I think Jayant hits it right off the bat. First let me say that minority equity is not much different than just being an employee. It is the written agreement that is key here to protect the people taking ownership instead of cash. You as the majority owner can force them to sell the shares back or otherwise make sure the company is never profitable. Because of this, I question why GREAT talent would take the offer.
All that negativity aside. With a proper incentive agreement based on their contribution to future profits (or revenue), what can they do for you? A CPA can help you with the books (keep you legal), but generate no revenue or bookings. An event planner, a photographer (I hope you know better than I do) can help you get placement for your models but may never be part of a "team" but they can feed revenue.
I hope this helps. Best of luck.
Do you have a proven Product Market Fit? Have you heard of "Lean Startup" before? When an entrepreneur is talking about putting together a team of sales, business development and executives to execute a business plan they should have found a business model. By that I mean the founder(s) have gone "out of the building" and talked to their target market to find out if the founder(s) understand their problem and have a solution that the market wants. This approach helps reduce wasted time and money developing a product that not many people want. The traditional method of a founder having an idea, writing a business plan, then getting seed money to fund a team to build the product has been proven to have a 75% fail rate. If you have found a business model through Lean principles, then you should have an easier time approaching venture capitalists and accelerators (like 500 startups) for funding. If you haven't filled out and validated a Lean Canvas or Business Model Canvas yet, I'd encourage you do check out Steve Blank's "How to Build a Startup" online class by googling it.
Equity can be a great way to attract talent for startups, especially when you are still not at a financially stable position to pay salaries at market rate. As a startup advisor and investor I typically see startups setting aside between 10 - 20% for all their employees ( in addition to what was set aside for the founding team).
Depending on level of the new hire (leadership, team member, sr. developer etc) you can package equity + salary. Early employees tend to expect higher equity because of the risk they are taking, and you can significantly reduce the % as your team continues to grow.
Quick answer is yes. Typically allow 20% of the Company for management equity.
Don't spared you equity fast!! CEO gets 2-5%, other managers 2-4%, all employees up to 25% you need to keep shares for angels and CV's at least 2,
usually you can plan it by spread sheet it is called CAP Table so you can see what is going to be your position in the end of raising money and team. more then this is to teach you to open a company and manage it.
I have done this and I kept the shares given as equity payment to employees at a minimum. It was an early stage of a start up where employees were paid in equity, but the company had 250 million shares of common stock so giving away 5k shares to each of the 25 employees did not cut into the amount we had left over for investors and reserve.
Honestly, I would not give a percentage but rather do it in a set amount. I personally would consider pay for my services through equity, but many people want cash or cash & equity instead. If your business is running and it's poised for success, you should have no problem paying in equity so long as you still retain enough shares to offer investors, and of course allow those who were paid in equity a way to sell them to either you or an investor.
the most important thing to have your team love the technology and to know it is scalable but you can get very good people with 1- 5% of founders stock
what kind of team are you trying to build?
I wouldn't give away equity to build a team either.
Tell your prospects that if they do the job they will be awarded with raises and bonuses.
I need more facts - what is the long term business plan, exit thoughts. I have found long-term sweat equity too often be a motivating placebo. The minority ownership offerings would only be entertained by the majority owner knowing all is well with no loss of control.
Real talent generally commands real compensation. - and a contract.
There's a substantial difference between "giving" equity and "promising" or "committing" or even "contractualising" the commitment - the three form different levels of commitment and require different degrees of thought to the process and its documentation.
The principle is perfect but there's some degree of work required in being able to structure and document the commitment.
The questions you've asked - percentage / quantum / valuation are actually the last to require an answer and only come into play when the contractualising is on the anvil.
Would be glad to help you gain further clarity on a 1-to-1 basis.
Yale, MIT, Harvard and I am sure the west coast equivalents when spinning out businesses divide the common stock into thirds. 33 percent for the founder, 33 percent for the money guy and 33 percent for the engineering/marketing or whom ever your key people are. In the scheme of things, common stock is not important if you are taking outside money. Preferred stock and the covenants will prevail. If you have the bucks to build your company, then who has the dough runs the show and I agree with the lot, don't give out much.
When you say "team" do you mean executive team, team members (as in staff) or an investing "team"? It's unclear from some of the responses if you're looking strictly for investors in your company or how to reward your staff with equity stakes.
I would expect to give 15% - 20% of the common stock to the team. This would probably be a negotiated number by investors at the time of a funding event.
Also consider advisers and interim executives. Then you can keep your equity.
One of the most important tenets in business is that "Cash is King".
People like to be paid in cash, cash is of readily determinable value, and if you have it, I ALWAYS recommend paying in cash and incentivizing through equity (options).
Conversely, equity by its nature works against one of the other important tenets of business, leverage increases returns.
So my answer to your question of whether to build a team through equity is generally, no.
If you do choose to do this, there are some industry standard rules of thumb (which should be ignored if at all possible), and then other methodologies which often rely on a replacement of compensation calculation.
E.g. If your lead programmer is worth $50/hour (or $100k/year), then their contributions would be related to their opportunity cost, i.e. each hour worked accrues a commensurate share of the company value at the time.
This method is inherently flawed as the valuation metrics themselves are not readily determinable. This uncertainty is yet another reason I suggest cash.
I would recommend not more than 25% to the entire group. If you are working with one or two people that you want on board, 5% each is good. Once they know that you value them and you all watch the business grow, you can make more shares available for them to buy. Most people would be honored to be offered 1-5%. It's the gesture as much as the amount, unless you are working with someone who has owned equity before in another company. If you decide you gave them too much, you will have a hard time getting shares back. Baby steps. You can all do more later.
You should NEVER give away equity to build a team. If it's an investment opportunity then yes and the average percentage is 10-15% depending on how involved and how much they invest. Always ask what they want first before you offer. If this is to build a team to help you grow it, my philosophy is show me what you can do and then we will discuss guaranteed money and percentages. I fould my team through networking and building relationships with people that have the same vision and trust.
How many people are you looking at to build your team? I would divide 50% by the number of team members desired and offer it to them. If they balk and ask more, then you'll need to decide how much you're willing to offer them and/or negotiate hard. Hope this helps. All the best.