

I think the equity a startup is offering me is very low. Am I crazy? - snapssc7

Here's the story. Company A is a new startup with one person. This guy has already invested a considerable amount of his personal money (more than a million) to purchase the domain name and a few other assets from an old business.<p>He has great business/sales/management knowledge and is someone I've known for years, but has no technical background. I'm a developer, and he wants me join as a technical co-founder. There's a business plan, but no prototype yet.<p>I was offered 2% equity (vesting over four years) and a fair salary (less than I made at my last job) plus benefits to join this company.<p>I thought the equity seemed quite low for being a technical co-founder, even though the sole founder has already invested quite a bit. There's also less risk in the sense that he has the money to pay me a salary.<p>What do you all think about the equity being offered, given this situation?
======
benedwards
I think it means he is not looking at you as a technical co-founder. He's
looking at you as an early hire. From his point of view, he has the expertise,
the money, the assets, etc... you are just a resource.

~~~
ladon86
I think that this is correct. Looking beyond money, this also means that he
won't view you as an equal partner when it comes to strategic decisions
either. He is the boss, and you are the employee with some stock.

I would only take the job if that is what you're looking for, and if you don't
mind leaving with the title 'Lead Developer' rather than 'Co-Founder'.

------
brudgers
2% equity in a $1,000,000 company is $20,000. Over four years of vesting at a
7% interest rate that's about $4,250 a year. It probably doesn't offset the
pay cut you're taking...particularly if you consider the risk premium 7%
return is nothing. It isn't a cofounder offer, don't kid yourself.

[edit]The domain name may not even be a company asset, and with the kind of
control the founder has, even if it is, he is free to sell it to himself for a
nominal price making your stock worth less.

------
pg
I would be dubious about joining a company that spent its first million of
investment on a domain name.

~~~
staunch
Some domains are truly worth $1 million. If the guy has plenty of additional
money to invest, why would it matter? A really great domain can increase your
chances of success.

~~~
pg
It's not necessarily a mistake to spend a million on a domain. What's alarming
is when it's the first thing you do.

~~~
prpon
PG: What do you think of the equity offered?

~~~
pg
I agree with the other commenters that it's an employee amount of equity
rather than a cofounder amount. I don't know enough to say whether it's a good
deal or not; that depends on the company. But what little we're told doesn't
sound encouraging.

------
staunch
This just came up in a thread. Jim Clark (who was hugely successful prior)
invested $4M in Netscape to get it going. Andreessen got 10%. Now maybe this
guy could argue you're no Andreessen, but you can point out that he's no Clark
either, and hasn't put in $4M.

------
jeffarena
You have an opportunity here if you think the business plan has legs. 10% is
an upper bound for what you should expect, considering he's paying you a
salary and benefits. 2% seems too low, IMHO, so I'd certainly push back on
that amount. However, if you are in a position to forgo the salary and
benefits between when you join and when the company raises capital (assuming
that is in the cards), you should consider that in exchange for a larger
equity stake. Depending on the amount of time between when you join and when
you plan to raise, I'd say that number is somewhere in the 15-30% range. Good
luck!

------
c1sc0
If you're in it for the big exit: run away and don't look back. If you think
the work is interesting, consider if working on the problem is worth the pay
cut. Treat the offer as a job offer & nothing more.

------
jacquesm
If you get a fair salary and you're given a piece of the company that's a
pretty good deal when he's already invested that much, but that does not make
you a co-founder, even though that might sound nice as a title.

A co-founder is someone that is carrying a good sized chunk of the risk and
that is likely not going to be receiving a market rate salary for a long time.
A co-founder would see the stock as their compensation and since it's risky
stock there would be more of it.

I can't say much about the risk here, there is not enough info in your post to
take a stab at that but unless the guy is very wealthy he must have thought
through the risks himself and your risk is limited to a small fraction of what
you'll make over those four years in salary.

If it's less than what you made at your last job then maybe you should shop
around a bit and see what your real market value is, that will give you an
idea of the 'hidden cost' here, which in turn will give you an idea how much
that 2% should be worth to make this worth your while.

2% is not much at face value, but if this is the next Oracle or google it
might still be worth your time. More info->better advice.

~~~
andrewtbham
"if this is the next Oracle or google it might still be worth your time".... i
think 2% of the next google or oracle is worth anyone's time unless you're on
the fortune 500 list...

I think a somewhat plausible best case would be a $50 million exit and 2%
would be a million dollars.

------
andrewtbham
2% and a salary is fair in my limited experience... one of my friends had .5%,
the company sold after 3 years for 60 million, he got 300k. He didn't get rich
but the last company I was with I had options and they got bought out and my
options were worthless.

Here is a decent article... seems consistent with what people tell me...
[http://www.tonywright.com/2008/a-newbies-guide-to-startup-
co...](http://www.tonywright.com/2008/a-newbies-guide-to-startup-compensation-
or-stock-options-will-make-me-rich/)

------
damoncali
Think of it this way:

You start a company with him, and have an outside investor give you $1
million. That's a large angel/small VC round. Say it's worth 30% of the
company. Would you split that remaining 70% at 68/2 with the guy if he
_hadn't_ put any money in?

More importantly, it sounds as if he already considers you an employee (as
opposed to a founder). If you want to be a co-founder, this wont end well.

------
charlesdm
I wouldn't do it.

If you're being offered 2% on those terms then I'd rather do my own thing, but
thats just me.

------
phlux
I am in a similar situation, where I am 'founding' a company where my
cofounder is fronting the money and has the sales contacts to make our venture
happen. I am doing all the design, planning and development (hiring a dev
team).

I require 10% preferred with up-to an additional 10% common in addition to a
monthly salary (we are still negotiating the salary)

If I were you, I wouldnt take anything less than 10%

Here is what you should think about:

Assuming that you will need to go get a series A from VC if your venture gets
momentum; you're really talking about splitting up 40% of the company. So at
max - your share would be ~20%

As he is fronting the money - and may not need VC, therefore keeping the
60-80% yet your founding and BUILDING the thing, upto 20% is perfectly
reasonable and fair.

I would ask for a mix of common and preferred - with a set min of preferred
that you want.

