This case analyzes several issues faced by a typical startup: fundraising, founder and early employee relationships, and appropriate equity /cash compensation. Most early stage companies do not have significant cash flow, and as a result, cannot compensate early employees with a traditional salary or benefits. This can be particularly challenging for those with significant financial and family obligations.
This case study focuses on the challenges that Michael Rose, founder of Royal Rentals, faced when his first hire, Jerry Andrews, decided to stop working full time. Michael and Jerry had been working hard to develop the business concept of Royal Rentals and were beginning the process of raising funds to start the company. However, Jerry needed cash compensation because he had a family to support and two children in college. Consequently, he took a full time job with a different company, and offered to continue to work on Royal Rentals in a limited role as a part-time consultant. This news was startling and discouraging for Michael. Just as Jerry was torn between his commitment to the company and the welfare of his family, Michael was torn between his loyalty to Jerry and the good of his company.
The issues that Michael must address are 1) How to deal with Jerry and 2) How Jerry’s decision will impact his ability to raise funds and 3) How much funding to raise, if any, and from whom?
The teaching points of this case are the following:
• Understand how personal circumstances, goals, and expectations play into negotiating equity, compensation, and roles/responsibilities between founders and early employees.
• Consider how personnel and business challenges affect your ability to raise funds.