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Stake to be given to co-founders, early employees?

Jul 18 2012, 14:22   |   By SME Mentor

When working in a company, everyone looks forward to payday, the day they get an email or sms from their Bank informing them "An amount of Rs xxx has been credited to your account". But when one branches out and begins a business of their own, these days come to an abrupt end. For the initial couple of months, founders don't take salary; most of them are focused on getting the business off the ground. But eventually, they grow, and maybe even hire a few employees. What happens then? How do they plan for salary or do they give these early employees a stake in the company?

Start small:
"When the business is in the nasal stage, founders forgo salary, taking only what they need to meet expenses. And that is how it is, but when we start hiring people, we don't deliberate on stock options, we start with salary, and at a later date consider stock" Says Narayanan co- founder NFN [a mobile apps development company]. "We are 4 founders, we each have equal stake in the company but we decided to only give salary to our team, atleast for now" he adds.   Nandini Vaidyanathan in her book ENTREPEDIA covers this aspect as well. She tells all those who want to become entrepreneurs to be prepared, to be aware of who is performing what role and who deserves a salary and who a stake.

Do the Math
In some businesses and entrepreneurships, there may be many founders, but a few more actively involved in the business than others. At times, the founders agree to divide the stake based on percentage, time invested rather than equal share. Few might have invested in the company; a founder might have come in later, so such cases are all exceptions. Anjana Vivek spoke about how she is adding 2 directors to the board at Venture Bean consulting, and hereon they will each get equal stake in the company, though she is the one who started the venture. Same holds for employees says Senthil Nayagam of Railsfactory. "All our employees earn salary, just like we do, but we do plan on bringing in stock options for those who have been with us for over 3years and have contributed to our success and growth. We are working out the logistics with the accounting and legal team".

Weigh the options
Does it make sense to divide the stake among the founders? There might be one person who brought forth the idea, strategies, contacts while co-founder was more of a sounding more. What happens in such cases? When Shopo.in began operations, we hired a small team and started rolling out salary [one that meets the market rates]. The stake in the company continues to remain with Krithika and Theyagarajan, maybe after a year or so we might rope in a few crucial employees into this fold, shares Krithika.

Be cautious
Sometimes entrepreneurs get carried away, and in the excitement promise the sun and moon to their early employees. But this comes back to haunt them as the days go by. Therefore, it is important to spend time thinking about the money aspect in any business before making promises. It is a way of luring employees, but is it worth doing so at the cost of struggling to meet ends at the business? The primary focus should be growing the business and so finances should be handled with care and caution. Vinod Harith of CMO Axis is very clear in this "We, the founders have full control of the business, and as of now all employees receive a salary. Sometime in the future we might review and reconsider this".

Hold on tight to the reigns and don't lose sight of your business goal.


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