MBA2489 Q&A Wednesday: How do I ask for equity in a company I help start?

0:09Heyo, welcome to the$100 MBA show, giving you the answers you need to build the business you want. With our practical business lessons, I'm your host, your coach, your teacher, Omar Zinhome. And today's episode is Q &A Wednesday, where we answer a question from one of you, one of our listeners. If you've got a question you want to ask, go ahead and email me over at omar at 100mba.net. Today's question is from Sam, and Sam asks, how do I ask for equity in a company I help start? I'm a part of a SaaS company, software as a service, and I've been there for two years now. I joined the team about six months into the business.

0:45When I joined, there were five of us. Now we're a team of 30. I feel like I have been an integral part of this business and its growth and would like to request equity so I can own a portion of this company that I'm helping grow every day. Technically, I am not a founder, but I kind of feel like I should be one. What are your thoughts? What's your advice? I really appreciate it. Sam, no worries. I got your back. And like always, I'm going to be 100 % honest with you and give you the advice I think will help you become the most successful in this situation. First of all, you're right to want equity in a company you're helping to grow.

1:24Ownership is everything in business. I've started and grown two seven-figure businesses, both with a business partner, my partner, Nicole, bootstrap these businesses and own 100 % of the shares. So I know how important it is to have a piece of the pie. Because if one day you sell the business, it's going to make a whole lot of difference. Now, if you didn't start the company, but you want equity in it, this is a different situation that requires a different approach. This is something that has been done over and over again. So this is nothing new. This has been done before. So we can just follow best practices so that you can get a piece of the pie, but at the same time, understand what the company needs so that you actually earn it.

2:04Let's get into it. Let's get down to business. Anytime you're in a negotiation like this where you want to request something from somebody, it's always best to see things from the side of the other party. For example, if you're going on a job interview, look at it from the company side. They are trying to make a hire. This is a painful process for them. How can you make it easier for them to hire you? By putting yourself in the shoes of the employer, or in this case, the company owners, you can stress the things that are important to them and fulfill their needs so that they can feel like you deserve this equity.

2:41Remember, equity is earned. It is not just given to people. Those who started the business, they had to sacrifice their money, their time, their patience, their reputation. So they earned that equity that they have now. So how are you going to earn yours? Now, you may have already earned it in some way of showing your loyalty and the work you've put there, but you've also earned a salary. And as a founder, I could tell you that the last person that eats are the founders, the people that own all the stock, because they want to make sure that the team grows and the company grows, and therefore they probably get paid the least.

3:15This is common practice, especially in bootstrap businesses, businesses that are not funded by private equity or an investor. So there are three things you need to consider when it comes to making sure you're putting yourself in the shoes of your founders that are going to give up equity to you. And that's what they're doing. They're sacrificing their piece of the pie to just give to you. So what are the three things? Number one, what am I going to get in return? Why am I going to, as a founder, give you equity in something that is mine? It's going to come out of my shares. It's not going to come out of nowhere, right?

3:50It's going to come out of my shares. So let's say there's two founders and you want 10 % equity, they're going to have to give up 5 % apiece. What are they going to get in exchange for that? Because right now you are fulfilling a need for them. Are they able to fulfill that need with another hire? I'm just getting really real with you right now because this is the decision that the founder is going to make. These are the options they have. So what are you offering them that they can't get elsewhere? Now, you might be offering them loyalty. You might be offering them a long-term relationship. You might have some insights or influence that other people don't have and they value.

4:25But you have to answer the question, what are you giving in exchange for the equity? So the first thing is like, what are they going to get in return for giving you shares? The second thing you need to consider is risk. They want to make sure that their risk is lowered as possible, because what if they give you equity and then you leave. This is where a vesting scheme comes into play. So most people that earn equity, they don't just earn their whole percentage, like 10 % in this example, in one shot. They earn increments of equity based on a number of factors. This lowers the risk for the founder.

4:59What are those factors? Number one, time. So say, for example, you earn your first 2.5 % after completing 12 months. So you basically allow them to feel confident that you're going to hang around for a long period of time. You can also have a stipulation as a, hey, I will stay a minimum of four years or I won't earn any of the equity. I lose all the equity if I don't stay for at least four years. This lowers the risk big time because it makes them feel like, okay, we're going to get four years of commitment from this person. So they're not going to take two and a half percent or 5 % and leave.

5:31You may not think this is fair, but again, do you want to be fair or do you want the equity? So do what you need to do to get the equity that you want. And by the way, it isn't fair. You are not in a position of power right now. You don't have any equity. You don't have any ownership of the business. You're a salary employee right now. So if you want leverage, if you want power, you need to give up power. You need to be willing to say, hey, I am going to do something that I feel that's unfair for me so that I can be able to show you my loyalty. The next thing is they're going to want to make sure that you're actually doing the things that you are saying you're going to do to add value to the company.

6:09So they're going to be milestones or certain achievements you have to do in order to earn the equity. So say, for example, you're in a sales position and you need to increase sales by 15 % year over year. If you do that as a minimum, you tick that box, you earn the equity for that year. These milestones have to be measurable, meaning that you can measure this and they have to be in your control. You want to make sure that whatever these milestones are, you have a good amount of control of achieving them. Of course, you can't control the future. There are going to be other factors and business is all risky.

6:43We know this. There's the market and there's the economy and all that kind of stuff. But in reasonable terms, if you make the right moves, the right decisions, and you work hard enough, you can achieve these goals. So number one, you're going to show them what they're going to get in return for giving up equity. Number two, you're going to lower the risk for the founder. Before we get into number three, here is the key to win over your founders. You are going to increase the value of the company. You have to remember, why will they give up a percentage of their stock? The only reason why they would do this is because they believe by doing so, they will earn a multiple of more money or the value of the company will be valued at a multiple of what it currently is.

7:28Meaning that if they give you 10 % or five apiece in two founders, for example, that maybe the company is valued at$20 million right now, but by doing this in four years, you're going to help the company get to$100 million in valuation or$200 million. And in this case, it's better to own 90 % of a watermelon than 100 % of a grape. All right, let's jump into the third thing you need to consider when it comes to asking for equity. We talked about explaining what they're going to get in return for giving up equity. And number two, lowering the risk. Third thing you need to consider and have an answer for.

8:04You need to have a long-term vision for the company. By asking for equity, you are moving from the employee position to an owner's position. You're going to own a part of the company. So your vision for the company, what you believe is possible for the company matters because you're going to influence that growth, that vision. Now, obviously the founders have a vision and your vision can be aligned to this, but you have to sell them on what you actually see as the potential of the company. This is more of an inspirational piece that a lot of people forget. As a founder, you are busy putting out fires, hiring people, firing people, paying bills, and sometimes you lose grasp of what you're trying to do long term.

8:49By having somebody say, hey, I believe the company can do X, Y, Z in the next five years, and we can be the market leader in these areas because this is what we're doing now. Imagine if we did a few of these changes or tweaks to be able to take it to this level. This convinces the founder that you're not just thinking about a payday. You're not just thinking about getting more money out of them. You're thinking about the health of the company and how to make it more valuable. So selling them on your long-term vision and what's possible, the potential, is huge because this will convince them that you are not just an employee, that you are actually somebody worth considering to be a partner.

9:28People that are partners in a business are decision makers, are visionaries, are leaders. They're not worker bees. That's what employees are hired for, to implement the vision. But who's going to come up with the vision? Who's going to come up with the ideas? And I'm not just talking about cool ideas for features or for how to make the product better. I'm talking about strategy. How are you going to dominate your market? Can you offer some strategic thinking, a path forward to make things easier and be the leader in their space? Now, you might be thinking, well, if I tell them my strategy, then they can just take it and implement it.

10:03Yes, they can. You're going to have to risk that because business is risk. You have to be willing to say, hey, I believe in this company and love it so much. I'm willing to give you everything I'm thinking about, all the strategy because I want to see this thing grow. It's kind of like a love affair. I love this person so much. I love this company so much. I will do anything I can to make it happen because that's what founders and that's what owners of a business are all about. They're just trying to make it survive and thrive no matter what. So to wrap up, first thing, you need to make sure you show them what are you going to do from a practical return on investment point to make it worth it for them to give up equity.

10:42Number two, lowering the risk, the earn out, stipulations, milestones. And third, what's your long-term vision for the company? What do you want to achieve as a partner? This is my recommendation, Sam, to approach it in this way. My last piece of advice is don't approach us from a position of entitlement, that I deserve this equity. I've been with you guys for two years. I was part of the founding five. Entitlement stinks a mile away and nobody can withstand that stench. Nobody wants to hear that. What they want to hear is I'm grateful for the experience, but I want to take things to another level.

11:18I want to show you my commitment. Can you do the same for me? Thanks so much for listening to the$100 MBA show. I hope today's episode was informative, helpful. If you got a question you want to ask, go ahead and email me over at omar at 100mba.net. I'll make sure to answer right here on Q &A Wednesday. If you love this podcast, the best way to support us is to follow the show. Make sure you subscribe on Spotify or Apple Podcasts or whatever podcast app you listen to. Thank you in advance for doing that. Before I go, I want to leave you with this. If you are a part of a company and you don't have any equity, but you're a part of the first few people, just like Sam, and you feel bad that you don't have equity, don't take it personal.

11:55This is just business. When you start your own company, you get to call the rules. This is why entrepreneurship is so interesting is because you can create your own world and your own rules and you could choose who gets equity or not. The fact of the matter is that you didn't start the business, you didn't take on the initial risk, and therefore you're now going to have to have a different path to earn the equity. And that's okay because now it's time for you to earn it. Now it's time for you to sacrifice, price just like the founders did thanks so much for listening and i'll check you in the next episode i'll see you then take care