Paying People - How to compensate people when you don't have any money

How to compensate people when you don't have any money. So I got a great question recently from one of my Twitter followers, love you guys, Imrich, who's been a great fan for a while and I really love all the stuff he's saying, so thank you Imrich. His question was, so I have an idea, it's going to be split between an owner and development team, what is the best practice to split the percentage between these two if the owner has no money? This is a great question, and I know one that a lot of people struggle with, and I did too, having built a few technology companies and having a team and having to split, you know, percentages. There's no finite one-answer-fits-all solution, but let me give you some of the things to think about. So people obviously have to be paid, right? People obviously have to be paid for the time that they're putting in, feel like they're getting compensated. And it's pretty common that in a startup you don't have cash that pay out, right? You don't have a rich uncle giving you the cash to launch this thing. So the 3 most common ways: 1, you do a revenue share; 2, you do a profit share; and 3, you give up equity in the business. And I'll go through each one of them quickly to give you a sense of what you can do. So the first one is a revenue share, and this is where you're giving a percentage off the top of every sale that comes in from your business. So I don't know what you're making, I'm assuming it's some kind of software. Every time that software is sold, they get a percentage off the top of the revenue. Maybe that's 5%, maybe that's 10%, whatever it is depends on your margins, right? Usually software has pretty good margins, so you can afford a higher number, but depending on what you're making, if you don't have the margins, you can't support a high revenue share number. This is great in that it doesn't give up equity in your business, and they get their money coming in faster. As soon as sales start happening, they start making money, which can be a good incentive for them. One thing you might consider doing is a sliding scale. And this is something I've done a number of times with people who I've partnered up with in my business. So my business now, I'm the only owner. I own 100% of the shares. I don't have any partners, but I do a lot of joint ventures with different people. And often it's based on a revenue share. What I understand is I want people working who are committed to this, who want it to be great, who want to pour their hearts into it, But it's hard for them to do that when they're earning 10% of the money that comes in, and at the start there's not a lot of money coming in. People need to earn a wage, right? Not making tons of money, but they need to earn something to pay the bills, put food on the table, and so on. So what I'll often do is a sliding scale, and with my products and services and the programs I launch, it may look like this. For example, the goal is to get you to 10% of all of our sales. So that's 10%. I can afford that in my margins long-term. I want this to be a million-dollar-a-year company. That's going to be $100,000 a year plus for you as we build this thing up. But I recognize that at the start, you know, this is going to take work. You're not going to make money right away. You need to earn a wage. So you're going to get 50% of the sales upfront. So until you earn X amount, you figure out what is a livable wage. Until you get to that point, you earn half of the sales, and then after that, it slides down to 10%. So it gives them an incentive to work harder right away. You're losing a little bit of margin obviously at the start, but you're giving them a livable wage to keep them motivated and incentivized. They don't have to go back and get a job, and then longer term, it still works out down to that 10% or whatever you think is reasonable with your business. The second is a profit share. And with a profit share, it's a little bit harder because you're tracking all the way down to the bottom line, not just the top line. It makes them start to think more like a business owner, makes them start thinking about where you're spending the money instead of just how to make more money. It gives them a little bit more knowledge of how to run a business and all the things to think about. But it means the money's going to come in a lot slower, right? You may not make any profit for the first year. A year, and can they go 1 year without making any money, right? Some people can do that, a lot of people can't. You know, if they don't have the savings, they can't build that up. But that's another option to go with. You can say, we're going to give you X% of the profits as we build out. You know, and that's a little bit harder to project. You don't quite know how profitable you're going to be. And you have to be, I would say, if you're going that route, to be flexible. You can have a plan, but be flexible because it's probably going to change as you start getting into it and start making some sales. The third one is give up a piece of the company. And this is what most people think of, you know, I'm giving up X% of my company, not just my profits or my revenues, but shares. And what you really need to think about is do I want this person to be a part of my business and own shares? Does this person think like a business person? Because it's really hard to get somebody out of a company And just so much trouble and headache. It's like getting into a marriage, right? You want to make sure it's the right person. You're going to spend a lot of time with this person. You better get along. You better have the same values and vision for what you want to take and happen with the business. So with the shares, there's no right or wrong answer, okay? At the end of the day, it's going to come down to what you're both happy with. But some of the things to think about are One, what does each person bring to the table? So you're the owner, you're the idea guy, you're the creator, but you need development help. So this person's coming on and being a developer for you. They might say, hey, you know, there's two of us, so 50/50 split makes sense to me. But you may think, hey, you know what, this is my idea, you're just a programmer, I'm going to be out selling this thing, I need to bring on more people, I should own 90% and you own 10%. Right? So somewhere in there, you have to find common ground. But it starts with thinking about who's bringing what to the table, right? And what are you going to need to grow this into a real business? The program is going to be part of it, but what else do they bring or do you bring? And the whole needs analysis to build a solid company, you know, who's bringing what to the table? The other thing to think about is what has already gone into this business? If you've already put a lot of time, effort, energy, ideas, dollars into this company and they're coming in brand new, then that has to count for part of it, right? So when I joined my first software company, I wasn't the founder. I joined 2 or 3 years into the company. I became an owner in the business, but I wasn't a full equal owner. I wasn't an equal partner. I had a little bit less than my other 2 founders because they had put a couple years of work into it and I was joining brand new. When I started my next software company, I started with a partner and we had 50/50 each, and then we brought in a new person and made them earn in. They started maybe 6 months after, and so we made— I made that person earn in, and he could earn up to a maximum of, I think, 25 or 30% of the shares. I don't remember what it was. We wanted the new person to earn in and show that he was a good fit for the team. Regardless of what you do, you should have something to protect yourself. You should have some kind of agreement, so if it's a profit or revenue share, that there's an easy way to cancel out of it. Either of you can cancel, whatever the penalties are. Have that written down in the contract so you're not stuck with this person for a long time if it doesn't work out, if they're not programming, or if you guys just don't get along anymore. And on a shareholder's agreement, they become part of your company, Make sure you have a shotgun clause, which basically means that somebody's going to buy each other out. If you trigger a shotgun clause, you could say, I'm going to buy your shares for this amount of money, or if you say no, you can buy my shares for that same valuation. And make sure that one of you is going to be out of the business. But you have to have something like that in, just so that you're not stuck forever with a partner who doesn't work out. I know it's challenging, it's tough, and each negotiation is its own bear that you wrestle with, but hopefully that helped shed a little bit of light if you do revenue share, profit share, percentage of the company, and then helping figure it down to what percentage you're going to give up. For those of you watching, I'd love to know how you've done deals in the past. Leave a comment below, let me know if you have a business partner now, how you split it up, if you've done revenue shares and so on. I'd love to hear from you and add some more context If you wanna leave a comment. If you like this video, give it a thumbs up. And you wanna see more like this, click on my face, subscribe to the channel. Thank you so much, I'll see you soon.