Got a great idea but need more traction before you can raise money to get your startup off the ground?
It’s the situation a lot of startups find themselves in at some point. But what most entrepreneurs don’t realise is that there are more ways to fund a company beyond bootstrapping or working with external investors.
You’re probably familiar with an option pool structure — big companies or startups may offer senior executives equity in the company as a benefit in addition to a base salary. It’s a strategy that works well to attract high calibre employees.
So why not take a similar approach for a founding team as a startup? Going one step further to offer equity in your company not just to your executive team, but every employee on the founding team? Sounds generous. I know. But it can actually give you the boost you need and help foster strong team alignment when you start your company.
External investors vs. people equity
I’ve seen many startups approach funding rounds without the necessary traction as if they had no other option. When my co-founder Nik and I started influencer marketing provider, Hypetap in 2014, we explored a range of equity options before we completed our first raise.
Like any startup, we had no product to our name, nor were we generating any revenue, so we had to get creative. It’s why we went down the equity route, offering our initial team of developers a scaling equity structure. Following an investor-style pitch, the team decided to go all in, working to a 100 percent equity model.
The structure was tied to key product milestones, which gave the team a vested interest in the business, keeping them motivated and focused on developing the best product offering possible.
This alternate avenue provided us with the equity we needed to build a product and launch Hypetap, while also giving our team the flexibility to work part-time for the first two years before becoming full-time employees.
Just like a lot of startups, there were some late nights and weekends spent building our technology during the early stages of getting the business off the ground. But with the entire team having a stake in meant there was extra level of passion for what we were doing.
Your people are the key to success
Startups are risky business, but the rewards can be exponential. Taking on debt is rarely an option, particularly when your business has nothing to put up as security.
From my experience, making the right choice comes down to understanding your business in its entirety and knowing how much you really need to take it to the next level. Once you’ve established this, it’s important to agree on how much dilution you’re willing to take on.
We found that based on where our businesses was at and the immediate goals we wanted to achieve, an employee-focused equity structure was best suited to reduce our level of risk and keep our business focused on what it set out to achieve. The result — accelerated time to market and an incredibly devoted team who received a fast return on their investment. You could almost look at it as the equivalent to an angel round of funding.
There is certainly a range of options for startups to explore, and there’s no right answer, but there is a right decision for your business. Explore your options and know what you want from your business. Only then can you make the best decision that’s going to work for your company.
By Detch Singh is co-CEO and cofounder of Hypetap.
Image: cofounders Detch Singh and Nikhil Madhok. Source: Supplied.