In the March 13, 2012 Ask The Headhunter Newsletter, the owner of a start-up business asks whether it’s smart to give equity to a new hire:
After years of frustration with the way many professional services firms treat their clients, I decided to launch my own business. I have had modest success in my first six months and I am considering adding an employee. The individual that I am interested in has expressed concern about the added risk of working for a small company. He wants me to give him an equity stake to offset the risk, but I don’t want to give away too much too early, considering the competitive nature of the marketplace and my own business vision. What would you recommend?
Here’s the short version of my advice:
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There are two kinds of people in your start-up world, other than clients: employees and investors. You can’t fill a job with an investor. You must fill it with an employee.
Now, I’m a big believer in sharing profits with good employees. And I think it’s a great idea to make employees owners to a reasonable extent, commensurate with their commitment to the business. That’s what profit-sharing plans are about.
But employees must earn their way into ownership of the business. It’s simply not good management practice to give away ownership of your company before you know what you’re getting in return. If this individual were bringing you new clients or some kind of intellectual property to enhance the value of your company, then and only then would I consider giving him equity from the outset.
If you hire an employee whose contributions become a true investment and a key part of your business, then at some point sharing some equity may be a key to your long-term success.
You can test this candidate’s motivations. Try this:
How to Say It
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…This person is clearly looking for security and potential riches without making a solid investment.
I’d find another candidate, or someone who wants to invest in your business as a partner. Take a look around: Even jobs with big, stable companies are risky. There is no such thing as job security.
In the future, I would look for candidates who want to add value to your business and to make you more successful — not ones that want you to protect them from risk. Talk about jobs and salary to potential employees. Talk about investment and risk to investors. But don’t confuse the two.
Does your company offer equity to new hires? Have you ever accepted equity to join a start-up? How did it work out? I’d like to hear what you have to say about the risks of start-ups — and the joys of taking risks!