Ask HN: In this situation, what's a fair equity share?
I'm the third person, and my percentage is pretty low (low single digits). I came in pre-money, and I accepted the percentage given because (1) I was fine with the salary offered (deferred until funding) and expected money to come imminently (it took a bit longer, but we're getting customer revenue) and (2) realized I didn't have the full picture (how many points were in the option pool, saved for legal counsel, etc.) and couldn't evaluate what a fair share was.
It looks like funding is coming via customer revenue about... now. We'll be incorporating soon, which seems like a convenient time to revisit the equity question. I don't feel entitled to a 1/3 split, since the other two guys have been working on the project a lot longer than I have, but I did come in 7 months pre-money, so I feel entitled to all the trappings of founder status, and an equity share that would reflect that.
What's a good guideline for whether or not I'm getting a fair share? Is it wise or unwise to negotiate a higher share, and at what point (pre- or post-revenue)?
Also, how do board seats work? If I enjoy hacking more than business, do I want one, and how do I go about determining if I deserve one? (E.g., if there are 3 board seats, I don't feel entitled to one; if there are 5+, I'll be pissed if I don't get one.)
31 comments
[ 2.1 ms ] story [ 131 ms ] threadI have to say, as someone who is massively new to this - this is no right or wrong. There's no harm in asking the question, if you raise your concerns and walk away with any additional % - excellent. But the thing you don't want to do is alienate the others, so be sure of your approach before you voice concerns.
Nobody here will ever be able to understand the effort/risk you have all put in comparably apart from yourself, so the only advice I'd give is go for what you can get, nicely.
Unfortunately, you have already made the mistake of waiting seven months. As soon as they reneged on paying you the "imminent" cash salary, you should have demanded a much higher equity stake than low single digits.
At this point, you have the right to ask for whatever you can get. It's just a matter of what your alternative is, and how valuable you are to them.
Should I try to line up a job before negotiating?
How much did the original founders spend both in time and in money before you came along.
* How much have /you/ spent in relation to that?
* How affected was the outcome of the business by your presence, did you accelerate the growth, did you take it the extra step, can they survive without you etc.>>
I've done this math, valuing time at the market rate. I come out as about a 10% contributor, but they obviously can't give me 10%, since there need to be points for the option pool.
I was offered 2%, which seemed really low, but I was told that this was because the CEO wanted to conserve points for future hiring. I was also told the low number was because I wasn't relevant to getting the first round of funding (which appeared to be imminent). However, funding came later, at a time when I am relevant, and with 7 months on the line, I don't think this is enough, unless a large number of programmers much better than I am are hired (and they mentor me).
That's silly. There's no such thing as persevering points. If you create an option pool later on, everyone dilutes together.
However, I don't think I can suggest the CEO change how he runs his company.
If you thought the original deal was unfair, you shouldn't have signed.
In truth, I don't know what fair is, because I don't see the whole picture: who else will get equity in the future, what does the option pool look like, etc.?
You can't re-price risk after it has been fully assumed and if I was one of your colleagues I would be pissed off at your attempting to re-negotiate a previous agreement. You seem to believe your co-workers have an obligation to see you get a certain level of compensation and that your equity stake should grow or shrink depending on that compensation. That is the attitude of an employee not an owner.
Presumably he knows the lay of the land, and is someone that they would not want to lose--there may be a significant cost associated with losing him. That said, his leverage is way lower now that the work has been done.
Since you accepted the offer with salary although deferred. I think it is fair, assuming the other founders did not get salary, in lieu of the low equity you are receiving.
Obviously, no one has to renegotiate anything, but I'm asking what's fair. I can't evaluate my own number because I don't know what's happening at the bigger picture. If 30 programmers more skilled than I am are hired tomorrow, I'm probably getting a fair share. If some post-money marketing VP gets, say, 8%, I'm going to ask for a raise to at least that level or quit.
The other 2 people have no idea you are upset with the current arrangement. Waiting to see what happens with other hires and then getting angry just seems spiteful and jealous.
If you are unhappy with the current situation, you need to figure out if it is enough to force you to quit. If so, give them the option to re-negotiate to a favorable arrangement for both, or quit.
If you aren't willing to quit over it, ignore that factor completely and learn from the experience.
If they were stuck before you got there and you played an important part in getting a 3-person company to some measure of profitability then you probably deserve closer to a double-digit percentage.
A board seat is probably out of the question at this point but I'd recommend you negotiate for the same class of shares and vesting/acceleration options that your co-founders get.
That seems about right. I figure I'm worth about 9-10% of the work up to now, considering time spent and what we'd command on the market. That number needs to be docked according to the pool reserved for future employees, and raised if we go longer without salaries. There are enough variables that I'm not aware of, so I don't know what fair is although I have a general sense of the range.
A board seat is probably out of the question at this point but I'd recommend you negotiate for the same class of shares and vesting/acceleration options that your co-founders get.
Why is a board seat out of the question? Should I want one? I'm really naive about this question, and don't even know if I necessarily want one. What are the benefits and drawbacks?
Although it's tough to revisit this question after you've already established a deal (it would easy be perceived as opportunistic), it can't hurt to ask.
At worst, the other founders should be able to justify the allocation you've been given and their reasons for not upping your share; at best, they might revisit their decision given how much value you've delivered over the past 7 months.
Just make sure raising the question doesn't come across as blackmail.
I'm assuming you don't mean that you get paid back for salary you didn't get paid before funding. FWIW, investors are REALLY not keen to give $ to a startup and have a big slice of it go to to back-earnings.
Onto the question/situation, though. How long did they work on it before you? Do you all work the same amount?
Depending on the answer to those questions, I think you're entitled to a close to even share, assuming you all vest.
A way to get around the inevitable response is to vest. If you want to own 25% of the company, suggest that it vest over 3 years (you should ALL be vesting anyways). A good way to pitch it is this: "You guys have been working on this for 12 months. I've been working on it for 7. By the time I vest, the difference will be 41 months versus 36 months of time in. What do you think a reasonable percentage of my contribution will be at that point?" If time is the only facture, that's a fair point. If they poured cash in, have amazing connections, or had higher paying careers they set aside, they might be entitled to more.
Regarding board seats, those get re-assigned if you get funding oftentimes. Board meetings aren't particularly fun-- I'd avoid it unless you think your board will do something screwy. Only thing I'd offer is that you want founders to have control of the board-- if not, the board can fire the founders. If you are the odd-man-out, the board can fire you whether you are on it or not. So being on it offers little protection unless you have unanimity clauses written in. You can always ask to have regular optional attendance for the board meetings.
In general, though-- I think people attach a lot of emotional weight to "I had the idea" and "I've been working at this a few months before you came on board" (UNLESS that few months reduced the risk-- i.e. customer acquisition/validation reduces a lot of risk while futzing with code for a few months really doesn't). In 5+ years, the idea is going to change and that original few months of contribution is going to be pretty meaningless in the grand scheme of things.
Regardless, the contribution in the FUTURE is likely what's going to matter most... Which is why vesting is important.
You do need to be ready for some serious shock come tax time if you do take on additional equity. Equity (from the IRS perspective) is income, and is taxed as such. If the valuation of the company is high (not the cash value, the fair market valuation) then taxes are going to be through the roof even though you haven't received any cash.
b) ISO/NQSO's are income only when exercised, not when vested. When the stock price is expected to climb (such as when you can vest pre-IPO and you're pretty sure you will IPO), then it's wisest to exercise as soon as you vest to start the clock on long term CG holding period, but the key moment for the IRS is exercise, not vest.
All of the above reflects only my understanding of US tax law from being a (non-founder) employee at 3 past startups with some kind of public exit (two acquisitions and one IPO).