Employee Equity Sharing

[ryanlocaleyes]

Hello,

My name is Ryan. I run a small video production company in Denver, CO. I started the business 4 years ago, however since day one I've used the business as more of a side hustle than a full-time job. Last year I decided I wanted to take the business to the next level so I began putting more time & work into it (while working a full-time job). We did a little over $100k net last year and this year we're on track to doing a little over $200k in net.

I want to continue this pattern of growth & have started to invest more heavily in marketing & advertising. I've also quit my full-time job to run the business full-time. Up to this point I've worn most of the hats in the business while hiring video & sales contractors/freelancers when I need the extra help. I believe I'm at the point where I've taken on as much as I can handle by myself and I'm ready to bring someone on that can help my business grow. My idea is to hire my best video contractor (by far) as the "Head of Video Production" for the company that way I can focus on the high level goals for the company (marketing, sales, and other strategies that will help the business grow).

My question is what do I offer this contractor in terms of salary &/or equity so that he is enticed enough to want to leave his current job and join my growing company? This contractor's current job pays about $75k w/benefits. This person would be a pivotal piece of the company that would not only enhance the quality of work, but also free up my time to focus on high level tasks that will grow the business. My idea is to offer him a few options:

(based on projected $500k annual net income)

OPTION 1: $30k + 10% equity ($500k net income = $80k / $1mil rev = $130k)


OPTION 2: $50k + 5% equity ($500k net income = $75k / $1mil rev = $100k)


OPTION 3: $70k + 2.5% equity ($500k net income = $82,500 / $1mil rev = $95k)


Do these seem like logical options? If not, what do you think makes most sense?

Any advice is greatly appreciated. Thank you in advance!

[vangogh]

Welcome to the forum Ryan. Congrats on building the business up to where it is now. All of your options sound logical. Why not sit down and talk to the person you want to hire and work things out with him. Ultimately you both have to be happy with how much you offer him or one of you will be resentful of the other.

You're probably going to have to offer him more than what he's making now. If he's making $75k + benefits now, you're probably going to have to offer him something comparable to get him to leave his current job and join you and while I understand why you're using $500k in the equity numbers, you're on pace this year for $200k, not $500k. When I like at Option 1, it's really $30k + $20K at the moment. How much does this person believe in your business and how much it will grow?

It looks like your options are tying to meet what this person currently makes, but that might not be enough unless you know he's unhappy where he is or believes very much in what you're doing. If not, then you probably need to offer more to get him to change. You are asking him to leave a known quantity to take a chance with you and that likely means you'll have to offer more than what he makes right now.

That said, the best thing to do is talk to this person. Why not just float the idea of him joining you without actual numbers. You might let him know what you're thinking in general and gage whether he's interested in the idea. Assuming he is, you can then talk details. In the end I think this is something to work out with him and not decide on your own.

Hope something in there helps.

[ryanlocaleyes]

@vangogh - Sound advice! I know he believes in my business and is willing to leave his current job if I can make him an appealing offer. Love the idea of talking with him to find a solution that works best for the both of us.

Thank you for the response!

BTW - I see you're in Boulder. I'm just down the 36 in Denver.

[tallen]

I would try to adjust the offers so that the reward parallels the risk, as it were -- in other words, at a given realistic projection of net earnings, the $30K + 10% of net should result in a higher end value than the $70K + 2.5% of net.... At the 30+10 he is taking on more risk, at the 70+2.5 YOU are taking more of the risk....

You also might want to look at these offers over a series of possible outcomes -- in other words, what does it look like at $200K net earnings, vs. $500K net earnings, vs. $1M net earnings (is that even realistic?)

[Harold Mansfield]

I prefer either straight, guaranteed salary + bonus structure. Or Equity. Not both. When you have equity ownership you take the good with the bad. You don't get a guaranteed salary AND equity. Especially in a small start up.

What you're suggesting is that you're going to basically double your sales every year for the next 5 years. That sounds great but if you came to me with that I'd be suspicious.
From what you've said you cleared $100k this year. What if you don't grow as expected over the next 3 years, you can't afford a guaranteed salary of $75k + equity. At that point he's making more than you.

You could also just ask him what it will take, and see where he is and how realistic it is. Maybe he's willing to take the salary hit for now in exchange for a piece of the pie.

[tallen]

Just want to add that giving a percentage of the business's net as part of a compensation package does not necessarily have to imply an equity share -- one can share in the profits without having any ownership stake in the business -- assuming the actual owner(s) agree to the arrangement.

[ryanlocaleyes]

Thank you, @tallen & @Harold Mansfield for your responses! Both answers are very insightful.

@tallen - I like the idea of profit sharing instead of equity (at least to start). Do you have any suggestions as to how this would look for what I'm trying to offer? I.E. - $50k salary + 5% of net profits?