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In many startups there are some #1 or #2 employees who helped the whole business all the way.

I've got couple guys like that, I'd love to give them more than the salary (even though our salaries are pretty decent unlike many startups) they are still working extra hours, put a lot of blood and sweat which they wouldn't need to in a big corp.

I thought of giving equity but what happens if they decide to leave 3 months later?

If we sell the startup in some point, isn't it a bit shame for these hard workers as they are not entitled to get anything? What other startups are doing in this stage?

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6 Answers

up vote 9 down vote accepted

Don't give away your equity without careful thought, planning and an attorney. It complicates everyone's life in so many ways if it is not done correctly.

A much simpler way is to profit share with key employees. Setting aside a percentage of profits to be split among key employees shows generous gratitude and gives them a stake in the past and present success of the business.

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+1 for profit sharing and not equity – TimJ♦ Mar 27 '10 at 20:07
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The problem is profit sharing doesn't happen until you are big, and getting big takes time. How can you be sure about your employee motivation in the mean time (other than other factors obviously) – the dictator Mar 28 '10 at 7:50
Why do you have to be big to profit share? Sharing a little when profits are little helps motivate employees to consider how to help the company become more profitable. If there are no profits to share, what good is equity? – Keith DeLong Mar 28 '10 at 18:22
@Keith - "If there are no profits to share, what good is equity?" - Huh? - I would say that most startups have no profits to share early on, but the equity is potentially very valuable long term if the company is successful. I see profit sharing as a near term bonus, while sharing equity is a long term incentive about (building) the future value of the company. Each has a place and seek to accomplish incentives depending on the stage of the business and the person's role in the company. – Tall Jeff Mar 28 '10 at 18:54
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It'a "startup" and really new. We don't have money, actually we are actively loosing money :) I assume it's quite common for most startups not have money in the early days and then making a lot of money in the long term. That's why profit sharing wouldn't work for many startups. – the dictator Mar 28 '10 at 20:19
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up vote 8 down vote

You seem to have good intentions, so it would be a shame to spoil a good thing by giving them something they don't want. It doesn't sound like the subject of their getting equity has come up. They may like the fact that they are not tied to the company (They may be reluctant to leave if it means losing too much in the process.).

You may be shocked at what they may consider a bigger thank you than equity, profit sharing/more money. Have the company pay for a cell phone card for their laptop. Hold a company meeting at a resort. If you are asked to do any public speaking, interview, or blog, invite one of them along or see if they could do it in your place. Sponsor an open source project of theirs or give them a budget to test one of their ideas.

Sometimes we don't want to spend money on ourselves but appreciate it far more when someone else does. That's why you buy a round at the bar instead of just handing everyone a few bucks.

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up vote 5 down vote

Have you considered vesting equity? That protects you when they walk in three months and provides a level of stickiness that salary doesn't give.

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Absolutely - All equity should be setup to vest; even founder's equity. – Tall Jeff Mar 28 '10 at 18:55
up vote 1 down vote

Options work well for this sort of thing. Vested equity is another good method if you can't give stock options although vesting a percentage of an LLC is tricky to do.

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up vote 0 down vote

Recognizing and showing appreciation for the contributions, accomplishments and efforts that your #1 and #2 employees have made will go a long way.

As Jeff O above mentioned benefits like cell phones, laptops, meetings at a nice place, etc also help.

At the same time, I found the value and motivating effect of consistently recognizing and showing appreciation is much more effective than any tangible benefits I gave out. It takes more time but will not cost dollars you do not have.

If you sell the start up, some options to keep in mind are you can write in the sales agreement that the new company must keep the employees for x years. You can also give these employees bonuses at the time of the sale either from your profits or have it written into the sales agreement.

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up vote -1 down vote

I have no idea how to reward early employees. But I am pretty sure that profit sharing simply doesn't work.

This is because the founder can usually reduce the amount of profits need to be shared by the shady practice of hollywood accounting. If your employees are smart enough they will surely reject any form of "profit sharing".

Give them equity might work, but I don't know enough about that to comment.

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What?! A down vote without explanation? I believe what I say is true enough and yet I still get downvoted, duh! – Graviton Mar 30 '10 at 6:27
Well, it was a silly answer so I didn't comment. Of course profit sharing works. You gave an 'I'm pretty sure it doesn't work...' answer after others shared how they had successfully used profit sharing in their startups. This is Answers OnStartups, not Guesses OnStartups :) – jane Mar 31 '10 at 16:21
@jane, you should read my link ( Hollywood accounting) on why it doesn't work, or cannot be counted to work. – Graviton Apr 1 '10 at 5:42
We've been using profit sharing as an effective method of compensation for the past 10 years at Fog Creek Software. It definitely does work. If your management is out to cheat you, they will find a way to do it regardless of their accounting methods. – Michael Pryor Jan 17 '11 at 8:41
@Michael, that's very nice of you. But profit is a very subjective thing; any profit that a company makes can be easily "invested" away, leaving essentially very little or no money on the table for employees to share. This, coupled with the fact that the company has no obligation to disclose its financial to its employees, make it a huge temptation a lot of founders find hard to resist, and many fail to do so, not because they are out to "cheat" their employees, but because it's just too easy to not share the profit. – Graviton Jan 17 '11 at 9:18

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