

Ask YC: Normal Options/Equity for Employee Number 1 - auston

Not sure if this has been posted before, but I have a few questions.<p>1. What would be considered fair equity for employee number one, in a startup, considering there is another developer and slightly below market pay (let's say... 25% below market, 75k when market is 100k) with an incomplete product?<p>2. What is considered a normal/common vesting period for equity?<p>3. Lastly, what are the downsides of a revenue share only package?
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pjackson
As with most things: it depends.

How much risk have you taken out of your business? What is the market size and
upside potential? What is employee #1's contribution expected to be? Is
employee #1 your chief technologist, your CMO, or something different?

Have you closed angel or A-round funding, or are you paying them out of your
pocket?

I am an East Coast startup person. Employee #1 at a post angel pre-A startup
out here wants at least 1-2% with some hedging against dilution when the VCs
enter.

Equity at the startups I've worked for is 4-year vesting with a 1-year cliff
and monthly vesting at month 13. Most savvy negotiators will want a nut of
options that vest immediately on acceptance.

If your product is not complete and you can't show that the market is itching
to buy your product, a revenue-share-only package will be impossible to value.

But then again, same with the options.

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auston
Not much. Approx 5 million businesses. Employees expected contribution is to
finish development of system. Yes (Chief Technologist).

Thanks for the advice.

~~~
pjackson
Without knowing much about your particular business, I'd say you should expect
to yield 2 percent of the equity and hold out for a proven rock star.

I'd avoid any instant-vesting grants if it comes up unless that employee is
bringing you customer #1 or #2, or a significant partnership out of the gate.

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dshah
Lets remove the word fair, and I'll submit the following:

1\. Options: 1% - 5% since this is a "non-founder" early employee and you
already have another developer.

2\. 4 years vesting with 1 year cliff seems to be "market" (i.e. the most
common). After the cliff, vesting is usually pro-rata on a monthly basis.

3\. The big downside of a revenue-only structure is that it does not attract
the best candidates. The risk is skewed too much (the person you're trying to
recruit is taking too much risk).

My two cents. Situations vary widely (on #1), so the standard deviation is
pretty high.

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blader
1\. It depends (mostly on company financing stage and valuation).

2\. 4 years, 1 year cliff.

3\. It's an uncommon structure that won't align the company's interests with
your employee's. Revenue up front and value building don't always go hand in
hand.

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ojbyrne
As an aside, <http://venturehacks.com> is a great site for questions like
this.

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vaksel
From #3, are you asking what equity someone would want to work for free?
Because if you are you'll never find anyone who'll want to do that.

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erdos2
1\. Zero

2\. Infinity

3\. It fails to maximize your expected utility while minimizing everyone
else's.

