How about "I appreciate your desire to have more stock available to give new hires. You've proposed that I give up 4%, which is 40% of my allocation. I'm amenable to giving up 1%, which is 10% of my allocation and equal to the portion which you're willing to give up, and lets us bring in a whole new engineer."
If they counter offered, I might give up another 0.5% in return for "OK, you guys can have 1.5%, but in return the company rescinds your repurchase right with regards to 3%." (i.e. We accelerate vesting.)
This is a negotiation. Nothing you say results in you owning less than 6% of this newly valuable company, right? No need to agree to the proposal in front of you just because it is in front of you.
First, percentages are meaningless. The OP needs to quantify what's at stake in absolute terms. If he has justification to negotiate or otherwise take action to protect his interests, he should do so based on an understanding of the dollar amounts involved, not percentages. When you negotiate around percentages, it's very easy to win the negotiation but lose money.
Second, the scenario described is a huge red flag. The OP's company raised capital from investors. Ostensibly the options pool was addressed as part of the funding. The OP's post suggests that the options pool was way too small but instead of expanding it (and diluting everybody), which is typical, the company's founders and the OP are forfeiting a portion of their piece of the pie, which is not at all typical. Why?
The OP needs to understand the true state of his employer's equity structure. What you refer to as a "newly valuable company" could just as easily be a cap table disaster. If that is the case, negotiating around percentages won't save the OP from a bad outcome.
Where did I state that the OP should only determine present dollar value? I simply wrote "The OP needs to quantify what's at stake in absolute terms." Percentages are meaningless unless you have some idea of what x% of something is worth, whether today or tomorrow. As I wrote, it is possible to win a negotiation around percentages but lose money. I could fairly easily give you 25% of a company and structure the equity so that upon its sale, you netted next to nothing.
On this note, please recognize that figuring out what's at stake requires the OP to take an even bigger step back. The OP indicates that he was given a 10% equity stake in the company in the form of stock options when he was a contractor.
As a contractor, he would only be able to receive non-qualified stock options. The tax treatment of these is almost always less favorable to the recipient than incentive stock options, which can only be granted to employees. Now that the OP is an employee of the company, he may need to consider that the structure of his equity is sub-optimal. If there's justification for a negotiation here, the structure of the OP's equity could be just as important as equity amounts.
Further complicating matters is the OP's status, as it sounds like he's a nonresident alien. Cross-border tax issues can be very complicated and at a minimum, the OP should understand the implications of transactions involving his equity.
Bottom line: simply jumping into a negotiation over percentages is putting the cart way before the horse. The OP should seek the counsel of a qualified attorney and tax professional before he tries to address his concerns directly with the company.
You've got some good talking points, but it could be stronger:
"I agree we need more stock available to give new hires."
"It seems like you guys are giving up 10% of your total options which sounds fair to me. I'd like to contribute 10% of my options too. So that gives us a 9% options pool. If it makes more sense to have 12% options then maybe the two of you could each contribute 5.5 points."
You could also ask for a salary bump to compensate for the reduced equity.
Great advice. Always have acceptable alternatives in mind. For instance, propose that they accelerate vesting on your remaining options 50 cents on the dollar. So if they want you to give up 2% they would instantly vest 1%. The term here is "single trigger". Point being, be creative and try to work out a deal. A 4% starting offer isn't unreasonable.
From the description given, it sounds like there are two suits running the show with control of the business and the overwhelming majority of the financial interest. I'm assuming from context that the OP is the technical guy who dug the cofounders out of a mess when their initial outsourced product development was not of an adequate standard, and did so in return for only a 10% stake and poor immediate compensation. Apparently this got them to the point where they could start hiring more staff and taking serious investment.
It sounds like the OP was probably already shortchanged on both the equity and the direct compensation. I don't see any way a 4% offer is anything but a cheap shot/insult in this scenario.
> I'm assuming from context that the OP is the technical guy who dug the cofounders out of a mess when their initial outsourced product development was not of an adequate standard, and did so in return for only a 10% stake and poor immediate compensation
I'm making fewer assumptions.
And more importantly, I've learned that in a negotiation, being "insulted" by the first offer doesn't help me in negotiating an ultimate agreement. I think a counter-offer will get you a lot further than righteous indignation.
The opening offer reveals that the other parties are either naive or trying to take the OP for a ride. Either way, they've probably already forfeited any benefit of the doubt they might otherwise have deserved in negotiations.
That's not righteous indignation, it's just knowing who is sitting on the other side of the table when you're negotiating, and hopefully ensuring that you protect yourself accordingly in any final deal you agree on.
He shouldn't be giving up any of his shares. At all. He should be demanding more options. In all likelihood - he's the reason the business exists. They would have nothing without him.
The trouble is, that probably isn't true. They might have had nothing without him before, but now they have 16 people left without him, and presumably by now some of those other people are technical as well.
So, his relative importance may already have been reduced from "indispensable" to "valuable technical leader", and his personal negotiating position is getting weaker all the time as the business grows. He may have to give up something of value now to consolidate his position for the long term, but if he's been suckered already then consolidation may be the best course of action that is still available to him. Of course even a somewhat reduced but secured stake in the business may still work out very lucrative if the company is successful at its new scale and funding. The real question is how much influence he has left to give up as little as possible while securing the rest.
Unfortunately it all depends on his bargaining position right now. It might feel good for the rest of us for him to take one for the team and stand up for his rights, but it could lead to him having a worse outcome if those rights are beyond his bargaining position.
Sounds about right. I would even bump it up to 2% (even 8% is a HUGE allocation for what it sounds like you have done). And improve your tone dramatically.
If they counter offered, I might give up another 0.5% in return for "OK, you guys can have 1.5%, but in return the company rescinds your repurchase right with regards to 3%." (i.e. We accelerate vesting.)
This is a negotiation. Nothing you say results in you owning less than 6% of this newly valuable company, right? No need to agree to the proposal in front of you just because it is in front of you.