Deferred pay, without equity, is a bad idea. First of all, seasoned people aren't going to work for deferred cash only, knowing that companies rarely pay it back until they're roaring successes. Deferred pay arrangements usually are, "we'll pay you $X when we have the cash on hand" but the problem is that the cash is never truly "on hand"; in a growing business, there's always a better use for the money than paying zero-interest debt to employees. Venture capitalists don't want their infusions to be spent on back salary, and most CEOs want to invest revenues back into the business.
In lieu of equity, deferred pay is a bad deal for the employee: no upside, only downside, and usually on terms that are a lot less creditor-friendly than what banks can negotiate.
A further problem with deferred pay is that when things become difficult, it's not much of a motivator. After a year or two, people assume they're never going to get it back and become resentful. It's better off for them to have equity, where they knew full well they might not be repaid.
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
This is a decent first-order approximation, but for true fairness, the valuation should be set at the time the deferred-payment arrangement is made and should be lower than what is expected from a VC in the future. Because a deal may not happen, the fair valuation when this arrangement is set is lower than the expected VC valuation.
In lieu of equity, deferred pay is a bad deal for the employee: no upside, only downside, and usually on terms that are a lot less creditor-friendly than what banks can negotiate.
A further problem with deferred pay is that when things become difficult, it's not much of a motivator. After a year or two, people assume they're never going to get it back and become resentful. It's better off for them to have equity, where they knew full well they might not be repaid.
If a founder forgoes a salary, why not agree to convert the pay difference relative to the other founders into stock at the time of the first equity financing at the share price negotiated with the VCs?
This is a decent first-order approximation, but for true fairness, the valuation should be set at the time the deferred-payment arrangement is made and should be lower than what is expected from a VC in the future. Because a deal may not happen, the fair valuation when this arrangement is set is lower than the expected VC valuation.