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Over the years I’ve seen many founders make mistakes when it comes to sweat equity. I’d like to cover the common ones and, hopefully, help you to avoid them.

As you likely know, it takes a lot of energy to actually get a startup off the ground. Founders start with an idea, then put in many, many hours developing the model for the business or service they’re contemplating.

Then they rack their brains brainstorming the business model and how to go to market. They share their idea with anyone who’ll listen, and burn the midnight oil interviewing potential customers and partners. They develop a prototype or proof of concept, even if it’s a service business. And they do all this before any money comes in. Before a company is even formed.

Founders figuratively and literally pour sweat into their dream because they’re are fueled by passion.

But, somewhere in this process the idea becomes something more than simply an interesting project. This is when everyone involved becomes very enthused.

This is also the point when expectations begin to form by those who have helped the founder progress the idea. And those expectations form the foundation for the first mistake newly minted CEO’s often make.

Sweat Equity Mistake #1

People who have worked hard with their time and energy should be rewarded for their time and contributions. Most often these rewards take the form of stock options and, in some cases, a spot on the management team if and when the company is formed.

While the scenario looks a little different for each startup, it’s critical that the CEO communicates and sets expectations early in the process. That sounds simple enough, but it’s often overlooked.

That’s a mistake.

SmartMoneyPlaybookCoverThere is a virtual dump pile of startups that have fallen apart because the founders and creators formed expectations that were different from others in the group. It’s understandable why this happened, but it’s also avoidable. All it takes is communication early and often from the founder…the future CEO, to get everyone on the same page.

I describe how to find the right investors in the SmartMoney Playbook. It’s free, and you can grab it here.

Sweat Equity Mistake #2

Another thing I’d like to caution you on regarding sweat equity is this. Don’t give away titles too liberally early in the process. This is another mistake I’ve seen founders make early and often, only to regret it later. It can also create problems for you when you sit down to negotiate with investors, who’ll want to know why you awarded your friend a senior management spot.

Just because you have three people contributing ideas and energy to the project doesn’t mean you have three founders. It doesn’t even mean that all three people will have senior management positions when the company is formed.

I recommend you choose very carefully (and very early) who will be noted as founders and co-founders of the company, and how the ownership of the company will be allocated at the beginning.

Beyond that, make a point to manage expectations by letting people know it’s not yet clear who will have what title. After all, you probably don’t know yet yourself.

But you can and should tell people that they will have a place on the team IF you feel they have something valuable to contribute. Just be careful that they don’t form their own unrealistic expectations of title, founder status or how much equity they think they deserve.

It’s your job to manage that, and managing those expectations early will set the stage for your management team to gel together later when your company launches.

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