

Demands from first employee joining our startup - bobdilly

So I am one of the founders of a growing software startup and there are 3 of us in total, we have recently received some seed funding but currently none of the existing founders are taking a salary.<p>We need another technical guy - software engineer type - to help accelerate development of the projects we are working on, and we have found someone who seems very keen and competent.<p>We have proposed that this guy join us on a 6 month contract, as kind of a trial period, that would then change into a full time position if everyone is happy.<p>The problem is that we cannot yet afford to offer anywhere near a market rate salary and so this guy would need to take a risk (he would have to move to London from Germany) for a job at near minimum wage. But we expect that in 6 months time we will have received second round funding which would enable us to pay a decent salary.<p>The potential employee still seems very keen to do this although he is now wanting assurances about the future employment contract that would be entered into after the initial 6 month period.<p>Basically he wants to be assured that IF he is accepted into the company after 6 months to continue working, he will be given an agreed equity stake.<p>Love to hear some advice, should we agree to this? Is this an unreasonable request from an employee?
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regularfry
Under those conditions, I'm surprised he isn't asking for a decent chunk of
equity up-front. You said it yourself: "this guy would need to take a risk."
Compensating a risk with a fixed payout is more than a little shitty. Also:
think hard about the incentive structure you're building for yourselves here.
If he gets equity when a) the startup gets through a second funding round in 6
months, and b) _you also decide to continue his employment_ , the rational
thing for you guys to do is ditch him in 5 months and 29 days if the company
is going well. If I were him, I'd be _really_ careful about getting into that
situation.

You've got to remember that the fact that nobody else is taking a salary is a
choice _you guys_ have made, it's down to _your_ personal financial
situations, and it's not something you should hold over someone else as a
justification for not paying them. Especially if you need him that badly.

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dchichkov
Even if he would ask for a decent chunk of equity upfront, that wouldn't
change much. It would be no-cap equity from common stock. Would you put your
money into this?

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bobdilly
What do you mean by this? Why would he not want say 5% equity if offered?
cheers

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mikemoyer
You don't have to give up anything upfront (see my earlier post on Grunt
Funds)

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jusben1369
Not all all!. It strikes me that your employee - if anything - is too
reasonable. It seems you're asking him or her to:

\- Take a salary at substantially under market \- Take a chance on a startup
that has very little traction (just yet) \- Move countries/locations

If I understand it correctly or they are asking for is a very clearly defined
"If it all works out then in 6 months I want x% of the company" Seems super
fair.

My only counsel - and I think this works for both sides - is a minimum and a
maximum range. For example no less than 4% and no more than 10% depending on
how you perform. This works for both parties. If they're good but not great
you can have the conversation after 6 months "We want to keep you on and
around but not at 10%. Here's the non emotional, rational reasons why 4% is
the amount we are comfortable to offer" If 10% is hard coded into the
agreement you might have to cut someone who can otherwise be a valuable member
because they're not worth "that much" That helps you and OP. Secondly, if
gives them super motivation to contribute as much as possible during that 6
months to maximum their %.

One final note. What happens if you can't raise any more money for 12 months.
Funding is a beast. Have you built that possibility into the dialogue
anywhere?

Good luck!

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stevenwei
You want this guy to move across countries and work for minimum wage on the
hope that you'll be able to raise another round of funding in 6 months?

Sounds like you're looking for a fourth founder, not a first employee.

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nandemo
> _Is this an unreasonable request from an employee?_

To put it kindly: if that guy posed the question here from his point of view,
very likely the majority opinion would be "walk".

There's a lot of programming jobs out there that pay more than the minimum
wage. Even if you agree with the equity proviso, after 6 months any of these
things could happen:

* one of the founder leaves and your company stops growing

* your company doesn't get the second round of funding right away

* you decide the guy isn't performing well enough (I don't know how this would affect his prospects in UK/Germany, but in some places a 6-month stay would affect one's image significantly)

* the guy goes well but you decide to hire another person instead of hiring him full time (thereby paying market salary and giving up some equity)

* the guy goes well but you decide not to hire him full-time, for _any_ old reason.

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pygorex
There's a few things you can do:

* Drop the move to London requirement and allow him to telecommute. This could especially be appealing as he's working below rate. * Hire him on at a full salary with the understanding that he will defer a significant portion of his salary. He can defer it towards equity (maybe with a multiplier and definitely with a cliff) or defer until you close another round of funding (at which point he is paid a bonus equal to his deferred salary). * Depending on how well you know and trust this person: give him a small equity stake up front with a regular vesting schedule every 6 months.

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mikemoyer
I love hearing problems like this! I just posted a book on this topic on
Amazon.com, it's called Slicing Pie (mike moyer). The basic concept, called a
Grunt Fund, is to account for the different contributions people make using
hypothetical values. The % each person deserves is proportional to what they
contribute relative to others. The point of the book is to address problems
exactly like this.

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regularfry
Interesting. You shift the problem of all hours-worked not being made equal to
one of all rules deciding how to value hours-worked not being made equal. I
don't have a gut feel for how that might play out, but it does seem like it
might be fraught.

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mikemoyer
Hi Regularfry,

I'm not sure what you mean?

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regularfry
In a hypothetical typical situation, you have the problem that up-front,
before anybody has actually done any work, the assumption is that everyone
will put in equal effort, so everyone gets equal share locked in from the
beginning. Someone doesn't pull their weight, the shares suddenly look out of
whack and people get annoyed.

So, you could try the simple fix: a grunt fund calculated on the simple
assumption that all hours worked are made equal. Say one person does 60 hours,
the another 40, and you get a 60/40 split. BUT: the person doing the 40 hours
was working on a patent application, and the person who did 60 was just
bashing out template HTML. Not only that, there's a third person who's fronted
some cash for a lawyer, and they don't get anything because they're working
16-hour shifts at their day job and haven't put any actual _hours_ in. The
shares look out of whack, and people get annoyed.

Next - and this is where my impression of the grunt fund idea comes in - you
define an exchange rate between the various types of input up-front, so a 1
hour working on a patent application gains equal share as 5 hours writing
HTML, or $100 paid out of pocket. Everyone is happy, everyone gets a share
they feel is proportionate to the value of their input, and everyone's working
towards the same "pay-off" day. The question is, what happens when it turns
out, say, that they don't need a patent after all? The patent-writer's work
has no value at pay-off day, except in a certain nebulous "we had to go
through that learning to get here" way. Not only that, but the HTML-wrangler
now has an incentive to get the company to pivot into that situation so that
there will be no more patent work, and lots more HTML work. That's a weird
incentive.

That's what I mean by the trade-off: in the first case, you have total
uncertainty over who's actually going to do what. In the second case, you have
uncertainty over how many hours people are going to work. In the third case,
you have uncertainty over the value of those hours at pay-off day or, to put
it another way, you have uncertainty over the accuracy of the exchange rates
you define at the start.

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IsaacL
Why not just give him equity with vesting and a 6-month (or 12-month) cliff?

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dchichkov
You want to pay him below market salary, right? Practically that means that
you are asking him to invest 'market salary - your salary' every month.

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devs1010
wow you are out of line to expect anything for minimum wage and,not give him a
very large share in the company unless he has no experience and its more of an
internship

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bobdilly
Also what would be a reasonable equity stake to offer?

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devs1010
equal to whatever anyone else has, adjusting for who's been there longer, so
initial founder still has the most, etc

