Start-up Case: a Technology Company with a $400K Round

Scenario

A small start-up secured $400K in funding to hire additional employees.  The employees in question would cost $100K per year per person.  Given the nature of the business, outcomes are uncertain and discussions of equity & base compensation were difficult causing founders and would-be employees to start with an adversarial conversation. Moreover, hiring just 2 people for 2 years was sub-optimal – more good people could lead to faster growth.

Deployment

  • 40% of equity was linked to the compensation pool
  • Everyone started with a base that is at 50% of their market rate
  • Vesting: 2 years
  • Divesting: 5 years

Impact

  • More Hires: instead of hiring 2 people, the company was able to hire 4, which had a tremendous impact on the speed with which the product matured.
  • Better Hires: because employees came in significantly below market rate, there was little doubt about whether they believed in the venture.
  • Transient Hires: the 4 employees included a software and a database architect, both of whom were only needed in the first year.  To maximize their return, both architects worked as quickly as they good and left to free up funds so that the founders could hire marketing and then sales talent.
  • Equity-like Payouts: The company became cash-flow positive by the end of year 2.  Years 3 and 4 resulted in dividend-like payments to all involved.  The company was acquired in year 5 for an undisclosed amount.  40% of equity was distributed to the team immediately prior to the acquisition according to their calculated impact.