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 founders are in the middle. Which position you take when founding your startup can make a difference between the success and failure of your company. Read on to learn more.

One of my responsibilities as an Executive Coach is helping founders advance from the Idea Stage to the Build Stage. When you are starting a company, you need to assemble a Team to help you do it. In the high technology arena, granting Employee Stock Options (ESO’s) (Link) is often key 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?

In this post, I’m going to focus on the “Who” component of this question and not the legal or percentage details. These are essential questions that I will cover in a later post.

You May Not Agree

I will state now that some of you will not agree with my position on granting ESO’s. 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 believe that ESO’s should fully vest on the first day of employment.

I’ve seen all of these but what I am going to recommend is 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 whatever way you want. However, keep in mind that if you “do it differently” it could impact your ability to raise monies from investors.

Startup Stock – Importance

Last week in my post, Best Startup Team Management – Build a Startup Team (Link), I spoke about the need to build a Team during the Build Stage. I talked to how when seeking money from Investors, not Friends and Family; a Team is a crucial component of the decision process an investor makes.

I spent 32 years in Silicon Valley founding, co-founding and helping Startups. It is a highly competitive environment for top talent. There it has become a standard operating procedure for virtually every employee to get ownership in any startup. ESO’s (Link) are powerful marketing tools for a company. It is the “gold” that 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 (Link). I can’t imagine trying to Build a firm without a Team that had a stake in the company we would be building together. However, this does not mean that every person you hire should get ESO’s (Link) in the business. 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 in the company. There is nothing written in stone that says you have to give anyone in the company part ownership. People often confuse this point when they think “Startup.”

In Silicon Valley, when you join a startup, you will often get ESO’s (Link), 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, more often than not, the company dies or is acquired at less than whatever debt it has. The “options” to buy shares that you’ve gotten are worth zero. Keep this in mind whenever you trade a below-market salary in return for shares. In reality, few ESO’s will ever have a positive value. I

don’t recommend taking a substantial pay cut for a significant period unless you can afford to do so.

When Do I Grant Startup Stock Options?

All Startup Stock share options you grant to Key Employees should come with a “1-year cliff” and “4 years vesting”. The “1-year cliff” means if the person leaves or you terminate them within one year, they get no shares. That allows you time to see if this person is bringing value beyond their paycheck. Only persons who exceed their paycheck value should get shares IMHO.

For example, I love bookkeepers, but I would likely not grant them ESO’s in my company. Same for most sales or marketing persons. 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 are bringing value beyond their paycheck. Underpaying a person because you don’t have the cash to pay market rates is a reason to grant ESO’s.

I would grant ESO’s to a “C-Level” or “VP” role, assuming a proven track record in that role. If it were their first time in that senior role, I would wait six months. 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 rate salary. 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 ESO’s at a future date.

Conclusion

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

If you can afford to spend a few months to “make a go” of a startup, then 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 wouldn’t have it any other way!