Paying First Employees
Paying First Employees is a critical task. A Startup is not a magnet. Some candidates lose enthusiasm when they recognize that the company is new. So, entrepreneurs are thinking about ways to attract talented people to the company. When they like somebody, they want the company to profit from his experience. But they cannot offer him a big salary to attract him. Consequently, while they don’t have a proof that this person will be good for the company, they think that the right way is to offer him equity. This is not the right way of paying first employees. In a previous post, we answered the question of when to hire the first employee? We recommended that an entrepreneur should execute all tasks by himself in the beginning to learn the different aspects of his business from a prospective of an operating company.
Salary vs. Equity
Question: Should an entrepreneur pays his first employee salary or equity?
Paying first employee should not cause harm to the business. Entrepreneurs make mistakes in the beginning of the startup. The most common mistake is hiring the wrong people. Hence, paying equity to the wrong people is dangerous. Because it means that the entrepreneur partnered with the wrong people. And getting the wrong partners on board may sink the business. Consequently, chances are; the entrepreneur will feel the urge of getting rid of some employees / cofounders / partners in the first couple of years that involve working with others.
Can’t pay big salaries either.
While the majority of entrepreneurs manage their startup with a low budget because they don’t receive enough funds, we recommend to operate the startup on a low-budget-basis even when the entrepreneur has a lot of money to spend. Thus, paying salaries for the first employees should not cost a great deal. We suggest to
- Hire part-time employees. The entrepreneur should delegate a few tasks in the beginning. A couple of hours a day should be enough for the new employee to reduce the burden of tasks that fall on the entrepreneur’s shoulders. This way, paying first employees will not cost too much.
- A payment based on the success of projects. If the project makes money, the owner my share part of the profit with the employee. In this case the owner is not giving away an equity of his business. He pays for a freelancer to make a project that will make a revenue. For the entrepreneur to guarantee that the freelancer will do a high quality job, he needs to increase the sense of ownership of the project inside him. Therefore, he offers him a part of the revenue that the project will make. That makes the freelancer feel that he is working on his own project.
When to give equity while paying first employees?
An entrepreneur may give equity when he finds a partner that will add a long-term value to his business. In this case, the entrepreneur should not simply give a random percentage thinking that 25% or 30% should be more than enough. While it is important to decide on the overall percentage, the owner should not start paying immediately. First, he should see a proof that this person has something to offer in return. He has to prove himself. For the same, the entrepreneur needs to create a built-in program and set to the partner some milestones to reach. If the entrepreneur thinks that the partner should not get more than 30%. The milestones will be like; After 3 months he will get a 10%. Then after 6 months he will get a 20%. And after one year the percentage will be 30%. So, the entrepreneur has to make the partner feel that he has to earn the money by meeting the expectations.
In conclusion, even if the entrepreneur has money, he should not waste it on paying first employees. Additionally, a business owner should be careful when bringing partners to the business. Furthermore, the owner should expect to make mistakes in the beginning while hiring the first employees. Therefore, we recommend to pay salary not an equity. And when it’s time for having a partner that may add value to the business, the partner should prove himself first and earn the percentages on a milestones-basis as explained above.
Muhammad Helmy is a Business coach, Lawyer, Training package designer and Content writer. When coaching, Muhammad Helmy considers not only assisting Entrepreneur in solving the startup problems, but also developing a business model that offers unique value to the community.