

Ask HN: What do you think of profit sharing? - jjones

I have been invited to help out with a promising startup.  There are 3 co-founders, and then 1 engineer.  He is currently building the entire site and they have invited me to help out.<p>Obviously, they have no money so they are asking me to join the team and work for free.  Rather than offer equity, they have created a profit sharing plan, where 20% of the net income of the company is split among employees who hold a share.  I would have 1/9 of this 20%.  Also the stock in the profit sharing is non-transferable, not sellable, etc.  It's only good while I would be an employee.<p>I've seen lots of posts about typical equity percentages after a round of funding, but what about early stage startups?<p>What kind of equity should I be looking for?  What about the profit sharing plan?
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nostrademons
This is so easy to game and screw the employees. All they have to do is
reinvest the profits back into the business (by, say, hiring more employees)
and that net income vanishes back into expenses. Meanwhile, the value of the
business increases through all that reinvestment, so the co-founders stand to
make a big buck when they sell out - at which point, you're left with nothing.

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gaius
This is true at the macro level as well, if companies form an alliance,
"profit" is whatever the one that actually touches the customer says it is. If
you are going to share anything, it has to be _revenue_.

What are these 3 co-founders bringing to the table if not money? 3 MBAs and 1
(or 2) engineers does not a viable company make...

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damoncali
That sounds really convoluted for a 4 person start-up. The further you stray
from the "standard" ways, the more unintended consequences you'll run into.

Profit sharing is not terribly helpful when you're not profitable, and many
promising startups aren't - by choice. Also, you have to figure out how
"profit" is defined (or more precisely, how it can be manipulated).

So yeah, I'd be careful. Even with the best intentions, stuff like this can go
sideways.

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notahacker
Basically they're offering you a theoretical possibility of a future dividend
(without any of the benefits of actually owning equity) instead of a salary or
equity. That's a terrible deal. The company has to be making around $2 million
a year in profit before your share of the profit starts to resemble an
adequate salary (assuming they haven't diluted your measly share by then). If
they exit before reaching that threshold then they've made a healthy sum of
money whilst you've done all your work for free.

Even if they returned with a much better deal on paper, I'd find it impossible
to trust someone that made that offer. And by the sounds of it, the company is
at a stage where even 1/9 of 20% of the equity instead of salary would be a
poor deal...

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lzw
So, they want your help now, for some slice of theoretical profits at some
future date, at which point they might be profitable. Further, they're not
splitting all the profits with everybody, but just 1/5th of them, and you
would get 1/9th of that even though you'd be %25 of the workforce. Meaning
they keep %80 of the profits and all the equity.

You'd be better off going into competition with them. I'm sure you can find an
engineer like the one engineer they have and split the equity 50/50. Or find
an engineer and one of whatever-it-is the other 2 co-founders bring to the
table.

This is not a promising startup if this is the kind of deal they are
offering... because they won't be able to get good people.

If you want employees who aren't getting big chunks of equity, then you need
to pay them a market salary.

You're giving up market salary and getting a vague promise of a fraction of a
theoretical future profits.

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lazyjeff
I don't have anything to add to what the other posters have pointed out
already, but holy crap this sounds like the worse deal ever.

