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Ask HN: How Much Equity to Offer First Employee?

7 points by DJN ↗ HN
Hello everyone,

My first potential employee is a good friend of mine. I've been bootstrapping from his basement for a while now and he has been very helpful to me in general administrative terms. He is also a very good sales man (in his day job) so I've decided to bring him on board formally.

He raised a question recently about knowing how much equity is coming to him. Apparently his wife has been stressing and complaining about the amount of time he spends helping me out. :)

His role is principally going to be sales related. Cold calling, meeting clients, and hopefully closing sales of our software.

On my part, as the Founder, I wrote the software, invested over $10000 of my cash, and raised over $40000 in debt from family to build the business and run the SaaS platform.

If you put yourself in my shoes. What would you think is an appropriate amount of equity is appropriate to offer him? Naturally, it will vest over 3-5 years.

Assuming the "employee pool" is 20%, and you still plan to hire more people and the business builds momentum, what would you offer? Or perhaps would you just offer him a commission on sales? or both?

7 comments

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tom_rath
I'd offer only commission on sales (perhaps add in profit sharing if he'll do other work in addition to sales -- you don't want to penalize him for those parts of his job which do not involve selling), that way his performance will be rewarded directly. It's your company and the equity is yours. 100% It doesn't belong to someone you pay to work for you.

He might have been "very helpful", but he's not risking everything to build a business. He may have put in a few extra hours on the side here and there (and pay him for those if you'd like), but it really doesn't compare to the time and money you yourself have invested in the enterprise.

It's your company. You built it.

This fellow's blog (and particularly this post) may be helpful for your situation:

http://nukemanbill.blogspot.com/2008_05_01_archive.html

DJN
Thanks tom_rath.

That story is particularly apt in my case. The "sudden thrust" for equity seems to have come after we got a cold-call from two very large companies within the space of three days. But not to be a cynic, I plan to give him the benefit of doubt.

Perhaps I should give him two choices - work part-time (i.e. keep his day job) and get a commission on sales, or go full-time with no commission and get equity.

trevelyan
agree with tom_rath (upmodded). you shouldn't give out equity if you don't know the value of what the other party is bringing to the table. And if sales do not cover their own cost you are losing money having him work for you.

Also, never forget that issuing equity takes time and money for handling the lawyer, accountant, etc. It also significantly reduces your flexibility down the road if you need to reincorporate, transfer assets, etc. And it is easy for things to get messy if there are problems. You want to keep your organization as flexible as possible.

If I were in your shoes I'd offer an excellent commission on sales and give your friend an option to purchase equity in the company up to a set amount at some reasonable valuation. Treat your friend's required investment the same way you would treat an investor at this stage. If he helps the company grow your agreement becomes a very good deal.

DJN
Thanks for the advice. It is very much appreciated.

I like the idea of giving him an option. It aligns our interests and should look more tidy to other investors down the road.

SriniCenthala
Hi ,

First find out your company's worth not just by the investment, 1. go by your time & Effort & convert that into your investment amount, 2. if you market it successfully assume it is successful. Identify the worth in terms of money

As you have mentioned that 20% for employees , that's good at least you have decided already.

In your situation , for the employee irrespective of part time or full time , determine the effort & work accomplished equivalent in the market. Based on that provide the equity for the resource. Usually Sales commissions are ranging from 2% to 15% as commission from the revenue generated out of that deal. Fix a base salary which is something like 50k if it is full time. And add the additional commissions of what ever the percentage you decide.

If you can't provide the base salary then think about provide equivalent equity in percentage terms with the condition of being with the company for at least 2-4 years.

Be aware that when you want to grow big , you need to go for real investors. You need to provide them big junk of equity. This is what I do. But feel free to contact me if you have some more guidance.

Thanks, Srini Centhala, srini@absolut-e.com

My Blog http://Srinicenthala.blogspot.com Linked In : http://www.linkedin.com/in/srinicenthala My Company : www.absolut-e.com