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Add Equity Participation Plan initial

hey everybody Dan Martell here serial entrepreneur investor and creator of SAS Khadem II in this video I'm gonna tell you why I was backwards cuz I really think that the way people think about startup equity is backwards that's why I did that little flipper ooh and I'm gonna teach you how to think about what you need the team structure the percent equity the vesting schedule and make sure that you avoid some of the legal pitfalls although I'm gonna claim I am NOT a lawyer do not play one on the internet so definitely you know go to your own counsel but be sure to stay at the end where I'm gonna share with you how to get access to my fundraising like a pro training in that training when talk about the three phases of fundraising if you're gonna allocate equity I'm assuming you're gonna raise some capital they'll fund that growth and I'm gonna share with you my seven week process for closing your round super fast but first let's get into it [Music] so I got a funny story for you when I started flowtown that was my first equity funding startup we gave 1 percent equity to our BD guy maybe you've done this and we thought hey he's gonna add a lot of value great great idea turns out we were totally wrong so all of a sudden now we have a guy that's got 1% equity the business had pivoted at that point he wasn't even doing any foreign thing for us and we were about to raise our first round of funding and we had to get that back let me tell you that process jumping on a plane convincing somebody to part with their equity getting that done in time so that we can close around funding was very tough now it wasn't a Winklevoss moment but it was definitely a little frustrating so I've been fortunate enough to not only get counsel after we went through that scenario we talked to her start-up lawyer and he gave us a scenario that I'm gonna share with you guys in this video but I've been privileged to have the opportunity to walk probably you know 100 plus founders around thinking of their equity structure in the comp model and and how did to do it in a way that's gonna scale so what I want to share with you in this video is how to think about equity so you have a better understanding for allocating two team members number one build your dream team here's the way I think about it you start off today what's your revenue number could be zero could be you know 50k a month you have a team you draw a little circles with their faces on it you know like hey this is our team today fast forward one year what's the revenue goal what's the target perfect you now have that then you start drawing the dream team that you're gonna need to build to get to that level of scale if you don't start thinking about maybe a key CTO that you need to hire because you're current you know engineering co-founder is just not going to cut it or a CMO this you know chief marketing officer is gonna be able to drive the demand to really get to that next level of growth or you know it's EPO a chief product officer something it's really gonna lead the product side to free up your time as the founder to be able to you know really go after more strategic projects you're gonna need to think about the equity allocation to that dream team so number one is just sit down where yet today where do you want to go map out all the key roles and start thinking about what that looks like so that you can use that when you're figuring out what percentage of equity you're going to need to put aside to compensate that caliber of team number to carve out your equity pool here's the deal it's it's tough for me to say without knowing size of your business where you want to go etc but on average I will say that most founding teams usually put aside about 15% equity for you know key hires now and I have a video if you search on my You Tube channel there's a video I did on equity and like advisors and all this stuff so if you search equity Dan Martell you will find some other videos talking about percentages but at a high level 15% is kind of what you need maybe it's a little high maybe it's a little low depending on how big the team's gonna be but think about it you might want to give again I don't know what the market norms are right now you're gonna have to do that research we're gonna talk about it but you know maybe 5% to your CTO 3% for your CMO etc etc like you know maybe half a percent to some advisors or a person or 1% to an advisor etc like you need to think about what are the different people and then give them you know equity and curve it out of your total thing now I need you to understand that every time you give somebody else equity you dilute and minimize your your ownership but the argument is each new hire is gonna make the overall business more valuable because you're gonna have more horsepower more bandwidth more throughput so the overall pie gets bigger and more valuable but I want you to start thinking about carving out that equity for the next one to two years and every year following that depending on your funding rounds you might have to add another you know several percentage points to continue to round out that equity pool number three research compensation now this is very dependent on your city where you live what are the market norms but there's incredible information blog post core threads sites like pay scale and Glassdoor AngelList has incredible content around you know equity structures etc but you need to figure it out for yourself because I'll tell you a CTO in San Francisco and in the heart of you know technology innovation versus a CTO in Nebraska not know knocking on Nebraska but I'm just saying those are two different things in regards to base salary equity I mean a lot of startup companies in nan kind of major hotbeds of innovation the the teams don't even know that equity is a thing they might hear about it but they don't honestly know if you know a thousand shares is a lot or not they don't even ask for the cap table they don't understand what percentage of the total ownership does that equity represent in my business so sometimes are very unsophisticated so I want you to do your own research for where you're located where are you hiring these individuals from so that you can understand kind of how to build the comp structure for you because essentially the way I think about it is you know low risk a little risk a lot of risk right so when I was building my company clarity we were marketing platform marketplace for entrepreneur's the advice over the phone and I hired my first few engineers and kind of my CTO and my product leads etc I pretty much said here's your base our here's the equity structure if you take less base then you get more equity potential right because I'll talk about vesting in a second if you do more salary then you get less equity because it was really just like you know risk are you willing to take no salary then your equity looks like this or do you want to take enough to cover your expenses etc etc and I love it one time one of my engineers came to me and I gave him that option he said I don't need a salary I live with my parents I want the max equity and I was like I just hired an incredibly committed and driven individual so that to me is the opportunity of thinking about you know how to research compensation based on base salary you're gonna pay them risk levels and then also how much equity to entice them to stick around do great work feel like they're part of the founding team and get ownership in the business number four vesting schedule so here's the deal vesting means what percentage of the allocation do you get over what time frame meaning that if I get let's say one percent equity in a business and there's a four year vesting schedule that means that I don't get the potential of the full one percent for four years then there's the cliff the cliff is how long before I get any part of that equity right so if you think about it if we do four years with one percent you got a quarter quarter quarter on each year but with a one-year cliff so four years with one year cliff is the norm although there's some incredible companies testing out different models doing five years seven years I believe Angeles for example is up to ten year vesting schedule just because they want to align the reward with the commitment to long-term focus right so what's happening right now especially in the the hot beds of startups is people are jumping around right they're literally going to work at Facebook getting a year getting that going to work at Amazon doing a year getting their equity and and it's causing a lot of turnover amongst technical teams so anyways I all I will say is you need some vesting schedule allocating stock like I made my mistake and not giving that 1% without any best thing is not the way to do it I actually invested in a company and they had two co-founders and right off the bat they didn't do founder vesting they essentially allocated 50/50 of the business they went to raise their first round of funding in that process one of the co-founders the CEO realized that his other co-founder was not going to be the right person for the business like literally they got to go and he had to buy came out in that round to clear out the cap table because 50% equity for some person that's running around it's not involved in the business anymore will essentially stop you from growing your business because you won't be able to allocate anything right and most investors won't even touch you because there's not enough meat on the bone to be able to incentivize future hires so they had to buy that co-founder out and it costs I believe six hundred thousand dollars you gotta think about this that the business was maybe six months old so six hundred thousand dollars to a co-founder for six months old business cuz he knew he had the business by the short and curlies was not a cool scenario okay so I want you to think about vesting even for you and the founding team a lot of for if you're doing a Series A the investors might ask you to reset some of your your founding stocks so that has a vesting schedule so that it aligns with their interests of you continue to build a huge and meaningful company so that's that's that's the thing for years when you're cliff that means they don't get the first twenty five percent until the first year and then it vests on a monthly schedule number five stock options versus other types of equity look I'm again not a lawyer I'm just gonna say this an option is an option to buy the stock okay so that's a stock option I give you the option you don't have to exercise it if you don't want to because there's a tax implication and all that I'm not gonna get into that side of things but that's an option if you give somebody essentially allocate them the stock itself then it's a different thing because now there's no vesting okay so they're in trust me if you talk to some lawyers there is restrictions rsu's there's so many different ways to slice and dice share structures I suggest keep it plain Jane keep it simple Delaware corp again I'm giving you legal advice I really shouldn't anyways I'm gonna stop because I don't wanna get myself in trouble talk to you start-up lawyer do the vanilla in regards to documents and structures there's existing you know templates that have been created by Wilson Sonsini wstr who's a top law firm in the valley to Y Combinator's got fundraising Docs and C templates etc so just keep it simple don't do anything wacky if new investors want to do some weird thing just don't do that keep it simple so that you don't have to spend time into the future when you're successful fixing because that's what will happen the lawyers don't mind cuz they get paid regardless fixing some really weird scenarios in regards to allocations so stock options versus others I'm a big fan of the options keep it vanilla don't do anything creative number six plan for grants and promotions now here's deal you hire a CMO and they're amazing you're just like wow they're crushing it they're doing great and all of a sudden now they come to you and they say hey when I started you gave me one percent equity and I feel because I know that this other person just got two percent then I'm more of a two percent or because I'm adding as much value as this new hire you got a plan for that you got to understand that if you hire somebody as a junior developer and every six months is what I love about startups is literally people that are 23 24 young people can just rise and all of a sudden be the leading the operations or leading the marketing department at a young age they're gonna want to get compensated accordingly because they know their market value at that level of promotion so you need to plan for that in your allocation structure so just plan for issuing more grants of stock options and for promotions within your existing team as people kind of demonstrate their ability to handle more and more number seven you need to set the expiration timeline here's the deal if you give somebody an allocation as an option they still need to exercise that option if you have somebody that ends up getting let go or they take another job and they had options that essentially vested you have to set a timeline for expiration now some people will keep it short other people are arguing now to keep it longer the norm is about three months whereas they have three months after they leave the organization to exercise their stock options now the challenge with that is there's definitely a tax implication that they need to be aware of where they're gonna have to pay some taxes depending on how they structure it again I'm not a lawyer I'll let them deal with their own financial tax situation but some of them just don't have the money I remember had a good friend of mine that did some marketing consulting for Dropbox and he got stock option as part of his comp structure and obviously you know the story the company went to like a two billion dollar valuation he had to borrow the money to exercise his options to pay the taxes just to own the stock itself because the valuation was so incredible and that's that's true for a lot of companies actually know people that finance stock options for employees at some of these unicorn companies because they can't afford to exercise their options so they have to work with the financing person that essentially uses the stock as collateral to lend them the money super fascinating industry in financial model but I will say you do as the founders have to set that expiration timeline if you set it too long there's a lot of administrative overhead to manage that three months is the norm but do your research and set that so quick recap on how you should offer startup equity to your team number one we want to build our dream team design it number two we want to carve out our equity pool what percentage are we taking from our equity to compensate three research compensation your city your market norms use the online resources like a pay scale Glassdoor angellist etc to figure out what those hires would require for vesting schedule so that you understand how the equity vests five stock options versus others you can in entertain it you can ask your lawyer about the other options I'm a big fan of keeping it simple number six plan for grants and promotions of your team members and seven set and expiration timeline so people know what their commitment or needs are if they move on from your company so as I mentioned at the beginning I want to share with you really one of the most powerful frameworks that I teach my coaching clients called fundraising like a pro now if you don't know this one of my early mentors when I built my company flowtown first time I ever raised venture capital was Travis kalanick from uber this is before ooh BRR rate when it was uber taxi he had hired somebody else to be the GM my good friend Ryan and essentially it wasn't even a thing but but that you know that environment you know we'd go to Travis's what he called the jam pad to work on he was an early investor in flowtown and a formal adviser and he helped us with a fundraising process so when I share these strategies know that they 80% of them came from the things that Travis who went on to raise a billions of dollars for uber if anything I mean regardless of all the stuff in the media Travis is a world-class fundraiser okay you can't deny that and he taught us my co-founder Ethan and I how to think about that process the psychology involved the tactics the strategy I wrap all that up in the fundraising like a pro training so you can click the link below to get access to that I know it will help you close your deal really fast I talk about the three phases of fundraising and really a seven-week process to get your round close so click the link get access if you found this video useful be sure to smash the like button subscribe to my channel if you're new if there's anybody that you care about that you feel this could serve feel free to share with this this video directly with them as per usual I want to challenge you to live a bigger life and a bigger business and I'll see you next Monday hey everybody