Startups Stack Exchange Archive

Equity plan for compensation

I’ve been developing software (video game idea) for a startup by myself for the last year and need to bring on some resources to help. Currently, I’ve built a playable prototype.

At this point, I am pre-beta, and need help to get it polished enough for initial beta test. And would like them to stay on post beta if the idea proves viable. I don’t have investors at this point, so I can’t really afford to pay my resources. I’ve found three resources (a dev, designer, and UX designer) who are coworkers of mine at my current job, and because of our good rapport, they seem willing to do pro bono work.

I am sure, however, that they’d like an idea of when they’ll start getting compensated. So given my lack of funds until I have investors, I am trying to create an equity plan of x% after we do our successful beta.

I am new to running my own team, so I am looking for guidance on:

My Research: I’ve found some good resources, such as WealthFront, which provide good tips on equity plans, and this tool to show percentages based on level. The issue is, I’m not sure how meaningful .02% equity is to my resource when I don’t have revenue.

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I believe that equity is a good choice because it’s more motivating to them to have the product succeed so they get compensated… but “equity” is meaningless until we create revenue, of which I am unsure how to generate at this early stage.

Any thoughts would be very helpful!

Answer 7334

This is a really subjective question. The answer itself may varies a lot based on your long term funding plan.

I’ll try to address this in a generic way, but I would advice you to start thinking how this will reflect in a long term plan, also considering possible alternatives and pivoting half way through.

The wealthfront graph is accurate, but they are just percentages (calculated on existing data), and percentages in your case doesn’t mean much.

The way you should see equities at this stage are:

1) equity are not a way to compensate but a way to retain and motivate.

Equities turns into money in two cases, dividend to redistribute or someone willing to trade cash for that equities. In a startup enviroment this means that equities worth nothing, until the company is either profitable or has a valuation and interest that leads to equity trading. This triggers a commitment in everyone being payed in equities. Either we succeed or those are worth nothing. So is intrinsic that there is a goal. No need to set a specific time to distribute them. An additional method to have an even more appealing retention is to distribute the issue of equities on a deadline/semester basis (ala stock vesting). This is more fluid that having to wait for a promotion cycle for rising the equities. You want to reward you team for being there, not metter if someone turn into a lv 5 from a lv 4, right?

2) is a strategic way to manage new funds.

Every time you are going through a round of funding, from seed to final, a dilution of equity will happen. Is either you decide to give away part of yours, or you decide to refactor everyone royalties in a proportioned way. This is pretty important.Communicating this in the right way with your team (especially founders or early stage employees) is pretty important.

Back to your specific case, you product is different from the average IT startup. You have a continuous loss until the release date. Then you will have incomes, and hopefully profitability with a specific margin of growth, and an inevitable decay. Studying success (and failures) of similar software house / startups will help you find out more about how to manage compensations and equities. Investing in Blizzard is different then investing in Uber. The former is a cycle based investment (similar to hardware releases) the latter is constant revenue stream (no metter if no profitable or not).

Hope this casted some lights and didn’t add any confusion.

My personal suggestion is to motivate people to joining you with strong vision, a solid strategy and potentially an already existing good execution. Show what is your goal, share with them the plans on how you want to get there, and prove you believe in it by showing all the work you have done so far.

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