Ask HN: founders wants me to join for just equity, how much should I ask for?
20 comments
I don't remember who I'm quoting, but I think it is instructive: "There is a word for a technical employee who works for equity rather than salary. It is: 'co-founder.'" (And if not co-founder, a close runner-up is probably "fool.")
True but it really depends on how important the technical aspect (at least in the coding sense) is in relation to what the others are doing (or are capable of doing).
For example, I have a client today whose founders are guys having ultra-strong backgrounds in devising enterprise solutions, with major high-level contacts in the relevant market and reasonable prospects of parlaying all this into what eventually may become a $1B+ company. A "technical employee" could reasonably be thought of as "first employee," as opposed to "founder," in this type of case and could make a rational decision to take a whirl with equity instead of salary. It all depends on the nature of the opportunity and the credibility of the founders (I don't deny, though, that there can be a high risk of taking a sucker-bet in routine cases where equity-only offers of this type are made).
For example, I have a client today whose founders are guys having ultra-strong backgrounds in devising enterprise solutions, with major high-level contacts in the relevant market and reasonable prospects of parlaying all this into what eventually may become a $1B+ company. A "technical employee" could reasonably be thought of as "first employee," as opposed to "founder," in this type of case and could make a rational decision to take a whirl with equity instead of salary. It all depends on the nature of the opportunity and the credibility of the founders (I don't deny, though, that there can be a high risk of taking a sucker-bet in routine cases where equity-only offers of this type are made).
Yeah ... but their "ultra-strong backgrounds" and "major high-level contacts" aren't worth jack if the company's product(s) don't work.
(Well, they still might make some money off of them before they get caught out, but that sort of fraud, inadvertent as it might be, is not something you want to be associated with.)
The "technical employee" is a necessary (but not sufficient) part of their potential success, and getting the technology right is a lot harder than non-techies realize.
The biggest problem here, especially today, is that there are so many hungry people on the streets looking for work that your negotiating position isn't strong. On the other hand, if these non-techie founders truly are savvy they'll know there's not exactly a surplus of really good people to choose from....
My bottom line is that when non-technical founders devalue technical employees they also tend to devalue all the technical things that are needed to make the venture successful, and that that's a very bad environment in which to work.
(Well, they still might make some money off of them before they get caught out, but that sort of fraud, inadvertent as it might be, is not something you want to be associated with.)
The "technical employee" is a necessary (but not sufficient) part of their potential success, and getting the technology right is a lot harder than non-techies realize.
The biggest problem here, especially today, is that there are so many hungry people on the streets looking for work that your negotiating position isn't strong. On the other hand, if these non-techie founders truly are savvy they'll know there's not exactly a surplus of really good people to choose from....
My bottom line is that when non-technical founders devalue technical employees they also tend to devalue all the technical things that are needed to make the venture successful, and that that's a very bad environment in which to work.
In the case I mention, the lead founder was CTO of a multi-B company for over a decade (indeed, had been a key player in helping build it to that level) - he is technically savvy but just not doing that aspect of the work (at least at the detail level) in this company as he drives it. I don't think it is an issue of devaluing technical people (at least in honest situations) but just a matter of weighing relative contributions for a particular venture. Technical is not always foremost in what distinguishes a particular business model for success.
"Technical is not always foremost in what distinguishes a particular business model for success."
Indeed, and if you're a disciple of Clayton The Innovator's Dilemma Christensen the technology itself often isn't what's so innovative as the use to which you put it.
But it still has to work ^_^. At least in this case we can have serious confidence that the once and future CTO will make sure it does.
Indeed, and if you're a disciple of Clayton The Innovator's Dilemma Christensen the technology itself often isn't what's so innovative as the use to which you put it.
But it still has to work ^_^. At least in this case we can have serious confidence that the once and future CTO will make sure it does.
Bollocks.
No enterprise solution is worth $1B+ on the strength of 'major high-level contacts'.
It's all about the actual work put in and a massive dose of luck.
No enterprise solution is worth $1B+ on the strength of 'major high-level contacts'.
It's all about the actual work put in and a massive dose of luck.
First of all, please don't be uncivil in this way.
Second, grellas didn't say this company was worth $1B. He said that based on the founders' track record there was a "reasonable prospect" of it. "Reasonable" here presumably means in the judgment of experienced observers. Like who? Maybe like grellas, who has been a startup lawyer for decades and consistently posts some of the most informed comments on this subject. The point he was making is nuanced, and the example was obviously chosen to illustrate that.
Second, grellas didn't say this company was worth $1B. He said that based on the founders' track record there was a "reasonable prospect" of it. "Reasonable" here presumably means in the judgment of experienced observers. Like who? Maybe like grellas, who has been a startup lawyer for decades and consistently posts some of the most informed comments on this subject. The point he was making is nuanced, and the example was obviously chosen to illustrate that.
http://news.ycombinator.com/item?id=483610
Maybe?
(btw, op, there is another post here: http://news.ycombinator.com/item?id=483605 asking a similar question with numerous good answers... and only one of them is mine!)
Maybe?
(btw, op, there is another post here: http://news.ycombinator.com/item?id=483605 asking a similar question with numerous good answers... and only one of them is mine!)
This is where vesting schedules are everyone's friend.
I generally think that you should get a grant for the same number of shares that the three founders do, but if everyone's on a vesting schedule, they'll still own more than you for the next four years from today. After that, you'll all be on the same economics.
Here's the idea: let's say the three of them founded the company 9 months ago and they all have 100 shares each. You should get 100 shares as well, but let's put everyone on a vesting schedule that says you get 2.08% of your shares vested for every month served. So the three founders should get credit for nine months of service and 18.75% of their shares should immediately vest (as of the day you join) while you're at 0% vested. At month 48 after the company was founded, the three founders are fully vested while you're 81.25% vested. At month 48 after you joined the company, you're 100% vested and are on the same economics as the three founders.
I generally think that you should get a grant for the same number of shares that the three founders do, but if everyone's on a vesting schedule, they'll still own more than you for the next four years from today. After that, you'll all be on the same economics.
Here's the idea: let's say the three of them founded the company 9 months ago and they all have 100 shares each. You should get 100 shares as well, but let's put everyone on a vesting schedule that says you get 2.08% of your shares vested for every month served. So the three founders should get credit for nine months of service and 18.75% of their shares should immediately vest (as of the day you join) while you're at 0% vested. At month 48 after the company was founded, the three founders are fully vested while you're 81.25% vested. At month 48 after you joined the company, you're 100% vested and are on the same economics as the three founders.
I think this is very realistic.
No salary is a big no go for me. This is something I could only do with close friends that I have known for years.
Think about it this way: If those 3 guys really believe somehow in their project, they should be able to find some money to give you as a minimal salary.
If they expect you to take a high risk (not getting any money) they should give you a high reward if everything goes well. To pay someone means that you take the risk that she does not produce any value, but you win the most if she does.
No salary is a big no go for me. This is something I could only do with close friends that I have known for years.
Think about it this way: If those 3 guys really believe somehow in their project, they should be able to find some money to give you as a minimal salary.
If they expect you to take a high risk (not getting any money) they should give you a high reward if everything goes well. To pay someone means that you take the risk that she does not produce any value, but you win the most if she does.
If they don't pay for your living expenses I would classify you as a co-founder, not as an employee. The share you get should correspond to how much you contribute and how much they have done already. Anything from 15%-35% can be reasonable, but it very much depends.
The real questions are:
a) can you afford to take this risk? Can you take the risk financially and qua opportunity cost?
b) do you think all three other founders have valuable skills?
c) are the other founders smart and willing to work hard?
d) do you think they have common sense?
e) do you get a say in the way the company is run, or are you expected to shut up and code?
f) do you trust the other founders not screw you over? Are you absolutely sure they're trustworthy?
g) do the founders get along great with each other and with you? Are they mentally stable?
If you can't answer these questions with a confident YES! you should probably pass on the opportunity. If you have no doubt that other founders are going to accomplish great things, and if you're willing to take a risk, don't worry about having 5% less equity than you'd like to have. A 15% share in a great company is a lot better than a 35% share in a flaming train wreck.
Oh, and get things in writing, just in case.
The real questions are:
a) can you afford to take this risk? Can you take the risk financially and qua opportunity cost?
b) do you think all three other founders have valuable skills?
c) are the other founders smart and willing to work hard?
d) do you think they have common sense?
e) do you get a say in the way the company is run, or are you expected to shut up and code?
f) do you trust the other founders not screw you over? Are you absolutely sure they're trustworthy?
g) do the founders get along great with each other and with you? Are they mentally stable?
If you can't answer these questions with a confident YES! you should probably pass on the opportunity. If you have no doubt that other founders are going to accomplish great things, and if you're willing to take a risk, don't worry about having 5% less equity than you'd like to have. A 15% share in a great company is a lot better than a 35% share in a flaming train wreck.
Oh, and get things in writing, just in case.
In practice "get things in writing" doesn't help unless it's simply to memorialize the agreement. If your partners act in bad faith it just gives you (additional) grounds to sue ... and in this case they aren't exactly ensuring you have the money to sue. So unless the venture becomes so successful that you can get a lawyer on contingency....
> memorialize the agreement
Absolutely, that's the primary reason. It also clears up unnecessary misunderstandings. (E.g. one party may assume preferred stock, while the other founders will assume common stock.)
Absolutely, that's the primary reason. It also clears up unnecessary misunderstandings. (E.g. one party may assume preferred stock, while the other founders will assume common stock.)
Very true ... it hadn't occurred to me since due to my family's business dealings I'd absorbed that by the time I was making agreements.
Putting it down on paper forces a minimal level of clarity and detail, and gives all the parties concerned several chances to get it right, enumerate and specify details such as the above, etc.
Putting it down on paper forces a minimal level of clarity and detail, and gives all the parties concerned several chances to get it right, enumerate and specify details such as the above, etc.
As an employee, you don't work for no salary, period.
As a cofounder, you should get a significant share of the business (around the same % as the others have).
As a cofounder, you should get a significant share of the business (around the same % as the others have).
How does one technically get a "share of the business"? What does this mean? What paperwork is involved?
You'd be issued stock options giving you the ability to buy the company's stock at a very low price. These typically vest over time so that you can't just take the equity and quit. The paperwork is a bunch of legal forms. Have a startup lawyer look things over to keep yourself covered.
Sorry for taking so long to get back to you. Thanks for the reply.
What about if it's not a public company? That is, 2 or 3 people and an LLC?
What about if it's not a public company? That is, 2 or 3 people and an LLC?
It depends on what country you live in... you'll have to research the incorporation laws of the country you specifically live in.
In the UK, you can just decide how many shares the company has, and sell them for whatever amount per share you decide - that way you split the company between several founders. Of course, if you want more complicated stuff, like vesting, you'll probably want to speak to a solicitor.
In the UK, you can just decide how many shares the company has, and sell them for whatever amount per share you decide - that way you split the company between several founders. Of course, if you want more complicated stuff, like vesting, you'll probably want to speak to a solicitor.
If two of you are doing coding, what are the two other guys doing? What kind of value are they adding? Negotiate the equity based on the value you think you add.
I wouldn't even consider joining that kind of startup, I think 4 people is not manageable if everyone is working just for equity.
I wouldn't even consider joining that kind of startup, I think 4 people is not manageable if everyone is working just for equity.
How far along is the company? What's your current status, do you need the money? How much do you believe in the product? What % of the workload is going to fall on you, and how much do they need your skillset? How do their resources look (money, time, etc)?
There's a lot of things you'll need to explain before being able to get a good response. i.e. If the product is from scratch and there are little resources, there's no reason you shouldn't get close to or even founders equity, but if they already have a product with traction it's a completely different story.
There's a lot of things you'll need to explain before being able to get a good response. i.e. If the product is from scratch and there are little resources, there's no reason you shouldn't get close to or even founders equity, but if they already have a product with traction it's a completely different story.
3 founders, only 1 of which a technical person?
Don't waste your time.
Don't waste your time.
Why?
Worked well for me, as the "1 technical guy."
Edit: I'm not "questioning" your wisdom. Rather, I'm asking for clarification.
Worked well for me, as the "1 technical guy."
Edit: I'm not "questioning" your wisdom. Rather, I'm asking for clarification.
if one is designer, one is developer and one is product/marketing that's a good match I think.
This is a good match, especially if the designer is willing to get their hands dirty in the code, or go out and do sales, at least a little. Otherwise, I think designers will be sitting on their thumbs a lot once most of the initial design is in place.
That's not to say I don't value what they do, just that it seems their work is mostly front-loaded. Once you're launched and the design is fairly stable, the designer needs to be willing to switch hats and pick up slack where they can.
That's not to say I don't value what they do, just that it seems their work is mostly front-loaded. Once you're launched and the design is fairly stable, the designer needs to be willing to switch hats and pick up slack where they can.
I think that a designer can design as much as a developer can develop on a product. The best designs are the ones that are iterated and iterated upon. A designers work is never done, etc.
All founders should switch hats! :)
All founders should switch hats! :)
I would be far more comfy as a founder in an organization with strong business development, strong product design, and strong technical abilities than I would in an organization missing any of these three.
I would not do this. Several years ago, an investor was putting together a team and offered me 30% salary and some equity - with a 1 year commitment to see if the business would fly. Because the business plan seemed so good, I was going to go for it but then promptly backed out when I was asked to forgo salary for slightly more equity.
If you are not a full-on partner, then require some salary.
If you are not a full-on partner, then require some salary.
Read the equity equation if you haven't already done so: http://www.paulgraham.com/equity.html
> How much should I ask for?
More than you can get. (Unfortunately, biz folk respect folks who play games.)
It comes down to alternatives, yours and theirs.
You shouldn't join if you've got better alternatives. They shouldn't pay you (salary, equity) more than it would cost them to get "good enough" from someone else.
If they don't get you to sign on, what are their alternatives?
More than you can get. (Unfortunately, biz folk respect folks who play games.)
It comes down to alternatives, yours and theirs.
You shouldn't join if you've got better alternatives. They shouldn't pay you (salary, equity) more than it would cost them to get "good enough" from someone else.
If they don't get you to sign on, what are their alternatives?
Everyone -- thanks a lot for all the answers and insights.
That helped.
To give you more details, since some are curious, they are just beginning, about a month or two. There is some code but its not more then 5-10% of what is needed for public beta.
One other advice I got is to strive to stay with ~3-4% after all dilutions, which should be estimated as being diluted 1/3 for three times. so to stay with 3% i should start with 10.5% (->6.9% => 4.6% => 3%).
One other detail I didn't mention is that they want me to keep my day job (me salary paying job i currently have), until the first round (seed money). Currently the three of them also keep their day job, so we are all kind of equal on that aspect.
Regarding the founders abilities, they have design/biz dev/ceo experience.
One other advice I got is to strive to stay with ~3-4% after all dilutions, which should be estimated as being diluted 1/3 for three times. so to stay with 3% i should start with 10.5% (->6.9% => 4.6% => 3%).
One other detail I didn't mention is that they want me to keep my day job (me salary paying job i currently have), until the first round (seed money). Currently the three of them also keep their day job, so we are all kind of equal on that aspect.
Regarding the founders abilities, they have design/biz dev/ceo experience.
Have they done any work before? If not, getting the same share seems fair enough.
You should get "a lot", but unless they're just beginning and you're very close to effectively being a partner rather than an employee, the same or very close isn't realistic.
Be sure to do your due diligence on their character.
Be sure to do your due diligence on their character.
Unless they have a ton of the product already built, I agree with everyone here - you're a founder.
If they had a product up and running or even with customers, then you have to give some consideration.
The "idea" itself is worthless. Its all about the execution - and as a no-salary, techie - its going to be your job to help that happen.
If they had a product up and running or even with customers, then you have to give some consideration.
The "idea" itself is worthless. Its all about the execution - and as a no-salary, techie - its going to be your job to help that happen.
employees never make money in a startup, unless the company becomes Google size.
Let's say they give you 10% equity.
And let's be realistic. Even if the company succeeds, can the company become a 20 million dollar company in 5 years? 10 million? 5 million? 2 million? Or is it more likely to just be a $500K/yr business?
So if you pass the hurdle of failure, which has an insane rate on the web...how much would you really be making realistically?
Just remember to always include opportunity costs in your calculations. Is the risk justified, when you can make $450-500K in those 5 years, just being a regular coder.
Let's say they give you 10% equity.
And let's be realistic. Even if the company succeeds, can the company become a 20 million dollar company in 5 years? 10 million? 5 million? 2 million? Or is it more likely to just be a $500K/yr business?
So if you pass the hurdle of failure, which has an insane rate on the web...how much would you really be making realistically?
Just remember to always include opportunity costs in your calculations. Is the risk justified, when you can make $450-500K in those 5 years, just being a regular coder.
Great advice.
In your calculations just remember though that salary and equity are taxed quite differently.
In your calculations just remember though that salary and equity are taxed quite differently.
a) how far along are they? (just starting, coded some stuff, beta ready,etc.?)
b) do you think there will be minimal money in the company at some point soon?
c) is this a product you really want to see built? In other words: if they were two of your buddies, you were having a drink late one night, would you say to them when the idea came up: "wow this is a great idea, id like to help be a part of it".
b) do you think there will be minimal money in the company at some point soon?
c) is this a product you really want to see built? In other words: if they were two of your buddies, you were having a drink late one night, would you say to them when the idea came up: "wow this is a great idea, id like to help be a part of it".
You will be bargaining. Ask for a big share to begin with, possibly more than a quarter of the equity.
25%
25%, of course.
Some say since I don't get a salary I should get the same share they take, or very close. Is this realistic?