“He needs to understand that asking for more equity is like pulling on a string,” I said to Adolfo, my co-founder and VP Marketing. We were reviewing what offer package we should give a potential employee, and Adolfo was indicating the applicant wanted more equity.
“What do you mean, Brett?” Adolfo asked me.
“Let me explain. If an applicant wants more equity, that’s fine, we’ll give the applicant more equity within the limits of that role. However, it means we’ll reduce his salary, so it’s like pulling on a string.”
“I get it,” Adolfo said. “What are you worried about?”
Your need to make sure you are being fair to your existing employees when you make an offer to a new employee.
I said, “You have to assume that everyone will find out about what this person is making, so, if we offer something that’s out of whack with what we’re offering everyone else, then people are going to be pissed. We have to be fair, even if it means losing a potential employee.”
Adolfo nodded his head and said, “That makes sense. But how do you know the offer will get out (and the other employees will hear about it)?”
“People talk,” I said. “Somehow, someway, everyone’s gonna know (what we offer someone), so it (the offer) has to be fair.”
“What about if someone wanted no stock and only salary? After all, that would be at the other end of the string.”
You want your employees to have some skin in the game.
“I don’t like it,” I said. “Right or wrong, it indicated to me a lack of belief in the company. If they’re (prospective employees) in it just for the money and they don’t want any stock, they’re not right for us.”
“They can work at a larger company then,” Adolfo said, finishing my thought.
“Exactly!” I said. “If they don’t fit (in our salary structure), then we don’t want them in our company. They’re not going to work out.”
The reality is your job offer has to be better than your larger competitors to hire top talent.
Now this doesn’t mean you have to pay a higher salary than your established competition. It does mean your complete offer has to better than the competition.
Let me give you a way of thinking about it.
Here are the components of what you can offer an employee to join your startup:
Salary + Stock + Job Value
Here are the components of what your competitors can offer the same employee:
Salary + Stock + Job Value
It’s exactly the same. So it’s obvious what you need to do:
Your Salary + Your Stock + Your Value > Their Salary + Their Stock + Their Job Value
If you set your employees salary to zero, then the stock you offer employees better be through the roof. In other words, it’s pretty tough to be competitive, let alone better through a stock only offer.
It’s also pretty tough to be competitive with a ridiculously low salary offer.
The reality is you’re not going to pay more in salary than an established competitor.
But it does mean you have to pay something reasonable to your early stage employees. What’s reasonable? Well, that’s as close as you can get to market rate.
If you’re bootstrapping, you might be well off market rate. That’s okay. Then the value an employee gives to the stock, and the value an employee gives to the job have to be off the charts.
This is why early stage employees get significantly more stock than later stage employees. However…
Offering your prospective employees equity will not solve all your problems.
Sadly, you’re going to come across the spreadsheet jockey’s. Let me introduce you to what a spreadsheet jockey is.
A spreadsheet jockey is the prospective employee that will build a spreadsheet and put a value on the equity you give and a probability of that equity being worth something. It sounds logical, but (and it’s a big, big but) the spreadsheet jockey will always value the equity lower than leaving your larger competitor.
It always works this way. So you need one more thing to snare top talent…
You need to hire true believers and fanatics.
Two days later Adolfo came back into my office. “I’ve got good news Brett, (the prospective employee) accepted our offer. He starts in two weeks.”
I said, “That’s fantastic! Well done, Adolfo!”
Here’s the thing. You can’t buy your way into hiring top talent because nonbelievers will put no value on your stock and no value on the job.
You’re not going to win over the great talent that doesn’t truly believe in your mission. However, you can win over the great talent that does believe in your mission.
Doing this is amazingly simple. Just give the great talent you find exciting work to do, pay them fairly, and give them a generous option package.
Again, I’m not saying you should overpay. I am saying be generous. Generosity, combined with a reputation for fairness along with exciting work is a winning formula to build a great team.