“It is sacrosanct,” one of our investors said to me. I told him that we would perform a layoff in preparation for the next round of funding.
There really was no way around performing a layoff. We were only going to close $10M, and we needed the money to last at least 18 months.
Your decision to give people raises is determined by multiple things.
In our case with our current salaries and forecasted burn rate, we needed to make some painful cuts. It was the only rational choice we had. There would be no raises, but fortunately the remaining employees were being paid fairly.
However, you could be seed stage company that raised a Series A. You probably aren’t paying your team market salaries, so now would be a good time to bump people up to as close as market rate as possible.
You want your money to last at least 18 months, but you should plan for at least 24 months of runway because everything (especially profitability) takes longer than it should. All you need to do is build up a simple financial plan to determine what your cash position will be in 18 to 24 months.
I’d recommend building a worst case and an ideal plan. Then run the company to your worst case plan until you see evidence that you are exceeding the worst case plan.
You should give your current team more equity after each round.
Refreshing your employees stock options is one of the smartest moves you can make. You give your team a financial incentive to stick around.
The dilution is worth it because it’s hard to replace really good people. Here’s a simple way to think about refreshing:
Let’s say you have an employee you gave 0.5% stock options that have the usual four year vesting period two years ago. You just closed your next round of funding, so you’re wondering what you should give your existing team.
The simple answer is what stock option grant would you give this person if you were hiring this person today? Let’s say it is 0.4%, or 0.1% a year, vesting over four years.
What we did in this case was give the employee a new two year grant of 0.2% that started vesting two years from now. That way the employee has four years of options as an incentive to stay.
Plus it’s fair because you’re giving the employee what you would give a new employee (0.1% per year). The thing I love this technique is that the older employee will always have more equity than a newer employee even if the previous round is heavily dilutive.
But you may not be able to give your current team more equity.
Sadly some investors are not as evolved as other investors. You can ask that a certain percentage of equity be carved out to refresh current employees, but you may get turned down.
The answer that you may hear is, “The existing employees already have received their grants.” However investors will want to make sure you have enough equity for new employees.
You need to fight for what you can get for your team. Explain what you’re doing and explain the logic of how you’re doing it. This is critical since you want your investors to see that you’re acting in the company’s best interest.
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