Startup Lesson Learned: Think About Your Shares
Giving away shares of your company too early or too much is a dangerous and often irreversible thing. You should think twice before offering shares or accepting deals where you pay with them.
Only a few startups start with a team of entirely complementary members (a developer, a designer, and a business guy, for example). So most teams will need to buy in external resources. And as money often is short, the first reflex of many people seems to be to offer shares in exchange for a service provided by a third party.
Don’t Do This
Or at least try to avoid it as long and as often as you can. One of the main goals of each founder or founders team should be to keep control of the company. And the more you give away at an early stage, the sooner you will likely lose that control.
There is almost always an alternative way you can choose when looking for resources you don’t have yet. Be it going with the second-best solution (for example, buying a $20 template instead of hiring a talented designer). Or just paying for the service you need (paying that designer the $10.000 he wants, instead of giving him 20% of your company).
And more importantly, be aware of people offering services you can easily go without while demanding large pieces of the cake you are baking.
Two Bad Examples
- I once refused an offer for quite an interesting amount of money. Because the “investor” wanted not only an inappropriate high share of my company but also a permanent position with a regular salary. Eventually, he would have been repaying his own money, so I passed.
- An ambitious team looking for a developer didn’t have much money for a prototype of their product, so they offered me some shares. We never talked about the exact numbers, because I refused to get shares in exchange for only a few days of work (the time I needed to build the prototype).
If You Have To Share, Make Use Of Vesting!
Of course, “real investors” always need some equity. But there are some other situations, too, where to provide equity is probably a suitable option.
It all starts with the founder team. Founding a company is like marrying. You start with a lot of enthusiasm, but you will go through tough times. And with a very high chance, your team will change over time.
Living conditions will change for each of you as well as other things. So it’s smart to talk about what happens when someone is voluntarily leaving your company, or you have to force them to.
Besides that, it’s always good to give some shares to your early and essential employees. And if you can convince the one freelancer you need to sky-rocket your company, equity may be a perfect way to tie that rock star to your company.
For all of these scenarios – partners, employees, freelancers, and maybe more – vesting is something you should consider from the very beginning to make sure you won’t end up with shareholders not providing any value.
For more information, Wikipedia may be a good starting point.
What do you think? Drop me a line and let me know!