Most people have no idea what it takes to own a piece of a startup. They think that simply showing up for work entitles them to an ownership stake in the business, just because it’s a startup company. Others think they should be handed stock options like candy because they seem to have no cost.

I’m here to put a stop to all the madness. In a startup company there are only two ways to get a piece of the company – you either write a big check or you forgo your paycheck! The only other way anyone should be able to get a piece of a company for nothing involves dirty pictures and blackmail.

If you’re a company owner or entrepreneur, you may need some advice on how to deal with overzealous employees looking to bleed your stock dry. If you’re an employee or potential business partner that’s looking to get a piece of the action, allow me to give you some serious pointers on what it takes to get it.

Nothing is free

The first step to understanding why it takes real cash contributions to own a stake of a business is to realize that ownership has a real cash value. That can be tough to grasp in the formative years of a business because it’s either not making any money or there’s no market to sell your stock.

While the stock may not have a liquid value today, the whole point of starting this crazy company is so that it will have value, and for this very reason owning a piece of that stock has real potential value that needs to be appreciated.

As an employer, if you don’t think your options have value, you shouldn’t be giving them out. If you’re an employee and don’t believe that options have value, you shouldn’t be asking for them. Until everyone understands and agrees that the company’s stock has value, you can’t discuss how much anyone gets.

You only get what you earn

Stock options and equity shouldn’t be treated like a trick-or-treat offering handed out to anyone that shows up at your doorstep. If someone is doing $50,000 worth of work they shouldn’t be getting $500,000 worth of stock. That doesn’t make any sense.

If someone is getting paid $50,000 in cash (and that’s their market value), there’s no reason they should get any additional compensation in stock.

Try showing up at Proctor and Gamble and telling the CEO that you want a big stock grant in addition to your market wages. Explain how you think stock is just an intangible asset that he should start handing out freely. I would bet by the time you finish your first sentence he’ll be calling for security to have you tossed out on your head!

In order to make a fair assessment of what someone earns versus what the company is worth, you need to settle on a valuation of the company as early as possible. If you set a valuation of $2 million, then someone doing $50,000 worth of work could earn 2.5% of the company, not 50%.

You earn nothing for showing up

For those of you that plan on getting into a new business as a partner, you had better show up with a check in hand. Partners don’t get stock for agreeing to be a partner, they get stock for agreeing to share in the financial liabilities of the business.

Anyone would agree to taking on 50% of the business when it comes time to split the profits. But young companies are rarely splitting the profits. The more likely case is that they will be splitting the costs for the foreseeable future.

When you miss payroll for the first time and you need to come up with 50% of the liability, are you still excited about being an equal partner? How about when the business runs out of money and you need to mortgage your house and drain your savings to keep it alive? That’s what being a partner really means.

And that’s what business ownership is – sharing the liabilities as well as the successes. If you plan on becoming a partner in a business, you need to be able to share all sides of the business, not just the upside.

The saga continues

Getting two parties to agree on the value of a stock, or the value of someone’s time and efforts to earn stock, is never an easy proposition. Inevitably the business owner will always think the stock is worth more, and the partner or employee will always think they should get more of it.

Setting expectations early in the game is the best way to make this discussion easier for everyone. As long as employees and partners don’t expect more than they have earned, and owners don’t expect to get something for nothing, everyone should be on the same page -- or at least reading from the same book anyway.