How do you convince someone to join your pre-revenue startup as an employee, advisor, or board member?
Everyone is an investor.
This is a great question because it’s one easily misled as founders naturally treat human resources as potential employees.
That’s the mistake.
Employees get paid. You can’t attract talent to participate as employees if you don’t have any capital with which to work.
Treat everyone as an investor. Literally, everyone in fact. For example — wanted to get the attention of a reporter so as to garner some news coverage? Treat THEM like an investor.
Since you have no capital (or in the case of my point to consider about journalists, audience and brand awareness), you have to focus on what’s in it for them.
Three things matter most to legitimate startup investors. THREE. You read a ton of content about validation, MVP, customers, revenue, etc. All of those perspective are platitudes; they’re meant to inspire you that you CAN or teach you how you MIGHT convert investors.
The fact is end of the day, three things matter, period:
- Outcome. Can this exit? Will it? No ROI for investors, no investors.
- Competitive Advantage. Can you develop and maintain a market? If you lose to competitors, no investors.
- Team. When all else fails, this can overcome the challenges in the first two cases.
You want me to join your team and invest my time, talent, network, and experience… am I going to get something out of it? Will the equity be worth anything?
It’s the exact same question an investor asks.
They don’t really ask how much equity they get; equity in and of itself isn’t worth anything. The business MUST exit for equity ownership to be worth something beyond ownership and job.
So, can you? Will you?
How can you convince me that competitors will not put us out of business? Is the team capable of accomplishing this?
Notice, as I didn’t call it out, I only mentioned it… to do this REQUIRES that you give everyone ownership. Equity.
Investors only give capital in exchange for equity.
Unpaid employees and investors, thus people investing their time in the business, rightfully expect the same.
The challenge then is an exploration of HOW MUCH equity relative to each consideration. And it is a challenge. There are conventions (standards) but it’s also all highly negotiable based on your stage, their experience, their role, etc.
There are many tools and books on the subject. Slicing the Pie. Equity Calculators. Note that there is no definitive answer to each circumstance, there is only an agreed term between the venture and the person.
Start by appreciating that the equity due someone has less (but not nothing) to do with their job and more to do with your stage, their role, their value, and the potential valuation of the company with which they can consider equity vs. compensation.
If you are seed stage or even earlier, the person gets more than were the case at a later stage. They are taking more risk and have a greater impact at this stage and thus, deserve more.
Disagree? I think you treat your team like employees and that has implications to their passion, commitment, and contribution. Are you paying them well enough? No… right? So, at a seed stage, appreciate that you are VERY likely to fail and the team contributing to your success is making a greater investment in that success than would be the case when you are more established. You are likely to completely fail under which circumstances, you all lose everything. Everyone walks away with nothing. That’s a risky proposition for anyone contributing to your success and that risk warrants more investment in THEM to ensure they benefit in some way should you see any degree of success. If you aren’t paying them a market rate, they deserve more because they are investing their opportunity cost in you.
Are they considered a founder? C-level? Part time? Consulting or freelance? Or (god forbid), are you outsourcing? More to less, relative to my list. It has nothing to do with the job. The developer or marketing person doesn’t get more or less because of what they do, it’s the level of their involvement, their role, that matters.
If you’re outsourcing consider that the right answer is that they get no equity unless you aren’t paying them at all. Individuals who are building a company of their own are making their own investment, in their company. It’s a subtle distinction from consultants and freelancers who are investing in you but will forever remain free from you; individuals can be committed to you (and you to them), they get paid and earn ownership (though to a lesser degree, obviously, than full time employees) — outsourced companies are only committed to their business and you don’t want to mis-perceive ‘partnership,’ or non-compete as suggesting that they indeed care about your success as they are building their own company and will focus on the success of that first.
Their value is as a person with an industry standard compensation. That’s what they are worth. I appreciate that you think they are worth what you think your app is worth or what you are willing to pay to get something done but you can’t think that way when dealing with equity. A job that earns $300k is a person valued at $300k a year.
So, how do you deal with equity if you are only paying them $250k? What if you’re only paying them $100k? Now contrast that against the person who earns, given what they do and their experience, only $150k per year. They are intrinsically worth half as much so under paying them, paying our second hire only $100k when they are worth $150k is proportionally distinct from paying our $300k person only $200k. In both cases, we’re paying 60% of what they are worth but the higher paid individual, the person worth more is sacrificing much more of that value to invest in you.
The POTENTIAL Value of the Company
Having establish who is working with you and their value relative to your stage, the next decision is contingent upon what your company COULD be worth.
That’s a critical path to dealing with equity effectively. It is NOT based on what your company is worth. It’s not based on a perception of future valuation, alone. It is contingent upon being able to liquidate that value and if in the future you can’t exit in some way that they can get cash money for their ownership, their ownership isn’t worth much is it?
Is the company’s equity likely to be worth anything, when, and how much? This requires an exit (or IPO).
If your company won’t likely get acquired, can’t IPO, or you simply never want out, then equity doesn’t really have financial value, it has value in ownership. Be clear, might your company get acquired at any point in the future? Then it has financial value and you can you determine the value of the equity you are granting someone relative to that future value. The distinction is simply that instead of having equity worth something, they are effectively a partner. Begging the questions, do they get a say relative to their ownership?! If the answer is that it’s not likely worth anything and they aren’t considered an owner with an opinion, why would they want equity??
Balance all of those questions first
Then, negotiate it. Balance it with industry standards. And adjust it with cliffs and vesting (also negotiable and not necessarily required to be the standard usually applied).
All of this is helped for you case by way of first creating as much value as possible. And you can absolutely start creating value without actually starting much of the business.
Start, right now, with 4 simple things:
ONE: Get a notebook. Head to your favorite coffee shop and start ONE of 500, sit down, face-to-face, one-on-one interviews to figure out what not to do and to build a foundation of people to whom to turn with the initial solution. Yes, FIVE HUNDRED. Start spending your days caffeinated — you’re going to need it anyway.
TWO: Start marketing, constantly. Not promotion! We don’t have anything to promote yet. Start Marketing — The work of knowing and developing the market.
This is not the same as step #1, talking to potential customers, nor is it promotion. This is market research, competitive analysis, studying from where you might get funding, learning how such things exit, investigating what works and what doesn’t, etc. We do this to such a great degree as this is how we figure out what to do
insider secret: because customers are usually wrong — you do the interviews to figure out what NOT to do and you do marketing to figure out what TO do
THREE: Establish some market share by building out some industry assets: a Facebook group, a twitter, a mailing list, a newsletter… build some assets that are NOT consistent with your company name. We’re not yet building a brand as we don’t have that yet either — build some potential market share through industry related assets from where you’ll find an audience, fans, and early customers.
FOUR: Build the team — start back at the top of the article. No startup in the history of startups is the success of one person. No investor in the history of investors funds one person.