When Should Startup Founders Hand Out Equity and Titles?
When you’re a first-time startup founder, it can be tempting to start building the organizational structure of your company a little too early. If you’re a serial entrepreneur like me, you probably go the other way, and delay conversations about roles, equity, and titles until they can no longer be ignored.
There’s a happy medium in there somewhere.
And after 20 years of founding startups myself — or sliding into a startup’s org structure at various stages of growth, or even just participating at arm’s length as a startup advisor, consultant, or board member — I’ve discovered that the timing of when you dole out equity and titles is often as important as how much and to whom.
If you get it wrong, you either won’t get the early talent you need to succeed or you’ll wind up with underperforming team members who own way too much of the company to smoothly remove them.
So before you create your cap table or offer your first option grant, check these boxes.
Rule#1: Equity Is Not Paper
This is by far the most important rule. An equity structure is deceptively easy to create. You fill out a few official forms, and boom, you’ve got a million shares — or whatever your number might be. The first time I did it, I settled on 100,000, because a million “seemed too much.” I just didn’t know any better.
This is fine. At inception, your startup’s equity is probably worth less than it cost to set up the legal formation of that equity. Again, I personally put $1,000 into my first company, making each share worth a penny.
But when you start thinking about sharing that equity, you need to be much more miserly. Too many first-time founders (and even some repeat founders) have come to me in a panic, realizing they gave huge chunks of the company to team members who lost their passion for the project or seed investors who were now using their stake to block future investment at reasonable terms.
Resist the temptation to wave around large percentages (and I mean like anything over 1%) to anyone you want to bring on in the early…