If we don’t raise outside funding for our bootstrapped SaaS company, should we offer equity shares to key employees?

A practical founder with a growing SaaS company asked me that the other day.

He worked for a couple of VC-backed companies before he and his co-founder started their own company. It’s on track to hit $1 million in ARR this year with no outside funding.

One of his advisors told him NOT to offer equity to employees because “they aren’t raising money, so the company will never be worth enough to employees and therefore they should just give them cash.”

I told this founder that this advice was completely WRONG and naive.

Bootstrapped and practically-funded SaaS companies that grow efficiently to $5 million in recurring revenue are worth $25-$50 million if they sell it. Sometimes more.

Many bootstrapped founders on my Practical Founders Podcast grew their companies to $10-$20 million in revenue and then sold them for $75-$150 million.

Both bootstrapped outcomes are REAL MONEY for cofounders and key employees that can create life-changing wealth.

There are more than 20x of these successful exits than all the VC-funded billion-dollar exits every year. We just don’t hear about the “smaller” ones that don’t have big funding.

So the question about equity for non-founder employees isn’t about VC funding, it’s about SELLING YOUR COMPANY someday.

If you don’t plan to sell your company and don’t want to be pushed to do so, don’t offer equity incentives to employees that they view as part of their compensation and their eventual big prize. Just do profit-sharing or give them a creative option to win a small prize if you ever sell.

If you do plan to grow your company and sell it successfully, someday, equity with vesting for key employees can make perfect sense.

A self-funded founder who grows a $10M ARR software company and sells it for $75M cash gets 100% of that prize for founders and employees.

That’s more for founders and employees than all but the few most successful VC-funded software companies. In VC-funded companies that IPO, VCs win 70%-90% of the prize at a rare successful exit. Founders and employees average less than 20% ownership after all the funding rounds.

Either approach can create big outcomes for founders worthy of equity shares for real money when they are successful.

So this founder’s advisor either doesn’t understand the many modern ways to succeed with SaaS companies or they are pushing someone’s funding as the only way to create success for founders.

There’s a lot of bad advice out there for SaaS founders. It’s often out of date or just self-interested. Don’t take funding advice from funders.

If your main goal is to sell your bootstrapped company someday, on your own timeline and how it makes sense to you, by all means, offer some simple vested equity shares to team members.

Ownership mentality and sharing the potential prize are good things.

#practicalfounders