Equity: Your Least Expensive, Most Valuable Tool

Starting and growing a business is hard. Don’t let anyone tell you otherwise. Lack of capital and lack of talent are usually the two biggest hurdles.

Luckily, there is a free tool for founders that replaces the need for cash and attracts great people. That’s right. Equity.

Are the hairs on your neck starting to rise? I hope not. Because you’re not going to grow much of a business without giving (yes, GIVING!) away equity.

As the saying goes, you can own the entire grape, or a slice of the watermelon.

Which do you want?

If it’s a slice, read on.

What is Equity?

Equity is ownership or shares in your business. Equity, not paychecks is what builds real wealth. Why? Unlike paychecks, equity grows exponentially.

Granted, its face value is pretty worthless in the early days, but as your business grows, boy it can be worth a lot! Do you think Bill Gates or Jack Ma got rich from their salary?

Why You Should Give it

As much as you might want to, you can’t do everything yourself. If you are going to build a great company, you need great people and great people are expensive. Plus, once you have them, you need to keep them.

Equity is the magic that makes this happen on the cheap.

How to “Sell” Equity

No one wants equity in a business that is going nowhere.  If you are building a lifestyle business and you never plan to sell it. Your equity isn’t worth much.

But for those (I hope all) of you who want to build great empires. Here is what you do.

When speaking with potential partners, your task is to paint a vivid picture of where the business will be in several years

How are you changing the world? What is your annual revenue? Who are your clients? How many employees do you have? What does your office look like?

Your bold vision is what your future business partner or employee is betting on. Speak from the heart and be enthusiastic. It is your dream after all.

Be Generous

The earlier someone joins your company, the higher the equity compensation should be. You took a big risk starting a business, but now you are asking another person to leave their career and work for you.

One quarter of a percent (.25%) is plain insulting to a cofounder or your first few employees. Give one percent for your earliest employees and if they are a cofounder, they should be holding a lot more of the business. As you grow, reduce the percentage for new hires.

If you get cold feet, keep in mind equity aligns your interests! You want a slice of watermelon instead of the whole grape right?

Reducing Your Risk

There are plenty of horror stories out there of rogue founders running away with 50% of the company. But you can prepare for this with something called vesting and buy-sell agreements.

Vesting is pretty simple. If you promise your cofounder 10% ownership, you can “vest” it over several years. If someone leaves early, then you limit your exposure. For example, if you are giving 10% equity and you vest it for 4 years, the cofounders equity ownership would look something like this:

Year 1: 2.5%
Year 2: 5%
Year 3: 7.5%
Year 4: 10%

You can also create Buy-Sell Agreements. If someone leaves early, this agreement predetermines the price and the process by which the company repurchases their equity.

Final Thoughts

Equity is the least expensive, most valuable tool for a Frugalpreneur.

What else on the planet costs you nothing to give and in return it buys the loyalty and talent you need to make your business a success?

Give away shares to build and align your team. Work together and make it worth something!

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