Be careful when you give equity away, particularly when you have just launched your startup, and you’re brimming with confidence and excitement. I hear about this a lot, where someone creates a great startup and generously (often naively) gives shares away to a bunch of people to entice them to put in a bit of cash, come and work with them, or to stay loyal. It can come back and bite you on the ass.
By all means, give away equity away to key people – particularly if it will allow you to attract people who would otherwise not be interested in working with you. I did. I gave shares away with my previous business in order to attract top talent, and it worked out extremely well – I got people on my team who I could never have enticed without giving equity away.
If you’re not careful though, you could end up with small shareholders who really don’t know what they are getting into. Friends and family may all throw in £2k and get a nice 2% each, only to find their investment becomes worthless if things don’t work out – and guess who gets the blame… They don’t realise that investing in a family member’s business is like investing in any business – the shares can do well, or bomb and be worth nothing… “What?? You’ve gone bust?! …but you said your business idea was a real winner!! What the hell are you playing at!!??”
If you give shares away to staff members, you need to know what you are doing, and be careful that the people getting the shares deserve them. What if it doesn’t work out with that staff member?
What if you give away too much equity early on, and don’t leave enough for later when you want VC, or want to exit? If you choose to exit your business at some point, it will be very helpful if you have retained plenty of equity. Also, if you decide to go down the VC route then remember that VC’s don’t generally like investing in a company which has a bunch of small shareholders who add little to the company. If you gave your granny 5% for knitting you a jumper with your company name on, you might find it’s a problem when seeking investment.
What if you lose equity control because you have given away all your equity?
What if your business booms and becomes huge – do you really want the cleaner who received 5% for Christmas, to be worth millions? If so great! I’m just saying think about it.
It’s all too easy to give shares away when your business is just a startup, but extremely difficult to reverse the decision.
Also having lots of small shareholders can be a real pain in the arse. You have to keep them informed as to what’s going on and answer their questions (even though half of them don’t even understand what your business does).
Before you give shares away make sure you think through what it means if your company becoming hugely successful, or goes bust. Either way you may have problems if the wrong people have shares.
All I’m saying is just be careful, and think about what you are doing with your 100%. Don’t flippantly give away shares. They are really valuable. Give your shares to people who really make a difference.