equity, employee-compensationAt my startup I have a partner and a few employees, all of whom have some amount of equity in the company. At what point (if ever) in my startup’s life cycle should I stop offering (or significantly reduce) equity to new hires?
When you can, I’d say. Equity, at least in our sense, is a buzz-word that indicates a portion of the company given in lieu of some or all immediate salary or wage, and it tends to occur near the beginning of the business’s life as a means to pay people you couldn’t otherwise afford to compensate effectively. Given that–albeit abstract–definition, I would say you should stop giving it as soon as you can pay people what you truly think they’re worth. Now, for some, that might mean you keep giving them equity for a while longer. For others, it might not.
Of course, there’s a totally different question of whether you should stop giving it in the technical sense, but that’s really just a business decision. Many companies do give out stock options or even plain-and-simple stock as part of pay, and you might want to do that. I’m personally a fan of the idea because it drives employees to want their company to succeed without having to invest their time in forethought (which is surprisingly difficult for many people). But at that point it really depends on how your morale is doing, and consequently whether people will consider what you give them worth anything. The same is true for equity, but particularly once you’re into the long-term “I intend to pay people at least partially with shares” mentality.
But each of those forms of giving away shares carries a different philosophy, and you have to decide when you’re ready to abandon one and either roll into the next, or stop giving them away in general. Ultimately, I think new-hire equity is a great incentive at the start of a business to get people on board and excited, but once you start being self-sufficient, you should use it only as a reward for work well done. Microsoft, for random example, no longer needs to give out equity when people first join on just to get them excited. They can hold off and give out options (although I don’t know if they do options any more) to good performers, who’ve earned that stake in the company.
You should also consider the implications of either starting or stopping the giving out of shares. If you currently have only given a few select employees equity in return for their great work and faith while you were kicking off a startup, but then you start giving just about everyone some, that might reduce the morale of your original employees. On the other hand, if you continue a while giving it out then stop, that could reduce the morale of your incoming ones.
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