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What are the pitfalls to paying in equity early on?

Because we’re cash starved, but well-connected, we’re paying some early developers in equity, without vesting. We prorated a standard equity allocation for time served. We are only doing this with 3 people that we see as future employees and leaders of the company vs. contract work.  Most folks can’t afford to go full-time so this was a great incentive. They know there’s a chance they could be worth nothing and we are clear that dilution is likely in the event of funding.

Any pitfalls we should know about now? Any particular way we should structure the equity to preserve options down the road for the company while protecting them?

  • only real downfall that jumped out to me was the lack of vesting period. even when people seem committed and well-suited to your business at the start, there is no telling what will happen 3, 6, 18 months from now. vesting schedules exist for a reason and thats to align long term goals. without that, and a lack of salary, theres not much leverage on your end to keeping them involved in the business.

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    • Right, its kinda too late for OP to be asking questions when the equity’s already been granted. Can’t renege on contract now.

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  • I see absolutely nothing wrong with no vesting as long as you said its prorated. Nobody would accept vesting without salary, that’s insane – they’re asking to be screwed.

    However a big issue could be that if you go too long on this route, you’ll run out of equity and then you’re screwed.

    Another option is to set up some sort of “future bonus” on an event, like financing or first revenue.

    That way you can setup some sort of vesting for equity but at the same time there’s a guarantee if they get booted from the company before they vest, that if/when you get financing/revenue, they will be compensated for their work.

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    • I have to add that too much equity or “promises for bonus” given to people who are no longer there is a big red flag to investors, so be prepared to tread carefully.

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  • You can go for a while on that, but they won’t stick with you when shit gets real. Because you’re not paying NOW. There’s no level under where they are. In the short term maybe it’ll work, but you will find yourself running out of steam fast. Then you’ll either make money or have picked your own pocket equity wise.

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