MBA2079 Should You Give Up Equity to Attract Talent?

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Foreign. Welcome to the Hundred Dollar MBA show, helping you build a better business every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of webinar Ninja and in today's lesson you will learn should you give up equity to attract talent? When Whether you're looking to start a new business or startup or have an existing one and you want to take it to the next level, you might be considering giving up some of the equity of the company, your equity, so that you can bring on some really talented people. Whether that's a C level, hire skilled engineers or marketers. Or maybe you're trying to attract the right people and have them have buy in be invested in your goals, in the mission of your company. Is giving up equity a good idea? Well, that's what we get into in today's lesson. Everything to consider when it comes to giving somebody who's coming into your business equity as well as what are the alternatives if you don't give equity. Are there any other ways to motivate or incentivize your team members that are coming on? We got a lot to cover, so let's get into it. Let's get down to business.

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Many people that start a new business or are looking to scale their existing one, consider the option of giving a newcomer, somebody who's talented, somebody that can add value to the company, some level of equity. Some people are very comfortable with doing this and some people not so much. My job is just to lay out the facts and show you what this all means for your business, whether you decide to do so or not. First, I want to state something that a lot of people don't talk about. Giving somebody equity doesn't guarantee they're going to do a good job. It doesn't guarantee that they're going to put as much effort and care as much as you do. As the founder, a lot of people just think it's a silver bullet. Like, if I give somebody equity, they're going to move mountains for me. This is simply not true. You can't just bank on this thinking that this is the formula for success. I've worked with people that have moved mountains for me, don't have equity. They're just hardworking people. They're people that care. They're people that feel like they want to contribute, and they're being confident, compensated accordingly. Giving people equity that you're trying to attract or bring onto your team is not going to solve your problems. The other thing I want to mention is some people think that they have to give equity to somebody who's higher up or somebody who's experienced. You don't have to do anything. This is your business. You get to do what you want. If you don't want to give anybody any slices of your pie, you don't have to. It doesn't mean you can't get good talent or great talent. You just have to pay for it with, you know, compensation, with a salary. Now, many people decide to give up equity because they can't afford a base salary. They can't afford to pay somebody money for the time that they're putting in. And I totally get that. But we're going to go back to the first point I made. If you say to somebody, hey, I'm going to give you 15% equity. I can't pay you a salary, but I need you to take care of all the engineering in my new startup. In theory, this might sound like a good idea. Like, they're going to take care of all the engineering. They're going to get 15% equity. They're going to want to see the company grow and expand. So they're going to put in the time, maybe initially. But when things get tough, when they have to make a decision in their own life to take on another client or pick up a job or start their own thing. And let's say your startup is just not moving as quickly as they'd like to. You're not growing as fast as you like to. You're not making as much money as you should have by this point. It's just taking a while for you to get some traction. The time and attention and focus they're going to give you is simply not going to be the same. People are going to just naturally go and spend their time and focus on the things that are going to get them results. And you can't expect everybody to feel the same way about your business. This is human nature. People feel differently about different things. They have different circumstances. So just because they have equity doesn't mean they're going to do full time work or put in the time they need. The flip side is if you're paying somebody hourly or you're paying them a salary to work full time, contractually that's what they're supposed to be doing. If they're not doing that, they're not getting you the results, they don't get paid. Right. That's how it works. But if you give somebody equity, at some point they're going to invest the equity, they're going to earn the equity and it's there for life, basically. I mean, you can have different terms and different conditions, but once they actually attain that equity, they own a part of the company regardless of what they do. So does this mean I'm totally against giving up equity? No. Giving a portion of your business to somebody that is committed can work out, but you need to make sure they're the right person. This is like a marriage, right? This is like a relationship that's contractually binded. Once they earn the equity, they're a part of that company forever. So my advice, if you are going to decide to give somebody equity, have some sort of equity earning scheme, which is basically equity, a plan where it's like, what do they have to do to earn the equity? And it happens over time. It's not like they get all their equity in one shot. So say for example, you're giving somebody 30% equity and it's over the course of three years. Every year they get 10%. They have to hit certain milestones. If they hit certain KPIs when they do that, they earn that. You got to have some rules around this contract meaning like, hey, what if they leave early, what if they stay beyond the three years? What if they want to sell their equity, all that kind of stuff. Now are there alternatives to giving equity to attract good talent? Of course there is. There's a lot of companies that do some pretty creative things like profit shares, meaning that they want to give somebody an incentive to do well. So say for example, you hire somebody who's ahead of sales and say, hey, here's your base salary. I know it's not much, but you're going to get X percent of revenue of all new sales. You could do bonus schemes helping people achieve different one time bonuses when they hit one time achievements or reoccurring achievements. So there's a lot of ways to reward people in a monetary way outside their salaries. Now having said that, I'm a believer that you should get your business to a certain level of sustainability, of profitability where you can run and grow the business with no doubt, right? Things are going well, you have traction, you have what's called escape velocity, right? We talked about this before on the show. You should be able to do this with a product that people want, with higher talent, with paying people a salary, compensating them fairly for the work they do. Now when you hire talent, you're looking for great talent. And this is just out of my experience. The default or the expectation is not I want equity. They want to get paid, they want to be compensated. They want to make sure they have a salary so they can pay their bills and take care of their family. If you do that and you compensate them fairly and you're a great place to work, you give them autonomy. They're working on exciting things. They love the idea and the actual product that you're producing. These are things that people are really actually more interested in than equity. They're actually more interested in the work they're going to do at your company. Also, people that are joining your team, that are new are an unproven commodity. You don't know what they can produce. You don't know if they're a superstar or they're somebody that actually just talks a good game and can interview well. So you need some time to test them out, see if they actually are producing great value in your company, in your team, doing great work before you can actually introduce this idea that equity is an option. If you even wanted to offer, okay.

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To wrap up today's lesson. Should you give up equity? In my opinion, if you're going to give up equity in return, you should be expecting somebody to be responsible. Be responsible of a department, be responsible of an area inside your business. Somebody who's going to take those worries off your plate permanently. If you're looking for just somebody to do the work to actually produce what you need, whether it's great marketing or great sales or somebody to write the code for your software, you can find great talent and hire them and pay them a salary. You can reward them with bonuses, with profit sharing, with different other incentives. Think of it this way. Typically, people need to give up equity to get funding for their business, right? An investor. If an investor is going to put down cash to fuel your business, hundreds of thousands or even millions in exchange for equity in your business, then ask yourself, how much value am I getting when I give up equity to somebody who's new that's joining my team? Is it as much as I would get from a monetary standpoint as an investor? Because really, that's what you're doing here. You're making an investment in your company with somebody. When you're giving up equity, you got to make sure you are getting a return on that investment. Thanks so much for listening to the $100 NBA show. If you love what you hear, hit, subscribe or follow on your favorite podcast app. We're on Spotify. We're on Apple Podcasts. We're on Stitcher Radio. We're on Overcast. We're on Himalaya. We're on every single app. Go ahead and make sure you're following us right now. Make sure you're subscribed. Also, if you want to support the show, the best way you could support us is to share the podcast with your friends and family on social media. Go and do that right now on your phone. Share. It doesn't have to be anything fancy. You could just say, I love listening to this podcast. Check it out. Thank you in advance for spreading the word. Before I go, I want to leave you with this. There's plenty of big businesses that were started by the founders and never gave up equity, whether it's Sarah Blakely of Spanx or the founders of mailchimp or Basecamp. If you're patient, if you build a community, an atmosphere, a culture in your business that attracts great talent. Because, hey, you're doing great work and you're great people and you have a great team, people want to work there, okay? I just want to make sure that as we close off today's episode, you know that you don't have to give up equity. It's not like a must do. If you choose to, that's fine. But too often I hear that I got to give up equity if I'm going to be a successful business. That's just simply not true. Thanks so much for listening and I'll check you in tomorrow's episode Q and A Wednesday. I'll see you then. Take care.

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