Question
After years of frustration with corporate America and the way professional services firms generally treat their clients, I decided to launch out on my own. I have had some modest success since the inception of my business six months ago to the point where I am exploring adding an employee. I am running into the problem of granting an equity stake.
Although I have sufficient clients to immediately place the new hire into a challenging project, the individual that I am interested in has expressed concern with the added risk of working for a small business. He would like an added 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. Am I looking at this wrong?
Nick’s Reply
No. I’d find another candidate.
There are two kinds of people in your world (other than clients): employees and investors. You don’t fill a job with an investor. You fill it with an employee. Don’t confuse the two.
A simple equity stake test
You can test this person’s attitude and motivation. Tell him to forget about the job. Then ask him if he’d like to make a cash investment in your business. He’ll say no. If he’s not willing to invest cash, why would you give him an equity stake if he takes a salaried job with you?
You can also ask what he believes he would contribute above and beyond what the salary would compensate him for.
Balance equity participation with “key person” value
He’s clearly averse to risk. If you’re offering him a salary and can pay him, there is no more risk to him than with taking a job in a mature, well-established business. Every job is at risk in today’s world! I’d never hire anyone who is looking for a slice of the pie unless he’s a “key person” and absolutely critical to your business’s success. But I imagine if this person fit the bill you wouldn’t be asking my advice!
The one counter-offer you might suggest is that if in fact this new hire contributes materially to the success of your business you would consider granting stock or stock options after, say, six months or a year. (I’d consult your attorney about how to package this.)
In the future, when interviewing candidates, I would avoid discussions about investment in your company. Focus on employment and salary. Talk about investment to investors or possible partners. But don’t confuse them.
I wish you the best.
Have you ever asked for an equity stake as part of a job offer? Would equity compensate for risk like the job seeker in this story suggests? If you’re a small business owner, what would induce you to include an equity stake in a job offer?
[This Q&A is based on a previous column on the same topic.]: :
Seems to me that creating an “equity stake” would be pretty complicated. Lawyers and so forth. And what if you break up? Sounds like trouble.
I’m curious what you think about profit share arrangements. No equity ties or control but some upside. Though usally comes with lower base.