Recruiting is one of the most critical functions a founding team will have to do in the early days of a startup. You are practically in constant recruiting mode in the growth phase and need to be able to expand or contract dev/sales teams as needed (hopefully only expand) as well as bring in critical management team members who bring the right mix of industry credentials, experience and key contacts to help the company get to the next level. But one of the most critical components of recruiting is having effective incentives including but not limited to equity grants, stock options, remote office work, bonuses etc… There’s a lot of things to play with in the non-equity component of recruiting but giving up equity in the early days of a startup to non-investors is a difficult task for most founders – which I’ve covered in part in my previous post on Dilution in Startups. Outside of the 2-3 co-founders’ equity (which could also be subject to additional provisions), every employee should have a vesting schedule based on performance milestones and/or time milestones and depending on the stage of the company that could be further provisioned with half of the equity subject to the vesting provisions and half of it in a stock options format (which would require the employee to purchase that portion of the shares with his/her own money at a later stage). Of course the tricky part is to figure out how much equity is enough to recruit top talent taking into account the following:
1.The impact that person will likely have in the short-term performance of the company
2. The opportunity cost of the person being recruited (i.e. do they have to quit a high paying job/do they have other offers from startups similar in stature to yours)
3. The opportunity cost to the company if that person were to not perform up to par (seasoned industry execs aren’t always able to deliver in a startup environment) or leave the company early (in-demand talent will usually be offered several interesting opportunities throughout the course of their employment).
4. Founder dilution (most VCs will ask for – and in some cases the founders themselves will implement – an employee options pool/management stock in advance)
Many startups seem to feel uncomfortable negotiating these sort of provisions in employment contracts but you need to understand that not everyone will pan out. People will decide that they want to leave for any number of reasons or you will have to fire people. And in a startup, where you are relying on the full commitment of 10-15 people, every single under- or non-performer needs to be dealt with immediately.