Wait a Minute before Giving Away Equity

"I'm in the early stages of my startup and I'm concerned about some of the big decisions I'm making around adding a Co-Founder and taking on investors. What if I end up giving away half my company and regret it later?"

June 5th, 2024   |    By: Wil Schroter

The most expensive decisions we will ever make as a Founder all come at the beginning — when we are most vulnerable.

The problem for us as Founders is we don't realize at the time just how expensive those decisions are, or that our vulnerability will dissipate over time. All we can see in that very moment is that we need "everything all at once" and anyone who is willing to take our fake Monopoly money (equity) to get it is doing us a favor.

They are not doing us a favor.

Founders can easily lose half of their company in the first year by making huge equity decisions that feel like the right decision at the time, but when looking back, become the most expensive decisions they will ever make, and ones that we can't get back.

The McRib of Co-Founders

The first decision that almost everyone either considers or makes is bringing on a Co-Founder too quickly. Of course, we all understand the notion — we want someone else to help grow the company, and going it alone feels overwhelming. Of course — we totally get it. But that feeling will pass — the cost of the equity will not.

Remember that it is unlikely that this Co-Founder will continue to drive exponential returns on your equity investment—for life. Sure, they may be able to help code our new app or design our new branding, but once that's done, are they going to continue to offer that exponential value? Almost certainly not.

To put this in perspective, imagine hiring that same person as an employee two years from now. Would you give them half the company to do the same job? Of course not. Hell, you probably wouldn't give them even 1% of the company (if you are, let's talk about that!) Think of every person as an employee first, someone who contributes value, and weigh them on that merit. Don't pay for a Filet Mignon when you're really buying a McRib.

Investors and The Scale of Vulnerability

Once we've emptied our piggy bank of equity with a Co-Founder, now it's time to squeeze out a lot more spare change for the early investors. Everyone understands wanting to attract investors because at the beginning everyone is broke! The challenge with being so needy at such an early stage is it also makes it nearly impossible to exercise any leverage in our negotiations.

Think of our Scale of Vulnerability with investors from 1 to 10, with a 10 being "Most Vulnerable" and a 1 being "Invincible." We all pretty much start at a 10. We're vulnerable as hell. Our goal is to lower that number by building a product, finding customers, and ultimately, generating a profit. But in the early days, we have none of that, so our vulnerability is at its peak.

That means this is the absolute worst time to be negotiating for investment. There will never be a time with investors where we have less leverage on how much equity we will give up, so when our Vulnerability Scale is at 10, we know the cost is going to be insane.

The Value of Waiting

So what's the answer here? Time. Time is what we need to burn through the early days of formation and get our product moving. Every single step of forward progress we take, from a tiny iteration on the product to getting our first customer, lowers our vulnerability and exponentially lessens the cost of equity to grow.

What's crazy is that in the early stages, typically year 1 and 2, the stuff we're paying a massive premium for feels super valuable at the time but later on we realize were things that we could have had anyway if we just waited a minute. But patience and growth are bitter enemies to Founders in the early stages, so we extract a huge premium for small gains.

Remember that countless startups are born without those huge costs. Only a tiny percentage of businesses take on investors, and more than half of startups are run by solo Founders. The goal isn't to move fast — it's to move smart.

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In Case You Missed It

How Do I Get More Equity Back? Giving equity away is easy. Getting it back is super hard. So while we can get some stock back into our coffers, we have to focus more on how quickly we give it away than how we get it back.

Should I Pay People With Equity? (podcast) Paying people with equity is a time-honored tradition in cash-starved startup land. However, have you ever stopped to consider the real cost? Join Wil and Ryan as they break it down.

Startup Equity 101: Who Gets What Slice of the Pie? If you’re starting to freak out a bit about who gets what slice of your startup pie, take a deep breath, calm down, and get ready for Startup Equity 101.

About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

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