A friend of mine once bitterly advised me – “never do work for start-ups. They wants loads and they’ve got no money.”
He has a point.
As the founder of a start-up called Gamevy, I’d often like people to do lots of work for me. But really I’d like them to do it for free.
And honestly this is not just because I am mean, or because I don’t value their work, but because I have a long list of things I want to use our cash for and no wish to hand over chunks of equity to VCs who will want a very fast return on their capital.
Keeping costs low
The biggest cost for most start-ups – in our current knowledge economy – is salaries. And start-ups tend to want to pay as little as possible.
Now this presents them with a real problem, because they are also often trying to do quite difficult things – produce game-changing products; launch unheard of ideas; solve really tricky problems. In order to succeed they also want the very best talent – people who are at the top of their game and earn a lot of money, or brilliant new graduates.
Taking a paycut
I know a lot of people who have taken pay-cuts to work at start-ups. They normally do it because the work is fun and challenging. A lot of people – and I’m one of them – are more motivated by fun than money.
But money matters. And giving up something – like the top salary you know you’re worth – tends to provide a sense of heightened expectation on both sides, which is not always conducive to a good working relationship. New graduates who feel exploited are also unlikely to hang around. No wonder start-ups have a fairly high staff turnover.
Shares and Options
The popular alternative is to hand out options or tiny ownership percentages. We’ve all heard the story of the graffiti artist who took shares in Facebook in return for painting the office and netted $200million when the company floated… It’s a great story, but the fact is that for most people these options are worthless and offer little actual reward except in the most unlikely of circumstances.
The alternative is to hand out real and meaningful quantities of ownership shares in direct proportion to the amount people invest in the business.
For Gamevy, we made an unusual offer. For every pound of your market salary that you sacrifice you’ll receive the equivalent value in direct ownership shares. So a developer nominally on £70k, who takes home a salary of £30k is deemed to invest £40k in the business.
Profit is shared according to the ownership shares and every employee/owner has a direct voice in the direction and decisions of the business. This is true ownership, not paper options. At the same time, the model still rewards the founders who have invested capital, take zero salary and have the greatest proportion of risk.
It’s based on 3 main points:
1) owners work hard and put the long-term aims of the business first
2) equitable share of risk/rewards attracts the right people
3) keeping our costs low means we are all more likely to succeed
We didn’t decide to be employee-owned in order to pay people less. But that is one of the – little understood – beneficial results. We worried about whether people would be prepared to take on risk in exchange for future reward. It turned out that not only did we attract the right people, but we also attracted the best.
We have a team of self-directed, hard-working brilliant people any other start-up would give their eye-teeth for. And yet not many start-ups I know would have been prepared to give ownership for.
Of course it also means that none of the founders will ever be as rich as Zuckerburg. But hey. That’s OK. We’ll settle for sharing the millions between us.