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FAQs | Human Resources

Recruiting With Equity as a Salary Substitute

Q1: How do you recruit, manage and retain high performance employees, especially when compensation will be primarily equity in the company?
[Ben Cruz,]

  • I think there are several things that you must consider when you are trying to staff a company based on your plan. You must first understand that, though you are offering equity in what you hope to be a very profitable company, at the moment the value of that equity is probably nil. It is difficult for anyone who is not wealthy to leave a job with a comfortable salary to sign on with your vision, and no visible means of support. This does not mean that they won't, however, they may be looking to work under terms a little different than the ones you've envisioned.

    Regardless of how you recruit, you must be prepared for the woes of doing business with no capital. Until you get financing, don't expect these people to work for you full time. Many of the positions you are trying to fill will be taken by people who have probably not had time or inclination to build substantial savings. What you can expect, however, is to get some very dedicated part-time personnel who will spend their off hours with you working toward your collective vision.

    This can be frustrating, too. While you’re talking the talk all day, your partners/staff are working somewhere else. Nights and weekends become your collaboration times. Remember too, that this will be very frustrating for those whom you recruit as well. Be patient with them and they will perform for you.

    Whatever you do, put employment agreements together when you hire. Spell out exactly what compensation they will get now and what they will get after financing as well as equity shares, bonuses, and benefits. You will need these for both funding due diligence or should something go awry in the relationship.
    [David J. Simonetti,]

  • Even if someone shares in your vision, he/she may be unable to accept a strictly equity compensation structure on a full time basis.

    As suggested at a recent Nite Owl meeting, make contingent employment offers, with the terms of the offer dependent upon some event -- obtaining funding, landing a contract, etc. When that event occurs and the cash flow begins, you can pay the cash salaries required to get the top people on board full time.
    [Steve Fleckenstein, Morino Institute]

  • Your best prospects will probably fit the following profile:
    • there is another income in the family, providing some measure of financial security
    • the significant other/spouse endorses and supports taking the risk of a start-up venture
    • the prospect believes strongly in the concept and supports your vision and has a passion for the work

    Prepare a list of interview questions to help you and the prospect assess the level of commitment. How many hours can they commit to per week? For how long a period? What is their expectation in terms of compensation? What skills sets will they bring to this endeavor? Are there opportunities to learn new skills that will serve as some compensation?

    The three biggest problem areas I experienced as a team member of three start-ups were: poor communications about expectations; disagreement about compensation; and a timeline that was woefully underestimated.

    I think there are people out there like me who are willing to work with you to realize your dream, however I agree that you must be realistic about the financial and time commitments they will be able to make.

Q2: Can headhunters help find entrepreneurs who are mostly equity compensated? If so, how are the headhunters compensated?
[Ben Cruz,]

  • Networking is the best, I think. If you can get out and meet people in person and find out what others know about them at the same time, I think you have the greatest chance in successful recruiting. I don't think executive search firms will help as their compensation is usually based on the compensation that their client gets or an up front payment from you.
    [David J. Simonetti,]
  • I work as a technical recruiter (aka Headhunter) for a staffing agency with offices in the DC area. I am working with a few small startup companies to find people for their organizations. My experience has been that it is almost impossible to find people who will give up their day job to work strictly for equity. On the other hand, there are people out their who want to hear about startup opportunities and are willing to devote non-work hours to building a new venture. I find these people through networking for other established clients. I meet all local candidates for a face-to-face interview. One of the questions I routinely is "are you open to startup companies." If the candidate is open, then we explore those opportunities.

    Most of the companies I am involved with have some sort of revenue stream going before they get us involved, even if they haven't had a round of financing yet. In other words, they are paying salaries, even if they are lower than market. I get paid a commission based on these starting salaries. I haven't had a company offer me or my firm equity for finding them people. But that's an interesting concept.

Q3: Do ads in the employment classifieds work?
[Ben Cruz,]

  • I think there are many good ways to find equity partners. Want ads, contrary to the opinions of many, do work sometimes. You must target the ad the type of people you are looking for...entrepreneurial types who are looking for a ground floor opportunity.
    [David J. Simonetti,]
  • Advertising in the paper is a waste of money. On-line recruiting is much more effective if you are looking for technically savvy individuals.
    [Bruce Gnatowski, Source Services]


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