Getting a Skeptical Co-Founder’s Buy-In on a Performance-Based Equity Structure
Let’s say you’ve got a co-founder. You’ve read our site and blog, and you see the clear benefits of moving to a Performance-Based Equity (PBE) Structure.
Problem is that your co-founder doesn’t see them. That’s why we’re going to look at the most common objections to or concerns about PBE. This is the ammunition you need to persuade your co-founder to get on board.
So let’s get started.
Not Enough Control
Every human being on some level wants to maintain control. With performance equity, control is fluid. Performance equity rewards those who contribute, in real-time. This encourages every team member to give their all because, rightfully, they receive more. But it also means less direct control. How can you tell if this a problem or a benefit?
Consider whether your co-founder wants every team member, inside and outside your company, to give his or her all and to be fully invested in your company’s success. The old static type of total control doesn’t do that. Your choice comes down to: more control and less chance of success or less control and a great chance of success. We’re betting the second alternative looks pretty attractive.
Too Much Complexity
What could be simpler than saying: “You get x%, I get y%, we’re done”?
The fact is that fixed equity like this is pretty simple. But this type of simplicity isn’t flexible. And flexibility in compensation is what motivates people, not the same amount of compensation regardless of their efforts.
For example, suppose you and your co-founder start out with equal equity. Then, just a few months into your startup, an unforeseen emergency prevents your co-founder from staying on. While you–and the rest of your team–are working your tails off, everyone knows that the co-founder’s equity share is far too large given his contributions. Pretty demotivating.
Upstock solves this and other problems by offering a different and better kind of simplicity. We’ve automated everything for you. The innards are complex, but all you see is an incredibly easy-to-use dashboard that does all the calculations, handles the grants, keeps the legal documents updated and does everything pretty much automatically. Plus, instead of static equity, you get to use the far-more-motivating PBE.
Investors Will Complain about a PBE Cap Table
Maybe your co-founder likes PBE but is afraid of rocking the boat with investors. But that assumes investors won’t like PBE.
To see if that’s true, let’s ask what investors want. Clearly, a logical cap table that’s unambiguous. When investors uncover ambiguous cap tables during due diligence, they think “shady,” whether or not that’s true.
Here’s how Upstock solves that problem. We keep track of everything in a completely objective way. On the one hand, we can represent the entire equity pool with just one entry in the cap table: this encourages teamwork and a single focus instead of a scarcity mindset where everyone fights for the last share. On the other hand, we can show how much money’s been spent, on whom it’s been spent and what those people actually did. Because Upstock can provide transparency, clarity and completeness for equity allocations, it facilitates auditing instead of hindering it. It also supports both PBE and conventional equity, capturing not just part of what investors want to see, but everything they care about.
“Our Attorneys Will Advise–or Have Advised–Against It
The fact is that Upstock doesn’t make lawyers a lot of money. It helps you keep your money and incentivize your internal and external stakeholders. Since it’s automated, however, it does take away a lot of potential business from attorneys used to setting up start-ups with static equity and standard templates they repeatedly charge for.
To be clear, we’re not attorneys nor are we giving legal advice. Always consider your attorney’s counsel. But also consider what’s going to make your company both successful and in compliance with applicable laws (Upstock does have its own team of attorneys who prepare and update our documents).
Some attorneys do see the potential and value of performance-based compensation and equity. They know that the legal fees you save by using Upstock may later be used to pay for other high-value legal services. And they have excellent company: PBE is extremely popular and widely adopted among precisely those companies with the very best lawyers, the Fortune 100.
So why haven’t startups followed suit? Because, until Upstock, PBE plans were unaffordable. Upstock changes all that.
At the end of the day, yes, you should listen to your attorney’s counsel. And you should be sure your counsel is aware of the Fortune-100-wide adoption of PBEs. Then make the best business decision possible.
Fear of Using Performance as the Basis for Equity
Performance-based equity is, as the name implies, about actual performance. It’s not about who was there first, who has the better title or who has more credentials. It’s where the rubber meets the road.
Some co-founders want to hold on to equity by virtue of their “number” in the company or to reward their friends. Others, in contrast, want to make sure those who contribute the most also get the most. Which kind of co-founder do you have? Which kind of co-founder do you want?
Advisors Opposed to PBE
Most of your Advisors have been advising for a long time. That’s typically a very good thing. But when they’re used to seeing only one type of equity structure, one which isn’t PBE, they may viscerally reject PBE because it isn’t status quo.
Forward-thinking advisors can see how PBE conserves cash, enhances runway and aligns team member interests. But it is a change, and some advisors may still have reservations. This is where Upstock team members can help with detailed explanations and real-world case studies; reach out to us anytime.
Conclusion: Why Upstock Is Right for You
When you use Upstock, you’ll immediately cut your equity-plan-related legal fees relating to equity by tens of thousands of dollars. Further, Upstock can help you achieve over a 50% reduction in payroll by having PBE replace significant amounts of cash compensation. These reasons alone mean far more working capital, a longer runway, and increased transparency and alignment among your team, giving your co-founders the greatest chance of ultimate success.