I think the equity a startup is offering me is very low. Am I crazy?
12 comments
2% equity in a $1,000,000 company is $20,000. Over four years of vesting at a 7% interest rate that's about $4,250 a year. It probably doesn't offset the pay cut you're taking...particularly if you consider the risk premium 7% return is nothing. It isn't a cofounder offer, don't kid yourself.
[edit]The domain name may not even be a company asset, and with the kind of control the founder has, even if it is, he is free to sell it to himself for a nominal price making your stock worth less.
[edit]The domain name may not even be a company asset, and with the kind of control the founder has, even if it is, he is free to sell it to himself for a nominal price making your stock worth less.
This just came up in a thread. Jim Clark (who was hugely successful prior) invested $4M in Netscape to get it going. Andreessen got 10%. Now maybe this guy could argue you're no Andreessen, but you can point out that he's no Clark either, and hasn't put in $4M.
You have an opportunity here if you think the business plan has legs. 10% is an upper bound for what you should expect, considering he's paying you a salary and benefits. 2% seems too low, IMHO, so I'd certainly push back on that amount. However, if you are in a position to forgo the salary and benefits between when you join and when the company raises capital (assuming that is in the cards), you should consider that in exchange for a larger equity stake. Depending on the amount of time between when you join and when you plan to raise, I'd say that number is somewhere in the 15-30% range. Good luck!
Think of it this way:
You start a company with him, and have an outside investor give you $1 million. That's a large angel/small VC round. Say it's worth 30% of the company. Would you split that remaining 70% at 68/2 with the guy if he hadn't put any money in?
More importantly, it sounds as if he already considers you an employee (as opposed to a founder). If you want to be a co-founder, this wont end well.
You start a company with him, and have an outside investor give you $1 million. That's a large angel/small VC round. Say it's worth 30% of the company. Would you split that remaining 70% at 68/2 with the guy if he hadn't put any money in?
More importantly, it sounds as if he already considers you an employee (as opposed to a founder). If you want to be a co-founder, this wont end well.
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I wouldn't do it.
If you're being offered 2% on those terms then I'd rather do my own thing, but thats just me.
If you're being offered 2% on those terms then I'd rather do my own thing, but thats just me.
I am in a similar situation, where I am 'founding' a company where my cofounder is fronting the money and has the sales contacts to make our venture happen. I am doing all the design, planning and development (hiring a dev team).
I require 10% preferred with up-to an additional 10% common in addition to a monthly salary (we are still negotiating the salary)
If I were you, I wouldnt take anything less than 10%
Here is what you should think about:
Assuming that you will need to go get a series A from VC if your venture gets momentum; you're really talking about splitting up 40% of the company. So at max - your share would be ~20%
As he is fronting the money - and may not need VC, therefore keeping the 60-80% yet your founding and BUILDING the thing, upto 20% is perfectly reasonable and fair.
I would ask for a mix of common and preferred - with a set min of preferred that you want.
I require 10% preferred with up-to an additional 10% common in addition to a monthly salary (we are still negotiating the salary)
If I were you, I wouldnt take anything less than 10%
Here is what you should think about:
Assuming that you will need to go get a series A from VC if your venture gets momentum; you're really talking about splitting up 40% of the company. So at max - your share would be ~20%
As he is fronting the money - and may not need VC, therefore keeping the 60-80% yet your founding and BUILDING the thing, upto 20% is perfectly reasonable and fair.
I would ask for a mix of common and preferred - with a set min of preferred that you want.
I think it means he is not looking at you as a technical co-founder. He's looking at you as an early hire. From his point of view, he has the expertise, the money, the assets, etc... you are just a resource.
I think that this is correct. Looking beyond money, this also means that he won't view you as an equal partner when it comes to strategic decisions either.
He is the boss, and you are the employee with some stock.
I would only take the job if that is what you're looking for, and if you don't mind leaving with the title 'Lead Developer' rather than 'Co-Founder'.
I would only take the job if that is what you're looking for, and if you don't mind leaving with the title 'Lead Developer' rather than 'Co-Founder'.
this. he should be looking at you as a hire, not a co-founder. he put in $1mil+. what are you going to put in? nothing but experience? then there shouldn't be an expectation of anything close to equality.
the corollary is that if he's happily taking on the risk, has funds to pump in and sees you as his best choice of first employee and tech lead then he might be more willing to negotiate salary (especially if you were being paid more at your last job) than equity.
If you're in it for the big exit: run away and don't look back. If you think the work is interesting, consider if working on the problem is worth the pay cut. Treat the offer as a job offer & nothing more.
If you get a fair salary and you're given a piece of the company that's a pretty good deal when he's already invested that much, but that does not make you a co-founder, even though that might sound nice as a title.
A co-founder is someone that is carrying a good sized chunk of the risk and that is likely not going to be receiving a market rate salary for a long time. A co-founder would see the stock as their compensation and since it's risky stock there would be more of it.
I can't say much about the risk here, there is not enough info in your post to take a stab at that but unless the guy is very wealthy he must have thought through the risks himself and your risk is limited to a small fraction of what you'll make over those four years in salary.
If it's less than what you made at your last job then maybe you should shop around a bit and see what your real market value is, that will give you an idea of the 'hidden cost' here, which in turn will give you an idea how much that 2% should be worth to make this worth your while.
2% is not much at face value, but if this is the next Oracle or google it might still be worth your time. More info->better advice.
A co-founder is someone that is carrying a good sized chunk of the risk and that is likely not going to be receiving a market rate salary for a long time. A co-founder would see the stock as their compensation and since it's risky stock there would be more of it.
I can't say much about the risk here, there is not enough info in your post to take a stab at that but unless the guy is very wealthy he must have thought through the risks himself and your risk is limited to a small fraction of what you'll make over those four years in salary.
If it's less than what you made at your last job then maybe you should shop around a bit and see what your real market value is, that will give you an idea of the 'hidden cost' here, which in turn will give you an idea how much that 2% should be worth to make this worth your while.
2% is not much at face value, but if this is the next Oracle or google it might still be worth your time. More info->better advice.
"if this is the next Oracle or google it might still be worth your time".... i think 2% of the next google or oracle is worth anyone's time unless you're on the fortune 500 list...
I think a somewhat plausible best case would be a $50 million exit and 2% would be a million dollars.
I think a somewhat plausible best case would be a $50 million exit and 2% would be a million dollars.
2% and a salary is fair in my limited experience... one of my friends had .5%, the company sold after 3 years for 60 million, he got 300k. He didn't get rich but the last company I was with I had options and they got bought out and my options were worthless.
Here is a decent article... seems consistent with what people tell me... http://www.tonywright.com/2008/a-newbies-guide-to-startup-co...
Here is a decent article... seems consistent with what people tell me... http://www.tonywright.com/2008/a-newbies-guide-to-startup-co...
I would be dubious about joining a company that spent its first million of investment on a domain name.
Some domains are truly worth $1 million. If the guy has plenty of additional money to invest, why would it matter? A really great domain can increase your chances of success.
It's not necessarily a mistake to spend a million on a domain. What's alarming is when it's the first thing you do.
Most successful startups I can think of (Mint, Dropbox, Facebook, Twitter) who bought expensive domain names did it well after they had traction.
Mint.com was purchased during their Series A, well before any traction.
It's also the only domain of those four that had significant inherent value. They could have easily resold Mint.com for a profit. Buying it early gave them the benefits of the great domain and lowered the price they paid. I think what Mint did was brilliant.
The only reason I can think of not to buy a $1M asset for $1M is if it eats into your runway. If it doesn't then you're better off if you can.
It's also the only domain of those four that had significant inherent value. They could have easily resold Mint.com for a profit. Buying it early gave them the benefits of the great domain and lowered the price they paid. I think what Mint did was brilliant.
The only reason I can think of not to buy a $1M asset for $1M is if it eats into your runway. If it doesn't then you're better off if you can.
I stand corrected.
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He has great business/sales/management knowledge and is someone I've known for years, but has no technical background. I'm a developer, and he wants me join as a technical co-founder. There's a business plan, but no prototype yet.
I was offered 2% equity (vesting over four years) and a fair salary (less than I made at my last job) plus benefits to join this company.
I thought the equity seemed quite low for being a technical co-founder, even though the sole founder has already invested quite a bit. There's also less risk in the sense that he has the money to pay me a salary.
What do you all think about the equity being offered, given this situation?