Deferred Compensation

Monday, August 14, 2006 at 10:33am by Dan Marques in Bootstrapping

A great trick I uncovered this summer is ‘deferred compensation’. Say I have a great new idea for a business that is going to change the world. Whenever I tell someone about the idea they get really excited and want to know how to help. However, I do not have all the skill sets to pull the whole thing off by myself (as is pretty much always the case). I need a web developer, graphic designer, and a few other service providers along the way. As a bootstrapper, I understand that cash is the lifeblood of a start-up and that I need to conserve my equity as much as possible in order to maintain decision making.

So what do you do? You don’t want to pay the service provider(s) up front, and you do not want to start shelling out equity all over the place.

Deferred Compensation.

You tie their compensation directly to the success of the company. The web developer typically charges $100/hour and really loves the concept. You offer to pay the web developer $200/hour for his time, however, the condition is that you will only pay him once the firm achieves sales or becomes cash flow positive. He takes a risk, but receives a reward (in a higher rate) for his efforts. If you succeed, everyone wins. If you fail, the risk was spread a little farther out so no one individual is taking too big of a hit.

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