June 02, 2017

211: How to Distribute Equity in the Early Days of Your Startup

In this episode, Steli and Hiten talk about the tricky aspect of giving equity. While there is no standard way to give equity as companies follow their own rules, there are norms that you can choose to follow—especially if you are just starting. Listen as Steli and Hiten give their tips on how you can negotiate equity with your team members, what a fair offer would be for early startups, and how such a deal communicates TRUST and a long-term relationship, at the end of the day.

Time Stamped Show Notes:

00:07 – Today’s episode is about how to give equity to team members

00:40 – There are formulas and calculations on how to compute equity, but Hiten does not think there is a right answer for this

01:20 – There are norms on how equity is given: the year cliff and four year vesting

01:33 – The year cliff is when you get the first chunk of equity—which is a quarter percentage equivalent after your first year—over a four year period

02:08 – Monthly vesting

02:24 – There are other rules for other companies

02:48 – Hiten says that if there is a lot of equity to be given, he would go with the standard

03:20 – In the early days, many startups struggle with the equity question

03:55 – In some cases, it may be easy—especially for those who spend equal amounts of time and just divide it equally

04:26 – In most cases, everyone is doing a different task and the value differs not just for founders but also those who have hired their first employees

05:36 – There is a lot more material available now to do equity right

06:06 – Equity is not really standard until much later in the company

06:37 – What matters is that people you hire are incentivized to do the job

06:55 – Giving it too early, even before they prove their effectiveness in the company, is bad for your business

07:15 – This is what the year cliff is for – to do a good job and get your equity

08:03 – Equity is not really meaningful in the early stages of the company

08:16 – When negotiating with someone who is expensive, the lever is the salary and the equity and the value assigned to the equity

09:21 – The earlier on someone is part your company the more equity they should get, especially if they are holding a senior role

09:45 – The equity is a component of the offer

10:15 – Steli knows of a company that gives as little equity as they can get away with to their early employees, but thinks this can easily be rectified

11:23 – There are also examples where people give too much equity that it creates resentment within the founding team

12:03 – It is almost impossible to renegotiate a lower equity

12:18 – Be thoughtful about how much you are giving away as it would be better to give less rather than more to avoid a problem

12:38 – In the early stages, if someone is given more than 1%, there should good justification for it

12:51 – The quarter to a half point is a reasonable amount

13:25 – For employees, look at the equity and number but at the core, it’s about the TRUST

14:30 – Ask if you can trust the founders or if they are easily fooled by someone else

15:15 – Do you trust the people you negotiate with to be fair over the long-term and that you can see yourself being around long-term?

15:58 – Tap into the best practices and educate yourself; be thoughtful, fair, and balanced in giving out equity

16:21 – Think about what you’ll give upfront

16:30 – End of today’s episode

3 Key Points:

There are no clear cut rules in giving equity, but there are norms or standards that can be used as a guide.

The year cliff ensures that the person has proven himself to be effective for the company.

Trust is a KEY factor in negotiating equity.

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By Steli Efti & Hiten Shah: Serial Entrepreneurs, Sales & Marketing Experts, Startup Investors & Advisors, CEOs running multi million dollar SaaS Startups

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