motivated staff to fuel growth and product development. Working for a startup is a risk, and it’s one that many professionals are – quite understandably – concerned about. Founders have a variety of ways to make the process of working for their startup a less risky, more potentially rewarding experience for early-stage employees. One of the most popular and effective ways is by offering equity to early-stage employees.
In this blog post, we’ll look at the arguments for and against offering equity to your first few employees. We’ll also share the opinions of some of the world’s top startup advisors and entrepreneurs on hiring, equity and early-stage startup staffing.
When you’re growing, focus on quality
Many startups make, particularly those with venture capital, make the big mistake of rapidly hiring someone to fill every possible role. They value quantity over real quality and end up with a large team that’s often disconnected from itself.
In the early stages of your startup, it’s important to focus on hiring people who are high quality. A small team of a top-level people with specific skillsets and the smart, focused mentality required for success will outperform a large team of B-players.
Is equity a major motivating factor?
If you’re a relatively new business without ample funding, you may not be able to offer the same level of compensation that your competitors can. After all, they’ve been in business for years – maybe even decades – and are far larger than you.
One of the best ways to make up for this short-term lack of resource is by giving your earliest hires a share of your business. Equity – even if it’s a small amount – helps to motivate your team and drive them towards achieving success.
It’s worth pointing out that equity-based compensation agreements tend to work best in startups with huge growth potential. Could your startup become the next Google or Facebook? If so, equity can be a major motivator for early employees.
How much equity should you give?
Dr. Tony Karrer, former CTO of online dating website eHarmony, divides employees and founders into three categories: founders and co-founders, early employees and later employees.
The early employees are employees one through 25 – the people that start working for your company at its earliest, riskiest stage. They’re usually risk-taking, ambitious types who love the energy and teamwork that the startup environment offers.
Among early employees, equity can be a hugely important motivating factor not just in persuading them to come onboard and join your company, but in motivating them to perform at their best after they’re hired.
When it comes to equity division, there’s no rule of thumb. Some startup experts are adamant that no non-founder employee should receive more than five percent of the company, while others are more flexible.
Some experts, like Paul Graham, use a formula to determine equity. Others think of it on a case-by-case basis, looking at the employee’s skillset, the value that they can bring to the table and the position they’ll occupy within your business.
Should later employees receive equity?
Giving out equity to early employees is often more of a necessity than a choice; as your company is young, possibly unprofitable and underfunded, equity gives you a powerful alternative to the costs of a competitive salary.
When your company starts to grow and cash becomes greater, however, it’s often tempting to put an end to equity for employees. As with early employees, it’s worth thinking about equity arrangements on a case-by-case basis.
For example, if an opportunity arises to hire an incredibly talented person to add to your team several years into your company’s growth, giving up equity may be worth it. It will certainly provide additional motivation for your new employee!
In fact, some later-stage hires may be significantly more driven by equity than by a competitive salary. Many startups find that employees join them not just in order to find employment, but to feel as if they’re a part of building something valuable.
Understanding the importance of equity
Equity can be a major motivating force for your team, particularly in the early stages of your startup when cash is short but growth potential is immense. By giving it out to the right people – and in the right amount – you can assemble a wonderful team.
However, equity can also be misused and given to the wrong people. An early-stage employee who is compensated with equity but then underperforms could cost your company a huge amount in the long term.
Because of this, it’s important to have a careful hiring process that vets people not just on their enthusiasm for your startup or their work history, but on their ability to bring new value to your business and help your company grow.