Employee wants stock; what do I do?

Bootstrapped companies often don't give stock because there's no expectation of being acquired. They simply chug along over the years, as you've discovered for the last 14. As you've paid competitive wages, I don't think there is any real need to give out stock.

The Mailchimp founders didn't when they sold. Some bemoaned that fact when the two founders and they alone made billions, but as I see it, their employees could have easily gone elsewhere for more money or stock. That they didn't is an implicit understanding of their employment agreement.

If you are already conflicted after working with them for 7 years, the answer is most likely No. By now, the answer should be a clear Yes. However, the devil is always in the details. FOr the 7 years that the employee has been with you, it seems like they do the usual 9-5 and you feel that's not enough to get equity.

I would however ask you to look at it a bit differently. First, no one would work as hard as you on your business, period. A 1-3% stock in a private S-corp is not end of the world for an employee that has been with you for 7 years and you can trust their work. I think you are conflicted because they are not on call 24/7 like you and you feel it is not fair. Let that go. No employee would ever be like that and if they were, they would be demanding a lot more equity if they were smart.

Can you lose that employee and not lose sleep ? If yes, then they don't need equity. If they are very valuable to the business even with a 9-5 work style, you should consider giving them a small portion of equity. You could ask them for a bit more in return as well.

Chiming in here:

I’ve been bitten as that employee before. I helped build a startup but my founders chose to not give us stock. We were then acquired and I got pretty much nothing. I felt that I helped build a significant portion of the company but was not granted a portion of that company.

If this employee is valuable you should compensate them. This should come with drawbacks such as sharing the on call rotation among other things.

Edit: I’m not saying that you shouldn’t feel conflicted here, but if this employee is worth making a “partner” and you can’t live without this employee then it might make sense.

What is your endgame?

If you want to, you can not give him any equity, let him leave, replace him, train the next person, and continue to be on call 24/7/365.

I'd be tempted to give him a few percent if that's what he wants, let him be on call 24/7/365, tell him he needs to hire and train some new people, and you can concentrate on new projects, work/life balance, or selling the company as something that does not require your ongoing involvement.

Don't think of it as whether it's "fair" or "morally right" compensation for past work, concentrate on whether it is the right thing for the future, and whether it you can have any of your needs met in exchange for it.

Pretty much every tech company gives some amount of equity to it's employees, from the smallest startup to Google. 1-3% for employee number two is very reasonable.

You should try to think about this in terms of utility. Giving this person a small amount of equity might be the difference between retaining and not retaining them. How easy would they be to replace? After 7 years I'm going to guess not very easy. Giving them equity also helps to align incentives - they do well when the company does well.

IMO you should grant a certain amount of stock (say 2%) and have it vest quarterly over four years. Meaning each year he stays he gets another .5%, and he has to stay for four years to get all of it. This is a standard deal. I would strongly consider vesting a chunk up front (say the first year) as a show of good faith since he's been there so long.

Hire a lawyer to set up a cap table, it should cost you (I think, depending where you live) less than $1k.

The truth is no one is going to work 24/7 for 7 years with 0 percent in the company in the hopes of 1-3% 7 years later. Most companies offer 4 year vesting schedules to encourage that ownership.

If after 14 years you can't afford to hire someone to be on call tells me that 1-3% isn't worth as much as you value it... what would that be in real dollars under 10k? If that is the case it will cost you more to replace and retrain.

Something tells me you feel like you could go it alone if this person left. You view this employee as a cost or at best is a neutral force who might produce value as much as he costs. You view this person as an employee and not an equal.

Would you rather give them a $10,000 raise yearly or stock worth under $10,000?

Based on your replies to comments you should not. But then you must also prepare for that he decides to leave. Regardless - the 14 years you have managed so far is a huge achievement.

If he wants upside, consider paying him commissions for growing the business. This way he can make more money and you can benefit from the growth. He should be happier with this than holding illiquid stock. Sometimes people just want to be able to tell their family that they are owners of the business. It seems like he already has an inflated title so he doesn’t have much else to ask for to show or feel progression in his career. It sounds like a role that would be attractive to many people.

You need to decided his ultimate value to you.

I’ve been in the position of giving employees stock. I resented them because in doing so, I thought they would treat the business like I do. However, they still act like employees.

Don’t give him shares, give him a percentage of profit based on his continued employment. I’d also tie it to some kind of performance.

Sounds to me like you might grow to resent this individual if you gave them shares. I agree with everyone else: give them a % revshare for hitting milestones. No shares this late in the game.

Also, in this looming recession, equity will be less sexy to hold for employees. So use that to your advantage. Good luck!

(also - congrats on bootstrapping a sustainable SaaS!)

If this was a one-man shop for most of a decade, the conventional wisdom of giving early employees equity might not apply. You are not high-growth, you are not a startup. I'd honestly look at what other skilled trades do - if an electrician works on their own for 7 years, then hires an office admin, does that admin get equity? I honestly don't know that answer, but I'd ask such questions to determine what the standard practices are in wider industries, balance that with the practices in tech, and then make your choice.

Have you considered offering the employee a profit sharing arrangement instead? That would keep your S-Corp administration simpler and save you a lot of paperwork.

I run a small SaaS myself, and would never consider adding a shareholder unless it was tremendously beneficial to the company. If you already had other shareholders, I might understand giving some stock away on a less than ideal basis. But not when you have 100%.

Thank you for the feedback everyone. I really appreciate it. It did help. Had dinner and drinks with my COO last night. Worked everything out.

No. The "workers rights" crowd has gained a lot of public support from suburban women under the false pretense that they'd only go after the billionaire class, but I've seen them attack "mom and pop" restaurants with the same fervor. In one case they forced an owner of 20+ years to sell the business to their "workers coop" for far less than market rate. Funny enough is that the "workers coop" hires people for close to minimum wage despite the coop having 6+ partners.