I was recently on the Entrepreneur on Fire podcast, interviewed by John Lee Dumas about my entrepreneurial background, the startups I’ve founded, and what I’m doing now. We had a good conversation, well worth listening to if you haven’t heard it yet.
As a result of that program, I’ve received some interesting email from other entrepreneurs, including this one that asked a classic startup question: should I hire someone, and if I do, should they become a co-founder and get stock?
Here’s what the young man asked me:
I’m creating a new online business with both a B2B and B2C component, and have a co-worker who is a young entrepreneur as well and is on fire for my idea. He is really eager to help me in any and all ways possible. I would love to have him on my team; however, I am nervous with bringing on any potential “partners.” Maybe it’s a pride thing, or a control issue. What’s your take on this? How could I creatively enter a value-sharing relationship with this guy without giving up equity in my company? How do I start a team without losing my identity as the founder and president?
Your dilemma is a common one for founders, the question of whether to bring someone else on as an equal or whether to hold tightly to the proverbial reins. Thing is, most founds think that it’s the idea that’s so valuable, but it’s the implementation. In fact, ask a VC, they’ll tell you that ideas are a “dime a dozen”. It’s the team that smart investors are betting on, whether the company delivers what it originally promised or whether it “pivots” and delivers something different, but more valuable to the marketplace.
With that in mind, I would say that if this other guy really has a lot to offer that helps increase the chance of the product getting out the door looking great, then seriously consider bringing him on the team. HOWEVER, I absolutely believe that whether they’re going to be a Board member, an executive or just a programmer or salesperson, that their stock should vest over time to ensure that they stick with it and are just as enthused about sticking around for the long run and making it a big hit as you are.
This generally works like this: You offer this guy, oh, let’s say 10% ownership in the company. That means that if you’ve already incorporated – and you absolutely should do so if you haven’t – then you have a certain number of shares issued by the corporation. Let’s say you issued 100 shares. Now ten of them have this guy’s name on them. But he doesn’t get anything yet. Let’s say you want to ensure he sticks around for two years. You can then have a 24mo vesting period where each month he gets 1/24th of his shares. Or to make the math easier, every 3 months he gets 2 shares, and on the day he hits his two year anniversary the remaining 2 shares are also awarded to him. Total: 10%.
If there’s an acquisition even during those two years, you can decide whether to “accelerate his vesting” and grant him the full 10% or keep the schedule as-is, and if he ends up with only 5% of the company because it’s only halfway, well, that’s still a pretty sweet deal, right?
The wrinkle is if you raise additional capital and issue more stock for them. Each share you add dilutes each existing share, so where you started out with 1 share = 1%, if you issued another 100 shares for investors, you’ve just diluted each share by 50%, so his 10 shares are now worth 5%. Then again, 5% of a big company is worth a lot more than 10% of a tiny one. One way savvy investors try to work around this is through what are known as anti-dilution clauses, where each time you issue stock they are automatically allocated a portion of it to ensure that their percentile ownership remains the same. So in that situation, your partner’s 10 shares would automatically become 20. Good for him, not always what investors want to see.
And finally, one more thought: Do you enjoy working with this guy and is he going to be able to help make the company fun to work on, or is he going to be a whiney, immature partner who thinks the world revolves around his wants and needs? If the latter, then hire him as a contractor with a work-for-hire contract and give him a trial run to see if he steps up and does a great job or bears out your fears. Firing a loser is a lot easier if they’re not a co-founder or partner, for sure.
Hope that helps you out!
Now, dear reader, what’s your two cents? Did I offer good advice, or would you like to share something different with the entrepreneur who sent this question to me?