The F|R Interview: Chris Michel on the Good in Giving Your Equity Away, June 6, 2008, www.gigaom.com

We’ve written recently about how to preserve your equity when fundraising. This week we spoke with serial entrepreneur Chris Michel,
who explained why founders should not be afraid to give additional
equity disbursements — out of their personal stakes! — to reward senior
staffers.

That’s what Michel did just six months before selling his latest startup, Affinity Labs, to Monster.com for $61 million in January. Michel gave up a tidy bit of his own windfall, but he has no regrets, and thinks more founders should follow suit.

F|R: You gave half a percent of your personal
stake in Affinity Labs to three senior managers shortly before selling
the company. Why?

Chris Michel: One key to success is having a very
small and overqualified team. We all know this, but forget that the
best people could also go and be CEOs at their own companies. In a “war
for talent” you have ask yourself: What wouldn’t you do to
bring the right people onto your team and keep them in the game? Rarely
is compensation enough to make anyone happy. First, people want to be
at a place that they’re proud of, surrounded by people who are as
talented or more talented than they are, working on problems that
matter. Second, they want to be [remuneratively] valued. Compensation
is a necessary, though not sufficient, tool. But you can’t screw up the
comp stuff because it’s the easiest thing to do right.

F|R: What is the right amount of equity to give away? Why not give senior mangers larger stakes up front?

Michel: Boards tend to be very cautious with
compensation, and its unusual to increase someone’s equity unless there
is a promotion or a retention issue. Typically VPs of early-stage
companies get between 1 percent and 1.7 percent of a company. That’s
just the benchmark, but it’s what investors will expect to see. The
equity structure of a VC-backed company looks like this: The investors
own 40 percent; the founder(s) own 40 percent; 20 percent is set aside
in an employee option pool. After a round of additional funding, your
senior managers may each be diluted from 1.5 percent to 0.75 percent.
If you sell the company for $100 million — a very good outcome for a
startup — the managers each get $750,000. If you toiled away for five
years to build the company, is that worth giving up five years of a
great salary? Maybe not.

F|R: How did you do it and convince your board to go along?

Michel: A request to give an unscheduled grant to
people can cause heartache, because there is a perception that it
depletes the option pool for future recruiting. But I went to my board
and said: “Here, I’ll take 0.5 percent of my equity and 0.5 percent
from the option pool.” They saw that I was taking it very seriously,
that it was impacting me, and went along. We gave 1 percent to three
senior managers, who each got 0.33 percent in addition to what they
previously held. The lawyers had never seen anyone do that before. It
turned out to be a little complicated, because you don’t want to create
tax consequences for people, but that’s what the lawyers are for. The
board was surprised, but it precipitated a philosophy at Affinity to
proactively take care of our team.

F|R: How did your managers respond?

Michel: No one said anything in particular, other
than “Thanks,” though I’m not sure they would. It certainly made me
sleep better at night. But the psychological benefit to giving people
equity might even be more important that the actual value. When people
are serious owners of the companies they work for, they work harder.
This wasn’t just altruistic. It was a smart business move.

Affiinity CFO, Curtis Atkisson, a recipient of the grant, responds:

I felt like I was being thought of as a “cofounder” of the businesses.
That recognition is as important as the ownership grant…it has extended
my commitment to grow the business post-acquisition. [It] has
engendered loyalty.

F|R: How much did this actually cost you personally?



Michel: Maybe $350,000. It isn’t that I was super
generous, my point is that you can very easily give away some of your
ownership and it won’t affect you very much. It is the statement that
matters. Over and over I see founders who are parsimonious with their
equity, and there is good reason for this. But most startups die. If
you run the calculation on the net represent value of the equity, this
is the cheapest thing you can do to lock in good people. If your
company is a “big win,” you’re going to make a lot of money anyway. If
not, no one vests. There is no downside. It just makes sense for even
the most self-interested founder to be very generous with their team.
Net-net, perhaps those 1 percent benchmarks need to be fundamentally
reconsidered.