Startup Sweat Equity: How much, How soon, What now?

STARTUP SWEAT EQUITY

HOW MUCH? HOW SOON? HOW LONG?(And How Not to Make the Same Mistakes I have

made)

We’re talking about ownership

Sweat Equity is a just another form of compensation

Form usually driven by tax issues (stock, options…)

It is art and not science (but not arbitrary)Almost always a negotiation

Cannot be viewed in a vacuum It will not look right with 20/20 hindsight

Cofounders are UniqueDo you need them? (read blog and comments)

Understand Commitment and PrioritiesUnderstanding CapabilitiesUnderstanding Personality

Vest EquityDocument the Deal

Keep An Open Dialog

Stage is Important

Company Stage

Modified from AVC Blog: www.avc.com

Now paying salaries & equity is worth more

HeadcountFounders: 2-3 peopleEarly Employees: 3-5 peoplePool Recipients: Up to 50 people

How Much? Changes with Stage

Salary/Equity Mix

https://blog.wealthfront.com/startup-employee-equity-compensation/

2011 Data

Equity AmountFounders – Crapshoot

Early Key Employees – One offs

Later EmployeesBest to create something objective as a guide for later employees

and adjust as equitable.

Example from Fred Wilson: Determine market cash comp (not what you actually pay in cash comp) and then multiply by up to 1

And provide equity equal to that value

How Soon? VestingHow long do you have to stay to earn/keep

stock?Typical: 25% to vest at the end of the first year

remaining 75% to vest monthly over next 3 years

Cliff vesting protects from a bad hireInvestors may reinitiate vesting

What Now? Investors, Fired, Quit, Mergers, Acquisitions, Performance, Retention

Leave or fired? Contract governs but fairness is good

Investors expect to see reasonable termsAcceleration? Single/Double Trigger? Full/Partial?

Retention Programs

Recommendations

Grant equity as early as possible (tax)Make system as objective as possible

Use the benefit of 20/20 hindsight to correct inequity

Consider retention grantsDon’t get greedy – Smaller piece of bigger pie

Don’t Negotiate in Percentages

Good Luck!