You think you need money to build your startup (but you’re wrong)
Money. Everyone seems to want it from you. Few people want to give it to you. And if you are an entrepreneur in the current climate, the reduction in available finance will feel very familiar.
If you’re building a startup you know people will happily take your cash to help you create your product, grow your customer base, or offer strategic advice. Although we hope they do, these people won’t necessarily care about your business or its long term success. As long as they’ve been paid for the work and they feel they delivered on the brief they’ll be happy. And fair enough, that was the nature of the agreement and that’s the sort of transaction cash facilitates.
Imagine if they did think long term though. Imagine if they truly cared about your initiative and helping it become a success. Imagine if their incentive and motivations were aligned with yours. As career analyst Daniel Pink suggests, money in and of itself isn’t the best motivator of people to up their performance, productivity or creativity. When people truly care about the work they do (not just the paycheck) they do far more extraordinary and satisfying work.
What’s the problem with money?
Perhaps this question is a little misleading — there is nothing wrong with money per se, I use it every day and we’ve raised it for our own startup. AWS, Google, Slack, Trello; they all prefer hard cash. Money makes the world go round and you need it for the essentials, to put food in your belly and build your businesses infrastructure. But when it comes to the creative input your startup needs and incentivising the right kind of contribution and commitment from those helping your build it, it’s not always the right, or more importantly, not always the most effective tool for the job.
So what could be better than cash?
How about empowering people to truly join your journey? By allowing them to share in the success, and the risk, you’re getting hard proof that the people helping you build your business believe in you and it (not just the paycheck). That is real early validation. These are all things startups need and these are the more human aspects of collaboration people are really looking for and are motivated by. Yes we need to pay the bills, but does our whole week, month or year need to be on a pure means to an end basis? For some in the world unfortunately so, but for others that may be be more fortunate, there are opportunities to contribute that value input, not an hourly rate. Money, time and time again, struggles to deliver the satisfaction we are really looking for — our need for contribution and recognition. Our need to be useful and help others.
What’s the alternative?
What could be a more powerful currency than money when building your business?…. your equity!
Equity is different to cash in three unique ways:
- It’s long term not short term — so it aligns interests
- It gives ownership — a sense of belonging and purpose
- It has the potential to continue to grow and grow and grow — it values contribution over time
Yes it comes with risks but also a much larger opportunity. It changes the transactional nature of work into a more motivating and engaging collaboration. It truly shares the success.
I know, if you’ve spent even a moment in the startup ecosystem you’ll have heard the wise wisdom, ‘your equity is valuable, so hold on to it’, and I couldn’t agree more. But if you’re considering exchanging it for cash and then using that cash to build your business, the cash may be a far less powerful tool to get the results you need. Doing this is also far less efficient than if you had cut out the middleman investor (the equity for cash exchange), not spent the time chasing the money and had chosen to reward those who helped you directly with equity. You have to question the rationale.
Ask yourself some questions
To add to the dilemma, getting a favourable equity for cash exchange rate is getting harder for founders (especially in the UK). Of course not all startups (and their equity) are equal; some will have no trouble raising funds, but the trend is certainly down. From the hundreds of conversations we have with startups at Vestd the expectations from investors are getting higher and higher. If you’re a startup struggling to raise you have to ask yourself three key questions:
- Do I really need the cash right now?
- What would I actually spend it on if I had it? (not just “growth” or “build the product”, be specific)
- Is equity a more powerful currency than cash to achieve the results I need?
The third question is key, you need to exchange your equity in the most efficient way to achieve what you need. In some cases that might be directly with the people you would have spent the cash with, and you may get far more for your equity. You’ll get genuine, honest and committed help not just a smile and an invoice. Then you get to hold onto your cash for the things only cash can buy — commodities and essentials like food, shelter and wifi. But most importantly you’ll get early validation, build advocates and will have enabled others to have a chance to share in a greater potential than if they’d just taken the cash. When you take out the middleman, everything really does get a whole lot more interesting for everyone involved — the founder and the people helping build the business. Collaboration becomes more creative, committed, human and less transactional, with people working on things they care about and achieving far more remarkable results.
You don’t want to give your equity to just anyone, but the next time you are about to hand over cash to someone, just ask yourself: am I using my most powerful currency here? Am I incentivising the behaviour, input and results I really want? Most importantly, am I doing it with someone that cares about my business and are our interests truly aligned?
If you’re an entrepreneur wanting to know how you can distribute your equity to incentivise those helping you build your business (without the hassle) find out how start with our Complete Guide To Setting Up A Company Share Scheme