What would be the best way pay members who worked with me to get company started?

I basically interned at a company on and off for 3 years while in college, then worked in front end sales, commission based for another 2, then went on to architect improvements in that company; which there were disagreements, so I went off to form my own company, my own way.

I’ve put just over a year of 24hr days and maybe 10k into my company, which is in industrial manufacturing, and are about 1 month away from our series A, to launch and build the first factory. Starting about 2 months ago, I began working with another resident at a start-up accellerator I am in, eventually, I gave him a title in the company as he helps with a lot of the paperwork, finding people to do certain tasks, planning and certain compliance/regulatory issues.

Recently we brought on a 2nd person who will be handling all the engineering and systems management, as well as when we expand to new regions, to set-up additional factories.

I havent paid either of them anything so far, but the business accellerator mentioned they would come up with comething for them. The first guy put in 1100 for airfare on a business trip for us. They also said they are willing to put in 5k each for the launch, which hasnt happened yet, but will be helpful to launch. Which I would like to view as a freiend and family kind of thing and just repay it when we launch with maybe a nice present or something also.

They will be part of the team though and an integral part of the company. They are asking for a contract agreement to sign so they feel more comfortable and secure in their role and as part of the company. So far, the first guy has put in maybe 100hrs, the 2nd guy, maybe 25, of actual work, not regarding lunches and chats and this and that.

How would you suggest I contract with them? I feel as though they may want equity, but id rather just give a % of the net, rather then equity. I feel this is motivating as the higher the net, the more everyone makes, maybe not though. They seem to have a strong ideaology that because they put in this time, without forward pay, prior to launch, that they will get a big equity chunk and be millionaires in a year or two; which I dont agree with. The net of the company will be approx 4MM+/yr but that must be invested into more factories and product diversification, along with other business grwoth things, and they should just be happy with executive salaries with their year end or quarterly bonus from the net. I would personall feel robbed if i put in all this work, to just go and make them overnight millionaries and feel it is unjust to me. If theyre going to be millionaires formt his startup, they have to put in atleast 4yrs, as i did, into the industry. but it will probably be more like 6-8. I feel theyre a bit greedy and i maybe gave away too many of my trade secrets, which they think is common knowledge, but is actually deep industry inside information. Well, that was my mistake.

The engineer is very good at what he does, albiet, there is a large supply of engineers in this city, maybe not as skilled, but desperate for qualtiy jobs, especially something so amazing and exciting as this. The tech writing guy is pretty good also, and i do see value in him, but i believe an administrative assistant could similarly fill that role, along with an health and safty manager or warehouse manager/compliance officer. It would parlay the launch to replace them, but it could be done. This business is highly investable and extremely exciting to work for. If we cant come to terms on this before the launch, it will be bothersome, so i’d like to find a middle ground pre-launch.

What type of terms would you suggest?

 


  • Being clear is fundamental. Sounds like there is a big expectation problem looming, and you would be wise to be very clear on your position and communicate that to them.

    One thing I would question is whether you are being fair to what sound like your co-founders. It is doubtful your business would be investable without more people, and they are taking a big risk working with you. You should respect that more.

    The reason you would want to compensate them equity is you would align yourself with them. It seems a share of net revenues could also provide decent compensation, but may be unfair if the value for the company is IP-based, also it may be dangerous for the company as will increase losses. A share of net profits in your business would be highly unadvisable, as it sounds like it will not be profitable for a long time.

    Sam Altman, Y Combinator, is quite interesting on this topic. http://blog.samaltman.com/employee-equity

    The ideal in any start-up is every person involved feels they have ownership, and that is when the magic starts to happen.

    • Hm, yeah I’ve been having difficulty deciphering between having them as co-founders or early stage employees. The fact that they put in just 100hrs doesnt really feel like it makes the mark for me, after putting in 5yrs unpaid into the industry to understand the position to place this company in, then build everything for the company (this is a brand new emerging market very few people are aware of). Basically, if this was the chicken and the biscuit story…I worked in a damn biscuit factory for free for 5 yrs, then figured out the perfect biscuit recipe, then went around and found all the ingredients and the perfect oven, then i put them all together; i guess they brought an ingredient or two, after and helped mix it, so we can make this biscuit together.

      I’ve only known these people less than 3months though, and we only meet once a week, if that. Hardly enough time to really know anyone, or give them a part of my company.

      Do you think its fair to offer them a potential for equity after working for the company for 1year, and the board agrees?

  • When people do unpaid work for your company before there are any employees then they’re clearly founders. If you want an employee-employer relationship you have to actually pay them a market salary. This shouldn’t be difficult to figure out. If you don’t have the money yet to pay them a salary (because you haven’t closed series A yet) then they’re taking a financial and professional risk, and therefore need to be commensurately rewarded. None of this should be news to you.

    I’m glad you realize you’re being a child when you complain about other people maybe becoming millionaires based on your work. Obviously in that scenario you would be making even more money. Don’t let petty jealousies cloud your judgement.

    That said, all founders and early stage (including yourself) should get their stock on a vesting schedule.

    So either get rid of the people or make them founders and give them substantial equity and a salary as soon as series A closes. Your strategy to “bring people on” without paying them in salary or stock is exploitative, and probably illegal.

  • well, i offered the following: sign on bonus equivalent to one months starting salary (equivalent of 160hrs+), full return of vested monies, nice exec salary, bonus incentives based on board decisions (they are the board) and equity after 1yr, based on board decision;that seems a very fair offer to me.

    Maybe it is just difficult to give up a piece of something you built and grew yourself, so, I ask that they put in at least some decent time portion to understanding the industry and company. As I said, this is a new industry, they really have just 2 or 3 months experience and that is mostly from my teachings

    Working for a month or two and receiving a large equity share seems too easy to me. Maybe a fractional equity, as in .5-2% as a feel good thing

  • It is easy to look at hours put in, etc as a means to limit what others receive.

    My suggestion is to look forward: are there skills, contacts, experience, whatever that these people bring to the table to improve the company going forward, and to align vesting equity based on that.

    What matters is that the pie grows – not how you split it.

    Unless you really are a cheap bastard.

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