New Company – Who Should Get Startup Stock?

WHO SHOULD GET STARTUP STOCK

❏ Today, I’m speaking on Startup Stock: Who Should Get Shares? Some startup founders believe every employee should own a piece of the company. Other startup founders believe precisely the opposite. Some of the founders are in the middle. Which position you take when founding your startup can make a difference in the success or failure of your company. Read on to learn more.

One of my responsibilities as an executive coach is to help founders advance from the idea stage to the build stage. When starting a company, you must assemble a team to help you do it. In high technology, granting Employee Stock Options (ESOs) (Link) is often crucial to attracting key team members.

But “How do I do it, and who should get ESO’s?” ESO distribution is a common question. ESO distribution is why I’ve written Startup Stock: Who Should Get Shares?

This post will focus on the “who” component and not the legal or percentage details. These are essential questions that I will cover in a later post.

You May Not Agree

Now, some of you will disagree with my position on granting ESOs. Some of you will believe “everyone” in their startup should get ESO’s. You might think no one but the founding executive team should. Some will consider that ESOs should fully vest on the first day of employment.

I’ve seen all of these, but I will recommend the “standard.”

By “standard,” I mean that the majority of Venture Capital (VC) (Link) Silicon Valley companies do it “my recommended way.” That doesn’t mean you have to. It’s your company; you can do it however you want. However, remember that if you “do it differently,” it could impact your ability to raise money from investors.

Startup Stock – Importance

Last week, in my post, Best Startup Team Management: Build a Startup Team, I spoke about the need to build a team during the build stage. I talked about how, when seeking money from investors, not friends and family, a team is a crucial component of an investor’s decision process.

I spent 32 years in Silicon Valley, founding, co-founding, and helping startups. It is a highly competitive environment for top talent. It has become a standard operating procedure for virtually every employee to get ownership of any startup. ESOs are powerful marketing tools for a company. “Gold” can enable a founder to attract the “best of the best” to join them in building a business. Without it, top talent would never give your company a second look.

I’ve been a founder or co-founder of many companies throughout my career. Once I cemented the financial viability of my “idea,” I started building my team. With my team, I was most often able to create a successful company by granting them stock options. I can only imagine trying to build a firm with a team with a stake in the company we would create together. However, this does not mean everyone you hire should have ESOs. Keep reading to understand why.

Team Does Not Automatically Mean Co-Owner

Bringing a person into the company does not automatically mean that the person gets co-ownership. Nothing written in stone says you have to give anyone in the company part ownership. People often confuse this point when they think of “startup.”

When you join a startup in Silicon Valley, you often get ESOs or a right to buy shares. These are startup stock options. In this area of the world, it has become “standard” to get a “piece of the company.” Usually, this is because cash is tight. You get “options” in return for a discounted (or no) salary for an extended period.

In reality, the company often dies or is acquired for less than whatever debt it has. The “options” to buy shares you’ve gotten are worth zero. Keep this in mind whenever you trade a below-market salary in return for shares. In reality, few ESOs will ever have a positive value. I

I only recommend taking a substantial pay cut for a significant period if you can afford to do so.

When do I grant startup stock options?

All startup stock share options you grant key employees should come with a “1-year cliff” and “4-year vesting.”. The “1-year cliff” means if the person leaves or you terminate them within one year, they get no shares. That gives you time to see if this person brings value beyond their paycheck. Only people who exceed their paycheck value should get shares.

For example, I love bookkeepers but would likely not grant ESOs in my company. Same for most sales or marketing personnel. These are commodity roles, not “key contributor” roles, at least until they have proven otherwise. Any position can later qualify for shares in the company if they demonstrate they bring value beyond their paycheck. Underpaying a person because you don’t have the cash to pay market rates is a reason to grant ESOs.

Assuming a proven track record, I would grant ESOs a “C-Level” or “VP” role. I would wait six months if it were their first time in that senior role. Then, I would either grant them share options or terminate them. Shares are “Special.” They mean this person is a “key partner” in your business idea.

They are “key” to shepherding the “idea” through the build, launch, and growth stages. If this definition doesn’t fit the person or the role, pay them a fair market salary rate. The challenging work of your startup will reflect well on their resume in the future. Remember, if their value to the company changes, you can always grant them ESOs at a future date.

Conclusion

I hope with this article, Startup Stock: Who Should Get Shares? I have convinced you that not every role in a startup requires ownership in your company. There are markets where it is all but required to grant ESOs to attract key employees, but not everywhere. Remember, every person you give options to in your company becomes a co-owner for whom you are responsible to some degree!

If you can afford to spend a few months “making a go” of a startup, do it! You will usually learn a lot about so many things, including yourself, in doing so. I’ve done startups for 35 years and counting, and I wouldn’t have it any other way!