We've got a lifestyle business that's bootstrapped and a sales guy is asking for equity...how would you respond? When do you give vs. not give stock options/equity?
Equity in a bootstrapped lifestyle business is... generally worthless. There's no market for him to sell once his shares vest. He might start to want some dividends and have voting rights but the majority owners can just decide not to make a profit for years reinvesting in the business.<p>Pretty sure this guy went to business school, watched The Social Network on repeat and think he's dealing with a typical VC funded startup.
Stock options can be a lot different than equity depending on how it's structured. The options I was given was a cash payout of market stock price minus exercise price. More like a cash bonus. If I ran a small bootstrapped company, I'd say no to giving out stock options because where am I going to get a reliable stock price? I'd educate the sales person that cash bonus structure is a more appropriate at this stage of the company and a bonus is similar to a cash payout of a stock option anyway. It is more aligned to his role in the company.<p>For equity (or structures resulting in equity), that's like taking on a partner. Voting rights, privileged info access, profit sharing. That is a very different dynamic. Since you're just calling him a "sales guy", doesn't sound like a partner to me. Again, cash bonuses are more aligned to his role. Also, you could revisit his role in the future. Use partnership as a carrot as long as he proves to be indispensable to the company over time.
If you don’t plan on exiting, equity isn’t the right move.<p>At some point said salesperson will fully vest, you guys will be generating cash (profit) and in theory that salesperson will feel like they might have a right to start taking dividends. This is a slippery slope - you as a management team will make decisions benefitting the business, e.g. retaining all earnings to reinvest while your employee is going to want the cash dividends.<p>Sales is the perfect role for commission. Salesperson can make a ton of money if they crush it, and you won’t have to pay them a lot if they don’t perform well. Business & personal interests are aligned.<p>Equity is interesting if it’s significant enough as a percent of company valuation and there’s a real chance of a large payout. Otherwise, it’s noise and likely will lead to unmet expectations.
Have you worked with this sales guy already ? If not, I wouldn't offer equity right away. Let him prove his worth for at least a year and then go from there. Also if/when you do equity, make sure you do vesting.<p>In a lifestyle/bootstrapped business, be very careful of offering equity. Pay generously if you can but if you give someone equity, now they own a piece and if they are not worth it, you will have a hard time getting rid of them.
I dunno if there's enough info to give good advice here. Whether or not I'd give out equity in this situation would depend on things like whether or not my intent is to raise VC or sell the company, what the company structure is (LLC?), whether I'm comping this sales person too low and he's right to ask for a bump, etc..
In real estate development, the business structures (e.g. Limited Partnerships) often preclude providing equity to employees of the development firm.<p>“Shadow equity” is a tool some companies use to provide similar incentive.<p>Financially shadow equity tracks real equity. But there’s no actual ownership. And no cash investment at risk for the employee.<p>But there is a high degree of transparency and the same rate of return as seen by the development firm.<p>However, I would be cautious regarding the individual. In the circumstances it smells like an unsophisticated request that may be motivated by unrealistic expectations.<p>There’s an impedance mismatch between the actual business structure and the demand.
I'm surprised a "sales guy" is asking for equity instead of asking for more commission. I'm possibly _more_ surprised you aren't sure how to respond.<p>What is the value of equity in a lifestyle business? You, as the business owner, are the only one who can answer that. Does equity mean profit sharing? Or are you planning to sell the business or IPO someday? ("lifestyle", to me, suggests the answer is "no")<p>Did you ask why he wants equity?
This is missing so much information that there’s no point in trying to answer. You need to provide data around the sales person performance, comp, etc.
Just dilute the shares until they're worth nothing in a few years. It's how most startups I've worked with handle the situation. You get a fat multi-million dollar payout and your employees that gave up their lives for equity get nothing!