Wednesday, March 30, 2011

Offer Equity to C-level Executives as a Recruitment Tool?

Q: Should you offer equity (for free or for purchase) when enticing someone to join the company at the C-level?

A: Some owners like to give up equity to key employees to engender loyalty and commitment to the company and to bridge the gap between salaries in the area and what they can pay. Others do not offer this "equity as payment". There is no right or wrong. Most tech companies offer equity. It's really the only way for them to attract high quality personnel who will work 60-80 hours a week to build the company. Investment banks and other entities pay high salaries for this work ethic but start-up technology companies cannot afford to burn their cash paying those salaries.

I know of someone who has helped a large number of small companies and accepted equity as partial or full payment. She has all this equity that she can't collect on. (No, she is not I.) So if you do decide to offer equity, you must structure your Shareholder's Agreement and/or Buy Sell Agreement to provide minority shareholder rights. Otherwise, you're offering up something that may ultimately be nearly worthless due to the lack of an automatic buyback provision (upon severance or contractual end) or the omittance of non-dilution provisions.

If you do not wish to offer equity, you can offer a percentage of gross profits or of net income. You can offer to pay your new management a percentage of any distributions BEFORE you distribute to yourself. There are a number of ways to structure an offering to someone so the C-level executive you are recruiting can share in the upside of the growth they'll help attain.

If you are a start-up and seeking angel investors, you may be able to obtain investment by an "exec with a check". An "exec with a check" is a C-level manager who likes working with start-ups but does not want to start his or her own company. He or she may have had their own company in the past, but now they'd like to help someone else do it. Since you are early stage and need money, they will contribute their money and their time for a stake in the company.

If  your company is pre-revenue, please do not advertise for a C-level position and in the fine print say you must contribute capital or pay your own way until you make money. You can alienate executives who may consider working for you later on when you do have revenue and can pay a modest salary. There is nothing more off-putting than having a position misrepresented. I've heard tales by C-level executives of how they were recruited (and flattered) only to find out that "there was nothing there". Be upfront. Advertise for a hands-on, deeply involved investor. If you are pre-revenue and don't yet have financial backing, believe me, an investor is what you want.

No comments:

About Me

Popular Posts

Designed By Seo Blogger Templates