Over the years I’ve talked with at least three different entrepreneurs that have given away a large chunk of equity to a semi-active business partner (non co-founder) only to have the involvement not meet expectations. Now, I’m talking about a role similar to an advisor where the person will help out but doesn’t invest any cash and doesn’t have a committed number of hours per week in the business. Whenever I hear this I ask why they didn’t make it a performance-based equity plan and, naturally, I get a blank stare. A performance-based equity plan is just what it sounds like: equity vests when certain goals are achieved (e.g. when you deliver X million in deals, you get Y percent of the business).
Here are a few thoughts on performance-based equity for semi-active business partners:
- Never give away equity in a startup without expectations being clearly defined (this isn’t limited to semi-active business partners as it’s also applicable to advisors and consultants)
- Always have a buy/sell agreement that defines what happens if someone leaves the business
- Similar to a vesting schedule, provide a schedule for the performance-based equity such that once a milestone is met, more equity vests (e.g. achieve X and 1/3rd vests, achieve Y and the next 1/3rd vests, and achieve Z and the final 1/3rd vests)
- Know that if the person doesn’t want the equity to vest based on performance, they aren’t likely to deliver (if they’re confident in the value they’ll add, they’ll agree to a plan)
My recommendation: make equity performance-based before bringing on a semi-active business partner. If the partner delivers the value, everyone will be happy. If the partner isn’t able to deliver the value, the startup retains the equity.
What else? What are some more thoughts on performance-based equity for semi-active business partners?