Dear Pomelo, do I have to give away equity?

The short answer to this is no, having a start-up does not mean you, as a founder, are obliged to give away equity or options to anyone if you don’t want to. However the question to ask in this instance is really SHOULD you give away equity? And to that, the answer is most definitely yes.

Equity is what keeps the start-up world running, without equity you can’t get investment - which is usually where most start-ups need to begin. We’re going to briefly explain why giving away equity is something founders should do in answer to your question, as it’s such a positive thing to offer employees and will end up benefiting not just them, but you as a founder too. If you want a deeper dive into why you should give away equity - you can read our article here.

Starting a business becomes a little bit of a chicken and egg situation on all accounts. You need proof of concept to get investment, you need investment to make proof of concept. You need employees to grow, you can’t pay for those employees until you grow. Equity is typically the area that can bridge both of these scenarios- creating a chicken/egg hybrid (that sounds weird, I know - but we had to stick to the analogy…)

Market expectations

The fact of the matter is, employees who work in start-ups or look at working in start-ups in their early stages expect equity and options plans (you can read up on the difference between the two here). If you’re not willing to give it to them, they could easily take their man hours and talent somewhere else - to a start-up that is willing to front their equity needs. You then run the risk of losing out on the best candidates to your competitors.

Working in a company that is in its early stages is a risk, if we want some real talk, it could fail at any moment, then employees would be out of a job. Often working in a more established business means more likelihood of higher salaries, mapped career paths, raises, bonuses and support - and a lot less likelihood the business will fail. Although some start-up’s are in the position to offer some of these things, it’s still in competition with stability - and a lot of people need a little more sweetening in their coffee to combat the bitterness of risk and no stability. Equity is the ultimate sweeter. It’s also better for you than sugar too ;)

Talent retention

So equity can be the reason to attract talent, but it can also be the reason to keep them. Talent retention is important for every company, but especially for start-up's. The way this works is through options. You’re not just going to give away chunks of your business to anyone without any conditions - as then you’re putting yourself in a risky position. Which is why there is such a thing as a vesting schedule. Vesting schedules are the plan in which they receive their options - and if they are engaged in this process they can clearly see key milestones on the horizon helping them stay motivated and engaged in the business as they come along for their growth journey.

Motivation

This is a big topic to dive into and you can read more on motivation theory in this article here. But the crux of this is, motivation is key in retaining your top talent and keeping them engaged. Losing early stage employees can often mean you’re losing out on all that intellectual insights and understanding they retain. And this is a bigger loss than companies realise. If you’re constantly churning your talent, then for every three steps forward you take, you’re simultaneously taking two back as you account for retraining, onboarding and new people getting a solid grasp and foundation on what you’re doing and how you’re doing it. It's far better to have a tight knit, dedicated team who are all in it for the long haul.

So, in summary to your question - do you have to give away equity? - technically no, but you most definitely should, and you also should want to for the good of your business.

If you want to chat about this, or need help navigating this exciting next phase in your start-up journey then feel free to get in touch, we would love to hear from you.