Strategies To Conserve Cash: Fractional Services, Equity and Deferred Compensation
Entrepreneurs are certainly passionate, creative, action oriented individuals driven by the vision of what is possible. These right-brained, passionate risk-takers typically lack the analytical and methodical skills of experienced, left-brained professionals. This creates the challenge of how to get high level, skilled left-brained talent, who can dive in at a high level and as needed, when cash is super tight.
The details that investors look for cannot be underestimated, underdeveloped or even worse, overlooked. Opportunities are scarce and the network tight. Entrepreneurs need to make sure that the details behind a great idea are clearly defined and realistic in order to be able to raise the funds needed to get to the next raise and ultimately scale up to success.
Cash is most scarce in the early phases of developing a company, with the founders often bootstrapping their new business with their own funds or that of friends and family. Finding quality professionals to prepare projections and the pitch deck to raise capital is difficult at best, yet necessary to paint the picture of success for investors to consider.
You won’t have many chances, so getting it right from the start is of vital importance. Fractional professional services are one of the best ways to control costs while continuing to build momentum and your team. Think creatively and get help where and when you need it most.
Equity and deferred compensation in exchange for services are also worthy of consideration when the consultant believes in the company, its mission, vision and values, and has the needed resources, usually time, expertise and a strong desire to make a difference.
It’s prudent to look at deferring the cost of professional services and key personnel as much as possible, while still attracting the talent you need to bring your vision forward to success. This might look like asking for a reduced hourly rate on upfront payment with full payment at the next funding event and, as incentive, offering equity compensation at a discounted rate to the raise. In addition to key personnel, as you grow, consider offering some form of equity awards to all of your staff as compensation for working at or below the average pay rate.
Mission Driven startups have the added benefit, (outside of potential future profitability), of being able to connect with like minded and passionate people who might be more inclined to get involved in taking a risk. Or such a company might attract new idealistic graduates. For example, someone who has a passion to see animals removed from the supply chain might consider working for less in the beginning so that they can participate and be part of a solution. This can go a long way in recruiting talented and committed team members.
Benefits of Equity Compensation
- Minimize cash outflow while attracting and retaining a talented team – equity compensation allows you to hire the senior level employees that you need with a cash output of junior level employees.
- Sense of ownership, your team and culture will have stronger bonds. With equity, employees actually own a piece of the company, adding somewhat of an entrepreneurial mindset so you can count on them to treat your business like their own.
- Vesting adds loyalty – stock options and restricted stock units generally vest over a number of years so you have employees working at below market salaries for at least a year. If they aren’t committed to the mission or otherwise don’t fit in with the team they will leave the company for a higher paying position. Those who remain will be long-term, dedicated contributors.
Equity and deferred compensation can be crucial in managing your cash while balancing the need for talented resources. My advice is to share your equity with the right people, what you receive in return will be a talented team of loyal individuals, committed to the cause and thinking like owners.
Don’t try to do everything yourself. Keep your focus on your passion, building and selling the vision. Tell the story while always interviewing for talent. Finding experienced professionals that are excited about your vision and that share your values opens the door to unlimited possibilities. In the early stages all you really have to sell is potential, which has the most value when being leveraged to secure the experienced talent you need to clearly and most impact-fully lay out your plan. Once funded, you would be wise to apply a similar philosophy to all inspired to join in.
Remember, it only takes a spark to ignite a flame with the right conditions.