Bootstrapped & profitable - should I give out equity to employees?
I have a bootstrapped SaaS business that's profitable and making ~$21k MRR. I currently own 100% of the company. I have a few contractors (full-time and part-time) but as I'm looking to grow the team, I'm considering giving out equity grants (both to existing and future hires). I don't need to do this from a cash flow perspective, but my sense from talking to a few potential hires is that many would value having some upside in the company, and I'd love to share in the upside with all our employees if we continue to grow.
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Any thoughts on giving out equity if you don't need to? Does my logic make sense? Are there downsides I'm not considering? Is there a more optimal way for me to accomplish my goal?
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A few lawyers have told me that if I want to grant equity, it will be much easier to do it as a C-Corp. Have anyone granted an equity equivalent as an LLC? Is it as challenging as they've made it seem? My one hesitation about converting to a C-Corp is it seems like if we remain a profitable business, it's less favorable from a tax perspective.
I'd love to hear from anyone who's considered similar questions!
The only reason to give away equity is if you need so much money to keep going that you're going to severely underpay folks. If you're going to pay fair market wage, don't give away a nary dime. Not even .0001%. It's so much pain. As.a private company, how do you give profit? You now need to open up your book, tell everyone how much you make. That might mean them asking for more monthly income. If they leave, will you be paying them split of what they owe from profit? Will you buy back their share? How will you value it? Can they sell to someone else? It's really not worth it. Most people will swear up and down that they will feel more vested and work harder, but once they have that equity they coast. Give them BONUS instead based on performance/profit. If someone can grow your business 10x, then sure give them equity but allocated over time and based on measurable metrics from them growing your business. Say someone tells you they can get your sales to $200k MRR. Great. You agree to give them 20% over 4 years. 2.5% every 6 months. With a goal of going up at least $25k every 6 months. After every 6 months, if they have met at least $25k, they earn their 2.5%. In 4 years, they will have 20% and you will have your $200k MRR. If they are not performing, you can fire them before hand. If you're thinking of being like a startup, then attend Ycombinator's startup school. But for an indie hacker, the "indie" stands for independent.
I am the only owner as well and I do not give away equity. If, one day, I will decide to sell, then 10% will be split amongst employees. I am not looking to be acquired (even though there are VCs asking), it is a business that is aimed to last (already nine years in, self-funded, profitable, no exit strategy).
Instead I am trying to compensate everyone well for their work, support them in what they are doing and making sure that work is adding to their life rather than taking away. E.g. 40 hours work week, extra time off, holidays, calm work environment (we are async and distributed) and many other things. There are better ways to motivate people than equity and money. Giving equity is the easiest, building a great team that has perfect conditions for work with a good culture is harder but totally worth it.
Super interesting and helpful!
Is the 10% that'd be split amongst employees written into employees contracts? How exactly would it work? Would it be split evenly or would some employees have a larger share of the pie?
This reminds me of what Basecamp does by the way: https://m.signalvnoise.com/the-liquidity-what-if-our-alternative-to-employee-options-equity-grants/
Split amongst all employees, equally. We are all a team working towards the goal to build a sustainable business.
Jason from Basecamp is one of the inspiration on how I run the company. So I would say 99% I got it from them. :)