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Deferred Payment or vested equity for great contractors that would be great team members later on?

Happy Holidays everyone!

I may be out of line for asking a question during the Holidays, but our first goals are at the end of February so quick questions.

Has anyone identified some great people that they can't pay/can only pay very little right now but they would be great as contractors and if it works as co-founders and team members? How did you do this or structure this? And what was the outcome?

My startup SitterCycle.com is a single founded company and what we offer nannies online classes that certify them in skills such as great nutrition, literacy, and soon on special needs care with experts in the field.

There are lots of moving parts and people so contractors that hopefully turn into teamates would be awesome to help me grow our company!

Thanks again and Happy Holidays!

12 Replies

Detrick DeBurr
1
0
Detrick DeBurr Entrepreneur
Co-Founder at Game Time Giving
Helen,
Have you considered setting up a "Grunt Fund". Checking out Mike Moyer's site/book... Slicing the Pie

Detrick
Helen Adeosun
0
0
Helen Adeosun Entrepreneur
Co-Founder and CEO of CareAcademy.co
Thanks Detrick! I will check it out, but trying to figure this out is this essentially mean that it is vested equity for staing on board to build it? Looking at the site now about the book and author.

Thanks!
Helen Adeosun
Tim Kilroy
1
0
Tim Kilroy Entrepreneur • Advisor
Analytics - LTV - Boosting Profits - Digital Marketing
Helen - We have used this formula with certain contractors: 1. Define market or near market value of services. 2. Offer to pay what you can. 3. The remainder can come in equity vested over 2-3 years if contractor is interested in product. 4. If contract is NOT interested in project, agree to pay remainder over 12 months
Detrick DeBurr
2
0
Detrick DeBurr Entrepreneur
Co-Founder at Game Time Giving
Tim... I like your formula with one exception. My concern with your approach is #3. If there is no value currently set for the equity, which is usually the case is early stage companies how can you be sure that you are offering the right amount to equity (not too little or too much). I like to refrain from putting an arbitrary value on equity prior to a funding event. In the meantime, I still need to use equity sometimes as a form of compensation. So in essence I offer a promise to issue equity rather than actually issuing equity. The promise is based on the contribution on the contractor relative to the contributions of everyone else up to that point. That way they always get what they deserve. At the end of the day, the goal is to be "fair". But how fair can you be when you really don't know what its worth. Upon funding, there's a valuation and a much "fairer" assessment of shares... issue them then.
Candice Hughes
3
0
Candice Hughes Entrepreneur • Advisor
CEO & Founder Hughes BioPharma, AdapTac Games, Digital & Mobile Health, Biotech, Technology Scout

You may be lucky and find such people. In my experience, I have not found any contractors who are willing to defer payment or go without pay for an extended period. Deferred equity seems useful to the founder, but the contractor will likely perceive this as a double-IOU.

I have been successful at negotiating reduced rates from what the contractor cited as their usual rate. This seems reasonable to me. It means the contractor cares enough about your mission and believes in you enough that they will accept lower rates. They are someone you can work with over the long-term and may offer them co-founder or employee roles at some point.

Since I am both a contractor and founder of my own startup, I am able to see both sides. From the contractor's perspective, they are contractors because they need to make money to survive. They usually don't have a leisurely financial situation where they can go without income for extended periods. They may need money to cover basic bills or to finance their own venture. Receiving equity doesn't help them cover their own immediate goals. Not only ,you are asking them to take a leap of faith that the equity will ever amount to anything. You are asking them to take an even greater leap of faith if you give them an IOU for equity (which is essentially and IOU for an IOU).

If people don't feel they are being compensate fairly, even if they take the job, they may not put full effort into it and may abandon the work as soon as something better comes along. Neither are helpful to the entrepreneur.

If you find a true co-founder (you should only have one or two), then that person should share in a large part of the equity, generally with no salary as they share both risk and reward. They are also a business partner with a management role. You will likely find people who might make good co-founders, whom you simply can't persuade to come on board because they can't go without income. So the ideal co-founder is someone not only who fits the role, is excited by the mission, but also is in a position where they can work at least part-time for a period without income. It is this combination that is challenging to find.

Finally, you don't want a large team of co-founders. It would be hard to run a company with 6 people thinking they are all jointly running it. Giving equity to many also complicates your later situation for investors.

Mike Moyer
0
1
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Helene,

The Grunt Fund (mentioned earlier), is a perfect solution to this problem. It is designed to address ALL equity issues facing early-stage bootstrapped companies. The contractor would receive an allocation in proportion to the value they provide retaliative to other inputs from other contributors. The relative value calculation is easy and is outlined in my book, Slicing Pie. If you send me an email to [removed to protect privacy] I will give you a copy (because I don't want to appear to be using this forum to sell books!)

In the model you can buy out a contractor under certain conditions which will allow you to get the equity back. The contractor should be happy with whatever outcome happens because they will be treated the same as anyone else.
Jennifer Klafin
0
0
Jennifer Klafin Entrepreneur
Delivery Manager at Workiva
Hi Helene-

I'm in a very similar situation - my early stage startup is less than a year old and I have 4 incredible people working pro-bono and/or for commission at this point and want to them to stay with the company. I'm definitely going to look into the Grunt Fund, hadn't heard of it, though we are currently planning to use Phantom Stock

http://en.wikipedia.org/wiki/Phantom_stock
Mike Moyer
0
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Phantom stock, vesting programs, options plans, different classes of stock and all those other kinds of tools are *irrelevant *when you use a Grunt Fund (www.SlicingPie.com). Wait until after you have cash in the bank to invest in complicated financial tools and agreements. A Grunt Fund is simple and covers all the bases. Grunt Funds are a universal solution for early-stage bootstrapped companies. All other equity methods lead to unfair splits and high legal fees. -Mike
Jennifer Klafin
1
1
Jennifer Klafin Entrepreneur
Delivery Manager at Workiva
@mike - I downloaded your book sample, though it requires a fee to read the recommendation. It would be appreciated if you offered advice on this forum, which is my expectation of this community, it is inappropriate to use this place for your sales.
Stas Oskin
0
0
Stas Oskin Entrepreneur
CTO at eyecam
@Jennifer Mike actually offered to send him a free copy of his book, which is greatly appreciated...
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