Should You Ask For Backpay When You Close Your Funding?

Welcome to the world of sweat equity.

I’ve been in your shoes. I went over two years without collecting a salary while we started the company and raised our initial funding.

I didn’t ask for backpay, nor do I think our investors would have given me backpay if I asked. The investors have invested their money to fund the company going forward. Investors don’t like the idea of reducing the runway of the company by paying you for past work you’ve done.

But you do get paid for your past work…In sweat equity.

Sweat equity is a simple formula:

Valuation of Your Company - Compensation = Sweat Equity

In other words, you get paid, through the equity you own, for the work you’ve done. Tim Berry has a nice post on Sweat Equity you can read here: Why Sweat Equity Often Stinks - Gust Blog.

Berry’s quote on liabilities says it all:

And I hate seeing liabilities on the balance sheet that track back to unpaid compensation for founders. Your valuation is your compensation.

Expect your sweat equity to vest over time.

Let’s say you close your seed funding for $1M, and your new investors get 20% of the company. That leaves you and your cofounders with 80%.

The equity agreement you sign will likely state that your equity will vest over a four year period with a first year cliff. Investors do this to protect themselves from you leaving the company and having a bunch of dead equity on the books.

You may think this is wrong, but you will not win the argument. Hopefully, you will realize that equity vesting over time protects you from a cofounder that doesn’t work out (read: What Are The Eleven Steps You Can Take When A Co-Founder Quits?)

You can negotiate to accelerate some of your equity vesting early.

In my case, our investors allowed us to start the equity vesting six months in advance of our closing, so we really had a six month cliff. You may be able to negotiate something similar depending upon how long you’ve worked without collecting a salary.

Do You Want To Grow Your Business? Maybe I Can Help. Click Here.