From the course: Creating a Business Plan

Compensating leadership

From the course: Creating a Business Plan

Compensating leadership

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- Your business plan needs to include a perspective on how you're going to compensate management. There are various ways that you can compensate your leadership team. You can give them cash, bonus or equity. And the variety of forms of equity that you can issue. Things like stock or options. I highly suggest you get some legal assistance from somebody who has done this type of agreement before. When you are awarding equity, that equity needs to vest over time even for the founders. This way if a founder quits, they don't walk away with a big chunk of equity just for having a good idea. Cash is also tight when you first start your business. So equity tends to be the preferred way to compensate management. But you have to realize that equity is the most expensive form of financing, and give it out wisely. This is why it's so important to spell this out in your business plan. Deferred cash, or a bonus is another option for compensating management, if your executives don't need cash right now. And doing so is cheaper than equity but it preserves the cash you need to start up the business. No matter what, put employment agreements in place that specifically spell out compensation, because when your business plan is complete and you think about taking it in front of investors, the way you're compensating management is going to have an impact on the return those investors might get. An example, I'm very familiar with. I started a business with a founder and some other partners, and we made the mistake of not having the founders equity vest over time. A short while into the venture the management team disagreed, and the founder decided to depart. We had to buy him out of all of his equity, because he just walked away with the idea. We also paid the employees a combination of cash and non-voting shares, so that there was a different class of stock for people that we could award them with. These can be very complex transactions, and you do need legal and financial assistance as you set this up, but it's a section of your business plan that has to be completed, especially if you're going to seek outside investment.

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