Over the last 10 years of running and building tech startups, I’ve built up my fair share of experiences. I’ve had businesses in Montreal and San Francisco, I’ve been through two acquisitions and I cofounded the FounderFuel accelerator program in Montreal, today one of the North America’s more recognizable programs. Moreover, most recently I was proud to start this blog with my good friends Gabriel Sundaram and Joseph Czikk.
Through all of that I consider myself a humble person, but I do like to think I’ve seen quite a bit and talked to a lot of founders. It’s been four years since I’ve written a blog post and today marks my first contribution to MTLinTECH.
To start: I love Montreal. I’ve lived on the west coast twice (four years in San Francisco and a year in Whistler), but Montreal has always and will always be home.
We hear it over and over and over again. The startup ecosystem in Montreal is blooming and has never been stronger. It’s an exciting time to be an entrepreneur in our city and I’ve had the good fortune of meeting a ton of founders on a regular basis. I like to spend time with them to help answer questions, provide guidance and make introductions when I can. I’m a strong believer in the “give before you get” mantra of the startup world.
But there’s one thing that I’ve been hearing a lot in this city, something that founders in Montreal continue to do. It makes me cringe.
Founders in this city are not offering stock options to all their team members. It’s an abomination to me, to know that people are pouring their hearts into your startups without any shot at the upside.
And it’s not only happening with early stage startups, it’s happening with mature startups too!
About 18 months ago I received a call from a head hunter working for a successful ecommerce startup in the city that was looking for a VP Marketing.
We talked about the usual stuff, role and responsibilities, vision, growth of the company, compensation, and he was shocked when I asked about the stock option plan. He told me the company is bootstrapped and the two founders own 100 percent of the business. I wasn’t interested in the role either way, but even if I was, no stock options was a deal breaker from the start, not only because I could never gain from any upside, but because it told me a lot about the culture of the company.
When news hit about PlentyofFish’s exit for $575 million, in which the sole founder owned 100 percent of the company, I was shocked. This is unheard of: It’s an anomaly. It just doesn’t work this way, I kept thinking. (Let’s just say I hope the founder distributes a large portion of the gain to his team.)
But back to Montreal…
Here are my top five reasons why everyone in your startup should have stock options:
1- You pay them less than they would make anywhere else doing the same job.
2- You expect them to work hard, as hard as if the company was their own.
3- You must keep them motivated through good times and bad.
4- You hired them because they’re great, you don’t want to lose great people.
5- You must treat everyone in your company equally.
As a founder and CEO, you have three goals:
1- Build a great team.
2- Set the vision.
3- Make sure there’s money in the bank.
You’re never going to build a valuable business without a team. Stock options go a really long way in finding and retaining great people, and as long as you have proper vesting in place there’s actually no risk in giving stock options.
But I get the sense a lot of people don’t actually know or understand stock vesting, and perhaps that’s really the reason founders in this city are so afraid to offer stock options.
In a nutshell, stock option vesting gives an employee rights to assets of the company over time. For example, you may offer a C-Level hire four percent of the company in stock options on a four year vesting schedule with a one-year cliff. In plain English that means your new hire will accrue his four percent of ownership over a period of four years. To own 100 percent of their stock options, they must stay with the company for a minimum of four years.
The one-year cliff means the employee will own nothing until they stay with you for at least 12 months. If they stay 12 months (meaning they complete their cliff), most vesting plans will give the employee the equivalent of the 12 months in one lump sum, after which the employee will accrue more and more stocks after each month of service.
Let’s say you setup your company in this fashion:
– You have combined total of 2,000,000 outstanding shares in your company.
– Of the 2,000,000, you’ve set aside 20 percent as a stock option pool to distribute to employees (400,000 shares)
– You hire a COO and offer him four percent in stock options (80,000 shares in stock options).
– Your company’s vesting schedules are set to four years with a one-year cliff.
– The COO doesn’t work out and you let them go after 10 months.
– In this case, they have accrued zero percent of their 80,000 shares because they didn’t stick around long enough to complete their cliff.
– The COO stays with you for two years and then leaves.
– In this case, they have accrued 40,000 shares (50 percent of their potential to get 80,000).
– The COO stays with you for four years and more.
– In this case, they have accrued 80,000 shares (100 percent of their potential to get 80,000).
With vesting in place, you’re always protected because the employee needs to stick around to own their options. No stress for you and great motivator for them.
Of course there are scenarios in which the vesting schedule may be more or less complicated than this example, but you get the point. So there you have it, here is my message to you founders in this city:
Every employee in your startup must have stock options as part of their job offer.
And remember: as the founding team, you and your cofounders must have a vesting schedule in place for youserlf as well. If you don’t have it from the start, you best be sure your investors will have you set one in place at the seed round so get it done sooner than later. It’s one less friction point for your due diligence process. Vesting schedules are inevitable, so talk to your lawyers for more information.
If cofounder vesting is something you want to know more about, let us know. Perhaps that could be the focus of my next post.