Attracting talent is enormously important.
I saw some earlier threads on this so I thought I would share how we are trying to do this at Eko. We created a pool of stock that advisory board members and early employees can invest in. This stock is issued at approximately 3X the founders round. The 3X number was debated and we felt it was fair. Principal founders can buyback in case a person leaves . Buyback rights lapse with time.
Tax wise this works out better but upfront investment is required.
In our case a COO or CTO could invest to own as much as 3% of the company. As far as we know this is very generous but we feel it would be worth it if we got exceptional talent. The stake would get diluted as we raise more capital but at 50% dilution it still means over $10MM for each of them if we can get a billion $ exit. For smaller exits the math is obvious. In addition to this we felt we needed to pay 24 lacs per annum as the kind of people that we are looking for would probably command packages of Rs 50lacs to 1 crore per annum. We have retained Reffster a headhunting and referral startup to find and screen candidates for us.
For other positions we have similar combinations of cash + restricted stock at lower levels. Advisory board members get only restricted stock.
This has worked well for us. We have got early employees to join us and we now have two advisory board members.
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Sanjay: “Stock is common, non voting and principal founders have right but not the obligation to buyback so all the early people are taking some real risk.”
So technically the employees pay the company (the 3x) and the founders can choose to pay the employees if they leave? the 3x comes to the company but a payout comes from founder pockets – i guess unless the figures are really small this isn’t a big deal.
I would imagine that to parlay some of the risk taken by employees there should be a two-way call (i.e. the employees can say ditch and get paid their initial amounts back as their right, but again not their obligation)
Also how does this work AFTER a VC comes in? You probably can’t issue fresh stock at lower rates than the VC paid, unless you go with a convertible debt structure. Was thinking of a similar structure but by putting all potential sweath stock into a trust held by the founders (or employees) which issues and manages the RSUs. So tthe trust first buys all potentially issuable sweat equity stock and then issues it to individual employees.That way the stock sale is a completely independent concept unrelated to the company and you can structure the calls however you like.
Sanjay,
A few questions –
Would the 3x valuation be kept open till potential investors see some revenue / earnings to justify the multiple or is it a random number and open for a limited period?
“Right but not the obligation to buyback” – in this case, will there be a premium payable on buyback ? If so, what % ?
At Rs.24 lacs cash compensation for a CEO plus stock grants, we are looking at a generous HR budget in a startup – will this hire be before the series A or after…? If so are you looking for VCs to fund the salary for Salesman no.1?
Interesting topic. Why so few comments…?
Stock is common, non voting and principal founders have right but not the obligation to buyback so all the early people are taking some real risk.
At exit the holding will be determined by how much additional capital is raised prior to exit. Our percentage may work out to be a little higher than You tube but percentages mean little. If our absolute values are anywhere near You Tube we would obviously be delighted.
Yes
I also think so. A start-up should be prepared for all possible out comes as it is a speculation at its best.
I guess this is an RSU kind of structure which is a good tax hedge with the ESOP FBT issues.
This would be pretty good if the numbers work out but if you get like a 100 cr. exit it would probably not even make the opportunity cost.
Also wanted to ask: what is “restricted stock” in India? Do you offer only preferential, non voting shares or is restricted stock the concept of restricted stock units where founders have the right to buy back?
Also how much total % do you expect founders, employees and investors to hold at exit? Youtube had nearly 30% each to the first two categories IIRC.