Most business owners will have heard of revenue share, but if you’re new to the startup world, you probably have not considered the questions of profit share vs equity compensation when bringing on staff. Those who have may think they need to give away chunks of their company to be successful. Both are problematic.
While revenue share applies more to major contributors in your company, or outside business partners, startup founders also face the issue of how to attract and retain high quality talent. When starting a new online business, employees expect to take on additional compensation perks to balance the risk that comes with working for a startup.
Where you stand on the profit share vs equity compensation question should partly come down to where your company is in its development… and how easy it is to attract great people.
Profit Share vs Equity Compensation: Will It Impact Your Company’s Growth?
The short answer is that, yes, selecting profit share vs equity compensation can impact your company’s growth if your compensation arrangement seems out of step with employee expectations or is otherwise unfair.
Your company’s growth engine is the people you bring on. To be competitive, you need to bring on the best people for the positions you’re hiring for, and those people need to be motivated to do their best as part of the organization.
If your compensation arrangement is out of step with what they’d consider fair, then it does not matter how great their resume or references were… you won’t see great performance, and that will drag down your business’ performance.
Profit Share vs Equity: How do they Apply?
Since employees who go to work for startups are taking on more career risk (if the company folds, that doesn’t make them look great, and they forego other opportunities), they’ll tend to be more enterprising than people you hire later in your firm’s life cycle, so tend to expect to earn an ownership stake as part of their compensation. In plain English, this means that they’ll expect something like stock options as part of their compensation.
Of course, this applies to new hires in the West, generally. It’s simply a cultural expectation here. Staff you hire from other parts of the world will not have these same expectations.
The younger your business is, the more important your early hires will consider equity compensation. As your business launches, grows, and matures, the less risk new hires will take on by joining your firm, and the less they will expect equity to be part of their compensation agreement.
If your business is 1 month old, for example, then any talented hire with significant involvement in your business will expect significant equity compensation. If your business is a year old, then new employees may still expect equity compensation but will settle for a lot less. As your business matures, newly hired staff will eventually have no equity compensation expectations.
Small online businesses – such as membership websites – tend to operate as sole proprietors or LLCs, and may not even be incorporated… so you may consider it tricky to set up stock options. If that’s you, then keep in mind that you can simply write a stock option clause into an employee contract and issue the shares when you incorporate down the line.
Now, what about profit share?
When your business is young, employees realize that you may not have much income over and above their basic salary, but are trading their time, effort, and talent in the hope that they will have a large windfall when the business works out. They won’t be expecting much of anything when it comes to profit share. No worries there.
As your business matures, however, your staff will expect that your business is producing ample cash flow, so won’t feel that they are taking on risk coming to work for you. But they won’t be expecting much above a good salary and benefits, either.
You can, however, try to maximize their effort by implementing a profit share plan. Implementing a profit share plan ties their monetary take home to the performance of the company, and ultimately to their job performance. That’s how it works in theory, anyways.
In practice, it’s less than certain that your staff will perform better after you implement profit share. What really matters to their performance is the amount of buy-in they feel towards your company. They need to feel like an important part of your team like they have authority over some key area in your company, and that you trust them to make autonomous decisions – thereby taking ownership over that part of your business. They need to feel appreciated, valued, and secure in their role.
This, ultimately, requires you to hire well, fitting the right person into the right job, and then setting them loose to absolutely crush it.
Profit Share vs Equity: Should I Implement One or The Other For My Membership Business?
Maybe.
If you’re a sole proprietor doing everything yourself, and bringing on support roles such as a web developer or writer, then I do not think it’s necessary at all. You can hire for a lot of these roles on a contract basis, not a full time basis, since a lot of freelancers opt to do remote work from various parts of the world to fund their nomad lifestyle. You can also find agencies to perform many key support roles.
As a business owner, I would always aim to provide fair compensation, trust, and respect before equity or profit share. Being friendly and flexible is really valuable. Think back to your past jobs and the bosses you’ve hated and loved. Your best bosses probably gave you authority over your work, helped you feel good about yourself, were friendly, supportive, flexible, etc. This attitude will go a long way to retaining talent and getting the most out of your people.
If you’re hiring key staff – for example, a professional podcaster to build your YouTube channel, or a data analyst to comb through facts and figures designated for clients – then I would always wait for them to request equity compensation before considering it. If they really are good at what they do, granting them an equity stake can really get the best out of them.
If you’re running a more mature business that’s making money and has a demonstrated record of growth, you’ll also tend to find that people want to work for your company because it’s a successful, fast growing, firm.
So, it’s worth thinking about profit share vs equity compensation when it comes to hiring and retaining key staff, but I wouldn’t be giving away the business or a good chunk of my yearly profit just to ensure my startup is successful. Think strategically about your compensation structure, and whether you need to provide anything over fair compensation, autonomy, trust, and respect to get the buy-in and strong effort you need to really scale your startup.
