Nowadays, with more and more individuals wanting to feel ownership over what they do as a key facet of job satisfaction, the question of startup equity becomes a pertinent one in almost any startup.
So as an entrepreneur, or as a staff member in a startup, what can and should you expect?
Considerations for Entrepreneurs – Framework for Giving Equity to Different Staff Types
As an early stage entrepreneur, we recommend you envisage your startup as a 3-5+ years project at least when considering offering equity (in whatever format – most commonly as vested share options). Therefore, someone who does a one-off job is unlikely to qualify, but someone who wants to offer continued, regular service in the medium-long term may be more appropriate.
Importantly, you should remember that (a) equity is a currency and may be used to supplement a lower (or no) income, and (b) it should almost always be earnt over a period of time, rather than unconditionally granted up front.
As a starting point, you should consider our ‘Equity framework for Early Stage Staff’ (download available for members below) when considering whether equity is an appropriate form of incentive to offer in the wider context of your business.
Considerations for Entrepreneurs – Raising Investment
If you want to raise investment in future, then you should be keen to ensure that your company shares are not spread all over the place. Partly, this is important to show you have your ship under control, and also partly it can decrease the attractiveness of the investment if a percentage of the company is already held by people who no longer have any involvement with it.
When offering equity to anyone, the priority with future investment in mind should be to ensure that:
1. There is clear rationale for any decision to award equity
2. You take a long-term view – e.g. 5% of a very small project now in exchange for a month of work is a very short-term view. If you are going to run this business for years and years, how can you offer 5% of it all in exchange for one month of work?
3. As much as possible, anyone who receives equity should receive them as options which vest (i.e. are earned) over a number of years. (Note: reverse vesting is also acceptable here where shares are issued up front but can be ‘clawed back’ if necessary).
Considerations for Entrepreneurs – Do I need to offer equity to anyone at all?
In short – no you don’t. It’s your business, you can do what you want with it. If you can find people to provide the services you need to get where you want to get to without offering shares in your company, then that is absolutely fine as well if it is your preference.
If you have high growth ambitions, then at some point you will hire a team of employees, and at that stage, the startup community consensus is that it is smart to implement an EMI Share Option Scheme – however up until then, there is often no reason to offer any equity provided that if you need services from other people, that you can actually pay for them.
From a staff member’s perspective, your equity can be a valuable tool to reward and incentivise people who are going to bring you long-term value, so you should make sure you play this card right and use it to your advantage. Equally, you should be wary of people who demand lots of equity without first demonstrating their long-term value to your project.
This Basic Training article was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated contracts and loads of startup legal resources and guides. For queries on company shares, share options, employment matters or generally, contact us directly.