Avoid the Startup Stock Options BS
Every single entrepreneur I’ve ever met has found themselves at this crossroads at least once, me included: You have a killer idea for a business. You have the skills and the experience to get it started. You might already be enjoying some green shoots of success.
What you don’t have is a certain set of skills to be able to take the next big step. It could be technical talent, sales and marketing talent — or any number of targeted skills that you desperately need to fill the gaps in your plan. And those skills don’t come cheap.
No problem, you think to yourself, you’ve got equity you can hand out.
But here’s the truth about how the startup equity equation plays out. There’s you on one side, asking, “How can I hire the best talent for the least amount of cash outlay?” On the other side, there’s someone asking, “How can I get in on the ground floor of a company but also be able to financially survive the journey?”
In all my years of startup experience, that tug of war is what it boils down to. Every time. And in order for that equation to work, a compromise must be reached, one that leverages a series of tradeoffs to fill the financial gaps on each side. The most valuable salary tradeoff might not be what you think. It sure as heck isn’t equity.
So let’s go over each tradeoff, why it works, and when it doesn’t.
1. Startup equity has never been a panacea.
I’ve been down this road dozens of times, as either the giver and receiver of equity. And while it has indeed been a windfall for me in the past, those moments were lightning-in-a-bottle, one-in-a-million shots.
Why it works: It’s those outliers that are the lure.
Equity and options offer, somewhat, the promise of sacrificing now for a big reward later. There’s also a general lack of understanding as to how options work. Thus, it can work, but it rarely works the way most option holders think it will when they sign on.
When it doesn’t work: Most of the time.