Ask HN: How much equity should I ask for?

Where are you living?

You probably can't ask for an increase of options in the existing grant (contract), only for a new grant. And since there's two developers you're effectively negotiating for the other person as well (even if you don't want to, the founder will claim employees should/will be treated equally).

Of course you personally can make money during an acquisition. If it's a cash acquisition there's now a buyer for your options, if it's a stock acquisition you'd now own stock in the new company (if you're lucky they're publicly traded so you have a market to sell your options to).

Is 0.2% the options you will have after the first year (with 3x0.2% more coming in the next years) or is 0.2% the total already?

How much salary would you say you're missing by working at that startup?

How many other employees are there in the company? Both 45k and 0.2% seem low.

You should definitely negotiate and consider your strike price as well. For Engineer #2 you should probably be getting at least 0.5%, especially if you have proven yourself. Make the argument that if the company were to exit for 10M in a couple years you would only net ~20K for about 3 years of work, which is less than a regular salary else where.

But why do you think your options would be worth nothing? That in itself is a problem.

Here's some classic advice on equity from Joel Spolsky (probably a decent place to start) - https://gist.github.com/isaacsanders/1653078

Negotiating in those situation (ie early employees in very early stage company) is a fickle thing. Think about it this way, you're functionally similar to an early angel investor (via the salary cut) that also joins the company afterward. It's easy to see that there is no one-size-fit-all numbers. And everything will depends on the very specific: both in what your contribution should be worth, and what you can reasonably negotiate. You got what you can negotiate for.

Besides another poster has mentioned (how much salary you are missing), you would also need to know how much money the founders put in personally (as opposed to seed round), how the company is doing, how much of the options pool is currently reserved for all employees, or even how much money are they planning to raise in the next round. Those numbers don't affect your contribution directly, but it affects what you can negotiate for.

I was about to say asking for 2-5% vesting over a 2-3 years. But at 10 people in the company, that sounds like a tough sell to ask for.

Rather than answer your question, I'll ask you a series of informative questions to help you find your answer yourself (this is useful for the next startup you work at).

* How much would someone with your skills make in terms of salary, bonus and stock at a large stable company inyourmarket (think IBM, Apple, Google, Amazon, Oracle, etc. -- basically any Fortune 500 that might consider hiring you)

* When do you think you'll be able to sell your shares (whether through an acquisition, IPO, private market sale, etc.)? Remember, vested shares are only valuable if someone will buy them.

* What do you think your company will be worth in the future? What will your share be worth? How does that compare with what your founders think it will be worth?

* Is your company willing to continue issuing shares to you in the future as part of a compensation plan, or is this a one-shot allocation?

* Finally, what's your risk tolerance? Are you okay making less than you could in a "soul-crushing big company job" (possibly a lot less) for the chance of a big pay day?

I'm going to ignore a lot of the other big/small tradeoffs around benefits and culture. But you should be thinking about these too.

Let me give you a concrete example. Let's imagine that Oracle would have hired you for $60k / year, with a 15% bonus plan, and 600 shares as restricted stock units vesting over a 4 year period. At current market prices, that works out to about $75k in total compensation per year before raises, market fluctuations, additional stock grants and high performance bonuses -- and, for well performing individuals, you can reasonably expect all of these things to be awarded you like clockwork at any healthy, respectable company.

Now, let's imagine that, 4 years after your start date, your company will be worth $50m and that you don't get any more stock. I'm guessing this company isn't big on bonuses (after all, it's a start up), but let's assume they average out to 10% over those 4 years. This, then, also works out to about $75k over that span. You'll probably have to fight and argue over every raise and additional stock grant unless your founders are amazing.

And that's the rub: most startups don't end up being worth $50m after 4 years. They are often (understandably) very poor about bonuses and salary increases. It often takes a lot more than 3 or 4 years to reach the point where the shares can be traded for money (if ever!)

Now, if your company hits it out of the park and is worth $500m, then that 0.2% sounds a whole lot better. But that's basically like hitting the lottery -- you shouldn't bet on it happening.

Similarly, if your company goes bankrupt, you get nothing for the shares except the memories and maybe a few t-shirts. And, unfortunately, you should absolutely expect this to be a possibility. Other possibilities include working for them for 7-10 years with the stock never becoming a tradable commodity and the company only being worth $20m or so.

Also, you're an early employee. The company will likely live or die by what you do. Your company should be viewing you as an investment with opportunity costs and expected returns. The opportunity cost of the shares is not too hard to compute (that's what I did above). The return is, in a sense, what the company ends up being worth.

I would go to your bosses with your version of these considerations in hand, and demand a plan that accounts for your concerns. And I would show them, with math, why anything else doesn't make good financial sense for you.

It depends how early you joined, how many people there are now, how many there will be soon, how much equity founders still have and how valuable they perceive your contributions to be (past, present and future)... consider that they both need to have the equity to give away and a material reason to part with it, not just because someone desires more. It maybe time to get moving if you have a bigger risk appetite and if they're not providing growth oppys or increased responsibilities... because often people outgrow companies and vice-versa, and that's okay... Never stand still.

You're missing out on $25K post-tax dollars per year by working at this company (assuming US taxes in CA or NYC and 80K "real" base)

You plan to stay there 4 years and in that time if all goes well, you hope the company to exit for $25M. I assume a low exit because the company is raising a 2nd seed implying that it isn't a moonshot business and seems to be struggling. This means you're looking for a very minimum of $100K in post-tax returns in 4 years and assuming you have not purchased your options yet and filed a 83b, will be subject to AMT (roughly 35%). Assuming the FMV strike price values the company at $1M today, you'd need to spend $ to buy those options as well so let's increase what you need by 1/25.

Sooo... to break even on missing $100K in salary over 4 years you need to own at least $160,000 in stoke or about 0.64% of the company AT EXIT. Over the 4 years, I'd anticipate a conservative 25% of dilution so now you need 0.85% of total equity in options.

To just break even on a $25M exit compared to salary loss, you need 0.85% of the company's total value today. Let's say that the company has a 33% shot of exiting for $25M meaning that you need 2.55% in options to break even on expected value. I'm guessing that if there's a $25M exit, you'd also like some upside beyond making up for loss salary so let's double it to 5.1% in options. If I'm being purely logical, I think 5.1% of the company in options is fair today for you.

Based on the model, if there's a $25M exit: You'll own 3.82% at exit. Pretax is $956,250 Post-tax is $583,312 Less salary loss = $483,312 This is a fair reward for 4 years of working hard and taking on risk.

Okay. Now some sanity. I don't think this founder is going to give you 5.1% of total equity in form of options. He just doesn't sound like the guy and given the undermarket salary, you also don't sound like a long term lead engineer. I could also be wrong to suggest that the company would only be worth $25M and could be worth $25B instead. That obviously makes a big difference so you could ask for less.

What would I ask for? I'd ask to be brought to market rate after the next round closes and threaten to leave if not. I'd also ask him what an optimistic outcome looks like and when then I'd cut that number in half and extend the time table by 2 and run the above calculation to come to an equity number.

Considering your second seed round is likely valuing the company around 1 Million you should probably ask for maybe 20% of the company for the missed out salary

Equity is the dirty secret of the widening wealth gap in society and especially poignant in startup land.[1] You’re taking a 50% pay cut for 0.2%. Assuming (for argument sake) no more dilution and $100m exit you get $200k. All that does is put you up to the salary you are giving up over four years. The founders (assuming 2, the other employees are at 0.2%, and 10% for seed funding) have 39% each. So their exit is $39 million each. Would you take a job where your future boss says, “I need you to take a risk, but assuming everything works out you’ll make $100k a year, your market salary, and I’ll make $10 million a year.” Does this sound remotely good or fair.

You needed more to start. The fact they gave you below market salary and crap equity is a huge red flag. Why help these people become rich if you can’t trust them to look out for you. If startups are all about learning and not earning [2], you need to really trust the founders. They should be helping your career in significant ways: prepping you for founding, introducing you to investors, helping you move quickly into more senior roles, bumping you up to market salary at the next funding event, giving you refresher grants, etc. Whatever helps you get where you want to go since you are taking a risk for them!

Depending upon your circumstances, I probably would just find another job. At least interview to get a BATNA for your negotiation. And look at total comp (salary, bonus, and stock) that you could get. Then compare to your current place and adjust for risk / reward as others have said. Ask to see the cap table. Look at likely exits with dilution and your percent ownership. Don’t fall for the snake oil of “10,000 shares and the founders (recruiter) said they could be worth a few hundred dollars each in a couple years!” Good luck.

[1] https://medium.com/the-wtf-economy/in-his-essay-on-income-in...

[2] http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

~0.2% is relative to how much the company could be sold for. Maybe do some research into what similar companies have been sold for or are worth. If the company is not willing to budge on options, perhaps see if they would be willing to split the difference of your salary with a convertible note. I would think that would be a fair option.

I would find a job that paid more and put the money past 45k in the bank. In a few years I suspect you will have more money.