Can You Build Your Startup Team Without Giving Away Equity?

“I want missionaries, not mercenaries,” The CEO of a startup I am working with, “Jeff,” said to me the other day. He was frustrated because his VP Sales just asked to increase his base salary to $230K/year.

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The VP Sales was doing a great job since joining the company a year ago, but this salary request was a bridge too far. It would wreck the company’s salary structure if he gave in.

“I feel like all I’m doing is kicking the can down the road (if I give in),” Jeff said to me. “There will just be another outrageous request 12 months from now.”

You want missionaries not mercenaries when you’re building your executive staff.

Yes, you absolutely have the option of offering cash, lots and lots of cash, to hire an experienced executive team. And cash might work if you’re just trying to quickly turn around a company and sell it in a couple of years. This type of company sounds a lot more like a private equity funded company than a venture capital funded company.

The problem with cash as the only incentive is you’re going to have overpay versus the market to get someone good to join your company. Almost by definition, the person you hired is a mercenary.

Yes, you can keep a mercenary executive on your team for a couple years. That how the all cash deal will work in the private equity turnaround game. However, all cash deals will not work in the startup game.

Equity aligns your senior staff, and the rest of your team, with your long term goals.

The most important factor in your startup’s success is your company culture. If you have a team of mercenaries that is driven by only the salary and bonus they are getting, the mercenaries will only stay until a better offer comes along. A team that’s in it only for the money is not conducive to you having a great company culture.

There’s a reason that VCs insist their portfolio companies carve out equity for the team. They know that equity aligns your team with your long term goals.

When I was building my company, I became very suspicious of any potential senior executive that wanted a higher salary instead of more equity. The push for a higher salary was an indication they weren’t truly believers in the company.

Just as importantly, you want your cash to last as long as possible.

What happens when the inevitable problems that every startup endures hit your startup? Your team’s loyalty is to the money, not the mission if you have an overpaid team.

Let’s say you have to cut salaries to keep your startup alive. How long will your mercenary team stick around? Probably not too long.

I inadvertently hired one mercenary in my startup. When we had to reduce everyone’s salary to minimum wage to keep the company alive, “Tommy” was the only person in the company to complain.

“That (minimum wage) won’t even pay for the gas to get to work,” he cried. Tommy quit a month later. He was the only employee to leave.

All the other employees stayed. Remember, you want missionaries, not mercenaries.

The equity you give your team will be well worth the dilution you take.

Maybe your true thought process is you don’t want to suffer any dilution. You want all the equity for yourself.

Ask yourself what type of culture you will build with that sort of greedy thought process? “Oh, the employees will not know,” you say.

Um, I guarantee the employees will know what you’re up to. After all, that’s why you hired mercenaries. Mercenaries will spot your greed a mile away.

Now, if you go the route of distributing a fair amount of equity to your team, and you develop a collaborative, inclusive culture, then the sky is the limit for your company. Your employee turnover is likely to be low, and your team, hopefully, will be executing at a very high level.

The better the execution, the higher the valuation of your company. The dilution you took will have increased the value of your holdings, not decreased the value of your holdings. You’ll say, “I’m glad I have a team of missionaries instead of a team of mercenaries.”

For more, read: Why Your Startup Culture Is The Key To Your Company’s Success

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I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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