By John C. Baldwin
No one knows what the future holds, which is why the discussion over equity is important to have as an early-stage founder. When building a company, you quickly learn that teams fall apart not just because of differing opinions, but equity issues too.
I met with my team early. Keith, my CTO, and I discussed the shares at the very beginning of this journey. Last week, I met with an attorney to discuss the best course of action to protect our company.
Keith and I’s business relationship is strong because it’s transparent. He knows how much equity we each have in the company. Once we receive funding, we’ll know where that money will be used. But more so, we’ll know when to pivot and go through with our second and third option in our go to market strategy.
We have set guidelines for each of us. Before going into business with anyone, set clear expectations – the same protocol should be taken when shares are being disbursed.
When meeting and engaging with founders, you hear horror stories. First time founders have been taken advantage of by listening to fast talking conmen in tailored suits promising to connect them to movers and shakers. Of course, if they provide equity – upfront.
That’s a recipe for failure. Founders, under no circumstances should you ever give any ownership of your company away upfront. You vest it over a period based on merit and a return on results for building your company, brand, and partnerships within the company. If you sign away a piece of your company’s ownership without receiving anything in return, you’re doomed before the company begins.
So, be mindful of what equity you give away. We will begin our fundraising round next month. It is exciting, nerve wracking, and doubt sets in. This is natural and very much a part of the process.
When pitching our idea, we look for investors to write a check and offer guidance along the way. We are required to give up a portion of our shares for mentorship, guidance, and yes, capital.
Originally, I looked for funds to get this idea from iteration to market. What I learned over the course of a year since becoming a founder is not to take equity lightly. All too often, first time founders make huge mistakes.
Passing out equity freely without thinking “Is this person worth having ownership in my company?” leads to dilution. That is not the best use of your cap table. The hush-hush tactic many successful founders keep secret is that some are single digit owners of their company.
There is a major push to bootstrap and avoid traditional funding rounds until it’s required because you lose a piece of your ownership each fundraising round. Again, it’s important not to become too fascinated with the allure of the startup world and Silicon Valley. It is a business. People are smart and calculating.
Recently, I received a direct message via Twitter thanking me for writing about my journey. He will be starting his own business soon. The support is appreciated. However, these are teachable moments I can share and assist founders in avoiding.
When it’s time to divvy up shares, think of what each person brings to the table. Again, create clear and concise expectations. Avoid the corporate lingo and HR job postings.
Imagine if FENDR was hiring a VP of Sales. We aren’t “looking for a team player.” You’re giving ownership away to a person that will “generate partnerships with other businesses with more than $25 million in annual revenue to utilize your business.”
Their goals are to reach 25 signed deals by the end of the fourth quarter, bringing in more than $2 million in revenue. These goals can be tracked and measured. At the end of the year, when the executive team reviews their vesting schedule, you can determine what goals were met or unmet.
When difficult conversations happen — and they will happen — you can circle back to the signed agreement. All too often, we forget action speaks louder than words. This isn’t personal, it’s business.
As the CEO, it is important that I look after the best interests of the organization and my team. Keith and I have discussed an employee incentive plan. It clearly lays out what the expectations are for the job. Meeting those goals ensures not only one’s employment with FENDR but their shares earned over a period of time.
One idea suggested was a bonus amount of equity given if a co-founder exceeded a goal. It is important to remember that equity is the incentive. As the company’s valuation grows, so does the value of their shares. When FENDR wins, so do its shareholders. When we do something great for the company, the equity is worth more. Circling back to my original thought of rewarding my team when they exceed a goal, I can still reward them. However, instead of equity, I use a cash bonus instead.
Follow me on Twitter and share your stories as business owners. How did you handle the discussion of equity and/or ownership? What ways would you handle your company’s expectations for the executive team? Let’s connect and discuss!
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