Two Tales of "Working For Equity" ...

Working for equity only is, realistically, the way most startups have to get going. True founders - the gritty, enthusiastic, determined, change-the-world, passionate types - will do this for a long time, including well after they start paying others on staff some real cash. While there have been times in the last dozen or so years, usually during times of venture capital excess, that cash to founders, early-stage executives and other key employees has matched regular market compensation (still with the upside of the equity), this is not true in the vast majority in the start-up game.

In my line of work, consulting to a range of startups as CFO, mentor, COO, counselor and therapist, I come across many "opportunities" to work for equity only and I have a couple of current clients where I do just that. In both cases these are pre-funding companies I believe I can help and where I believe in what they do and how they do it. In both cases the founders pay themselves nothing in cash, and what little money they do have goes to other resources they need to get to a funding milestone.

These are fair arrangements I enter with my eyes open and - particularly in my role - its clear very quickly whether this is equitable or not. Compensation-wise the biggest challenge is insuring people are respectful of my time and skills (when they don't write real checks for hourly or project work they don't tend to be quite as diligent on this as one would like!).

Then you find the people who just don't get it. Recently I was offered the opportunity to help a company and the opening gambit from the CEO was "well, we can only pay equity and in your own blog you say that's OK". Er, yes, but when it turns out that you have a staff of 15, all on salaries, a $3.5m a year burn rate and your equity is worthless due to numerous recapitalizations and bridge loans from investors then either you don't get it or I'm stupid to do it.

The second example came along just this morning. Someone in my network forwarded an email to me from a recruiting firm that is quite active in the Valley. They are looking for a "a stellar CFO to be their financial lead as they build their foundation and move into fast growth" and it goes on to describe all the usual stuff about how you need to know how to scale tall buildings in a single leap and conjure up millions for the business while providing the adult supervision.

Then come the red flags: "you can be an integral person as they raise a C-round of financing" and "we're also looking for someone with the ability to work for equity in lieu of a paycheck at first". Translation: "we've blown through two rounds of funding already and we need to try and convince some sucker to work for nothing and pull our asses out of the fire".

Worse yet, the same recruiter, on their website, is posting a position for "a strong, confident and very savvy executive assistant to support the CEO" and for which they will pay $80,000 a year. The company description makes it crystal clear that this is for the VERY SAME STARTUP looking to pay nothing to the sucker CFO. What kind of client is this that has blown through the money, wants a top-notch CFO for equity only and actually thinks its OK to waste $80k a year on an executive assistant to the CEO? Hello startup, exec assistants to CEO's are out of the question, let alone for $80k! Looks like you should have hired a CFO a long time ago!

Don't get me wrong. Working for equity only is a perfectly valid way to go. But get it right:

• Make sure the arrangements are fair and equitable to all. Don't be paying yourself or others a decent salary and then expect someone else just to work for stock
• Don't mislead someone about the value of the equity. If you have $30m of preference in some manner stuck in front of the Common, then convince yourself of the value of the equity before you try and convince someone else.
• Be respectful of people's time and skills and make adjustments to the arrangement if it's no longer in balance (either way)

Good luck on that Series C raise, by the way!

Comments

[Robert David]

This same 'later stage can't pay you anything up front' ruse gets done for sales and marketing types, too.

It usually takes one bad experience for people to understand that working for sweat equity is a bit 'stinky' - fool me once, shame on you, but fool me twice, shame on me.

That's why it makes sense to get some combination of cash/deferred cash and equity, if you can.

~Robert