Should You Offer Equity as Payment to a C-Level Executive?

Some small and medium business owners like to give up equity to key employees both to engender loyalty and commitment to the company and to bridge the gap between salaries in their area and what the company can reasonably pay. Most tech companies offer equity. It is really the only way for them to attract high quality personnel who will work 60-80 hours a week to build the company. Other companies do not offer this “equity as payment”. Investment banks and other entities pay high salaries for this work ethic (and still often offer performance-based options) but start-up technology companies cannot afford to burn their cash paying those salaries. There is no right or wrong.

If you do not wish to offer equity as payment, but you still need a strong incentive to subsidize an initially lower salary, you do have equity alternatives. As a small business owner you can offer a percentage of gross profits or a percentage of net income. You can offer to pay your new management a specified percentage of any distributions BEFORE you distribute to yourself. These are just some of the options you can utilize to structure an offering to the C-level executive you are recruiting. These and other alternatives enable the executive to share in the upside of the growth he or she will help attain. In your C-level recruitment you can state, “we offer equity alternatives”.

If you are a start-up and seeking angel investors or have been in business for a while but are now entering a heavy expansion phase, you may be able to obtain investment by an “exec with a check”. An “exec with a check” is a C-level manager who likes getting deeply involved with start-ups or rapidly growing small companies but does not want to start his or her own company. Or he or she may have had their own company in the past, but now they would like to help someone else do it. Since your company is in an early or expansion stage and needs money, the executive will contribute his or her money and his or her time for a sizable stake in the company.

Note to companies in the pre-revenue stage: Be careful when seeking an “exec with a check”. You can alienate executives who may consider working for you later on when you do have sufficient revenues and can pay a modest salary. There is nothing more off-putting than having a position misrepresented. There are tales circulated by C-level executives of how they were recruited (and flattered) only to find out that “there was nothing there”. These individuals spread the word to all who will listen, making it difficult for the company to find good people later. Be upfront. Advertise for a hands-on, deeply involved investor. Do NOT advertise for an executive until you have some cash flow. If you are pre-revenue and do not yet have any financial backing an investor is what you want. If part of the reason you need the funds is to bring in a C-level executive because strategy, finance, or operations is not your skill set, that investor can help you find the person you seek.