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Ask YC: Equity question for very early stage startup

6 points by nikhils ↗ HN
We are a team of three co-founders, each with equal equity share (1/3 each, we've yet to gain funding as we're still early on our journey).

We have an opportunity for someone to get involved who has lots to bring to the business, having worked for one of the major players in the space. He loves the concept and wants to take an active role in the company - more than just adviser but not quite co-founder as he currently has a full-time job.

So we are in a quandary: how to decide what equity share he is worth to us? As of yet, we do not have a valuation. So I'm not sure how we can apply the 1/(1-n) rule (Ref. one of PG's essays) in this case.

Here are some thoughts we've had so far...

- Difficult to base it on the value he'll bring to the company but this is obviously the standard way of giving away equity. So how do we solve this problem?

- It's likely he'll be helping us with gaining funding, so we've thought about structuring it as a "base + bonus" share, dependent on how much money he helps us secure.

So are there standard ways of approaching this kind of situation? And what questions should we be asking ourselves?

If anyone has particular thoughts on it we'd be really keen to speak to you in more detail about what we're doing.

Many thanks,

Nikhil

9 comments

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brk
A) I'd recommend that you reallocate your shares sooner rather than later so that you actually have a pool of unallocated stock to distribute to other new employees.

B) I think that you have to sit together as a team of 3 and determine what you think this persons value contribution will be. You are on the right track with a base+bonus thought. Remember also that you can arrange for the shares to vest over a period of time. This helps minimize the threat that you give someone more shares than they are worth - as the shares vest you gain better insight into the persons value contribution.

prague
3 founders is dangerous. I know personally of at least 2 businesses that imploded in part due to the nature of the number 3.

Be careful!

bookhuddle
I second the vesting strategy. Make sure that whatever you set up aligns incentives with performance and the company's interests. Since this person is still working at another full time job, determine what level of commitment you expect that person to make to your venture (i.e. 10 or 20 hrs/week until a specific date or a funding stage); determine when will he have to commit full time to the business.

Consider how much each of you has contributed in initial capital and sweat equity to this point, where in your company's development you guys are at (concept only, prototype, beta version, etc) and how what he'll contribute is worth to you guys.

Since there isn't a clear market to easily price your venture, it'll probably come down to an agreement that feels right to you and you can live with.

Definitely talk to your lawyer.

prakash
Is this person going to be full or part time? If full time work out a salary + equity, if part time try to work out lesser equity only deal which will change once he comes on board full time (i.e. there should be some incentive for this person to come on board full time, if not figure out why not?).

Create and allocate a pool from which to hand out equity to employees, it's usually around 20% for future employees. Key employees vesting should typically be aligned with the founders.

How long have you guys been working on it? Have you taken a salary? Are you working on it part time/full time?

Also, speak to a good startup lawyer (yup, spend that money it will be well worth it) to structure this.

Good luck!

aquaphile
I recommend establishing a pool of unallocated common stock, against which you can issue vesting (4 year vest with a 1 year cliff, for instance) stock options. The gentlemen to whom you refer sounds like a good candidate for compensation via options.

Another question to ask is if he subject to a non-compete. If not, should you consider making him a Part-time employee?

nikhils
Thanks to everyone for some great responses. I think we can live with the number 3!

Vesting is something we've definitely thought about - I now just need to do a lot more reading/learning about vesting arrangements and unallocated stock. Anyone know any good resources on these?

We also definitely need a good startup lawyer! Any recommendations for people in London?

Thanks again

prakash
Isn't Songkick (YC Company) in london -- you might want to check with those guys; and, the seedcamp guys (http://seedcamp.com/)