Ask HN: Reasonable equity for early employees?
The deal is: I've recently received a New York's startup offer to join as one of the first employees. The startup just got its series A round, and is already profitable (a bit more than ramen), which diminishes greatly the risks. The equity offered me (1% total) strongly reflects this. Taking the equity equation formula (considering the salary, which is a bit above market), if they didn't want any profit on my contributions, they are expecting me to increase the companies worth by 2,3% (conversely, if they are taking 900% profit, they expect me to increase the company's worth by 23%).
The second article I've mentioned quotes a table from Venture Hacks which may suggest this is a standard. The blog author rambles the table gives not enough equity.
Considering I'll be the first full engineer on the team (which had mostly interns and the founders which are kinda junior programmers, with a board member representing VC and helping with the boring part of the business legalities), is this deal any good?
19 comments
[ 3.0 ms ] story [ 41.8 ms ] threadBy all means, you should try to negotiate for more, but as the first employee at one startup and the third at another I was never given more than about .5% initially, with additional grants later on as reward for high performance and to help offset some dilution in later rounds.
Your risk profile may be lower than theirs, but I would take 1% as a signal that they really really really want you. I can guarantee they are not going to be giving employees 5-10 anywhere near 1%.
The the information needed to estimate its disposal value includes: the company's plans for future VC rounds, the terms of the 'A' round and prior investments, and the track record of the VC on the board. My opinion is that asking about the finances should not be an issue, since you are being asked to become a shareholder.
My concern is that 1% seems low for the primary technical person in a business which relies on code (assuming that this is) even if it is market rate.
On the other hand, you might want to this from Suster: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...
Factors that increase equity:
* Founder incompetence, poor negotiating skill, impatience.
* Financing risk (near end-of-runway with no term sheets, &c).
* Sometimes, lack of revenue (at shoot-the-moon startups, revenue isn't expected early on and isn't a factor).
* Below-market salary.
* Non-substitutable technical expertise. Rare. Rails devs may earn a premium relative to the market, but there's still a market for them. SEO, on the other hand, is hard to acquire, because people who can actually do it can almost always earn more freelancing.
* Ownership of relevant core IP; ie, if you came up with the idea behind the company's product, or own an idea that would be key to improving it.
* Frothy talent markets (but, see "impatience" above). If you need someone RIGHT NOW and LOCAL in the NYC startup market, you may pay a premium.
Note that none of these factors are "the primary technical person in a code-based business". That ain't got nothing to do with anything. Yes, that person may be key in proving the business ahead of revenue or funding. But when you got funding and sharply reduced financing risk, you got yourself to a place where you don't have to pay the lead tech person a cofounder's equity grant.
I agree that you may not have to and if you don't you can still be successful. On the other hand, if you are making a hire to fill a key position for the long term, it may make a great deal of sense to do so because a person hired at or close to the market rate can by definition find an equivalent position elsewhere.
1% of the company probably won't amount to much once the risk of failure, liquidation preferences and future dilution are considered. Not to mention a potential lack of technical chops among the co-founders.
In my opinion, hiring a key position at or near market rate is an indicator that the company views the hire as filling out the organization chart rather than as finding the person who creates significant value to the company, i.e. another entrepreneur.
I'm not saying it is a bad offer, only that it isn't structured in a way which will satisfy someone with entrepreneurial ambitions.
Considering the deal includes a trigger with very beneficial acceleration mechanism, I don't see them giving in more, on what already seams like an outstanding deal from the VC's perspective (the founders are relying on the VC's expertise on such deals, as they are not that familiar on what is standard and what is not).
But from a deal standpoint, there really doesn't appear to be one. Acceleration won't trump liquidation preference and it is likely the equity is simply being pulled from the options pool. The slice assigned to filling the position reflects the value placed on the role you are considering. It's not Steve Balmer's 8% as employee #30 and it probably won't cure the entrepreneurial virus if you are infected.
Good luck.
i = 1 / (1 - n) + sp
where:
i: the amount I'll increase the company's worth divided by the profit multiplier (which is 1 + profit(%)/ 100, eg: 1.5 for a 50% profit)
n: equity received
sp: salary price. Which is anual salary * overhead (pg suggest 1.5) / company's valuation
In short, my values are:
n = 1%
i = 1.023 (2,3% which with a profit of 900% means they'd expect me to increase the company's value by 23%)
sp = a bit above market's salary (can't say much more, sorry)
3 big named, 10-40 people, post-A companies offered 100K-130K salary, and about 0.15%-0.2% equity.
One stealth, seed-funded company in which I would be a funding team member, offers 1%-3% equity with correspondent salary.
The Mark Suster link mentioned by brudgers is solid. My suggestion is to examine your motivations and goals, and then to be true to them. It will also help you evaluate your progress against those goals.
I'm going to presume this is your first startup, so these comments may be wildly off base if it isn't. The things I got out of my first startup were these:
(1) Money (we actually went public, though I had a very small piece of it). (2) Massive rapid skill development in circumstances where I could take on as much responsibility as I wanted and could learn from great people. (3) Connections to people that pretty much set me up for almost every job I had after that.
The value of (2) and (3) were huge. If I could give advice to my younger self it would be to focus on those two things first, then negotiate the best financial outcome that I could after maximizing those elements.
In short, the first few in terms of percentage, then move to Wilson's multiplier factor model.