Start-up Case: Working with a 50K Seed Round 

A 2 person start-up secured $50K in seed funding along with some incubator space.  The founding team is two entrepreneurs: Bob, a graphic designer, who will lead technical development and Joe, who understands the market and will lead business development.  To get things going, they need two additional coders (back-end, front-end) for 3 months to build up the product and then they need to allocate most resources into business development to grow revenues, which involves creating collateral, hiring sales/marketing staff, paying for conferences/travel and other related activity.

Hiring top talent on equity alone is difficult, so cash compensation is necessary.  Assuming $100K per year (thus $25K per quarter) per developer, they would need 50K just to build out the first version of the product.  Then an additional 50K would be needed to spin up sales activity.  The total bill comes to 100K, twice what the budget allows.

Upon successful execution, the business should see first revenues within 6-12 months and be profitable within 2 years.

Deployment

  • 25% of equity was linked to the compensation pool
  • All new hires started with a base that is at 50% of their market rate
  • Vesting for the founding cohort: 1 year or upon reaching execution milestone
  • Divesting for founding cohort: 10 years

Impact

  • Full Team: with 50K, the company was able to fill out both technical (2 people) and business (2 people) development teams as well as pay for initial sales activity.
  • Team Motivated to Succeed: because all hires were motivated primarily by future payouts, they did their work as quickly and as well as possible.  Also, because of below-market compensation, team members came on board only if they believed in the success of the venture.
  • Transient Hires: the two technical employees willingly reduced their involvement after the initial development sprint to maximize resources for the sales team.
  • Equity-like Payouts: the company broke even within a year and had profits by end of year 2.  Years 3 through 5 resulted in dividend-like payments to all and rapid expansion of the business (see growth use case) until the company was acquired.  The acquisition triggered everyone’s calculated impact to be converted into shares thus resulting in an equity-like payout.