

What do I need to research & understand to negotiate equity? - planckscnst

Contrary to the advice I've seen on HN many times, I took a position at a startup with a compensation much lower than I could have gotten elsewhere, with the understanding that I would get some kind of payoff when we make it big.<p>Now the company is finally incorporating, so we're going to have the chance to make that official. The problem is, I really don't know all the issues involved in how shares/options work.<p>-Is it simply saying I'd like x% or I'd like y shares, or is there more to it?<p>-Is it worth using vesting as part of the negotiation?<p>-Are there things to negotiate other than amount and vesting?<p>-I know this last question is a big 'it depends', and not useful for the majority of people reading, but I have no idea how much it's appropriate to ask for; any suggestion would be useful. Some insight into my negotiation position follows. We have several engineers, but there are two that would _really_ hurt if either left. One of those is myself. They would of course get along, but it would be very costly for them. The other engineer is a founding member. I love the company, the people, and the work I do. However, I love my family more, and I have to make long-term plans, so I am willing to leave if we can't come to an agreement.
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robfitz
First off, it strongly benefits both sides to reach the 'correct' agreement
here. If you over-negotiate and get too much equity, the CEO is duty-bound to
fire you once they realize their blunder, since it's irresponsible to the
other stakeholders not to. Similarly, if you are given too little, you'll come
to begrudge them and quit, significantly hurting them.

If you started with any salary at all, you don't have a good argument for a
founder-sized chunk. An early, key engineer is going to be somewhere in the
2%-10% range.

If you started without salary, and thus took founder-style risk, you might be
playing more in the 5-20% space.

For the overall company breakdown, You can assume the structure is something
like 10-25% employees/option pool, 75-90% founders.

For example, the founders might choose to give 5% to each of 2 key engineers,
leave another 10% to spread among all future employees & advisors, and divide
80% between the founders.

Vesting is a clear "yes", for everyone on the team including the founders.
Founders & employees should be on a 4 year vest with a 1 year cliff (if you
get fired or leave within the first year you get nothing, at the end of year 1
you get 25% of the equity you are entitled to, and then another 1/48th of the
total each month from then on).

The vesting thing is more like... if the founders don't do it, you don't want
to work for them because they're clueless. So you should insist on it because
otherwise the company isn't being run properly. If the founders don't vest
themselves, quit immediately because they are mis-aligning themselves with the
future of the company.

You always talk about equity in %, not a # of shares. Companies can be started
with an arbitrary number of shares (my last one had 7 million, some go with 10
million, some 100,000). # of shares is totally meaningless -- talk in percent
ownership. Founders saying "And you get 20,000 shares!" are trying to trick
you.

My advice here is to make yourself a mock cap table, and try to play with how
you would set it up to keep everyone properly incentivized, as if you were an
outside board member wanting it all to run smoothly.

So assuming there are 3 founders (1 of whom is the engineer), plus you, plus 4
other engineers, you might end up with something like this (where you are the
high-value engineer):

Founders: 75% (30/25/20), Current engineers: 15% (8/2/2/2/1), Future Pool: 10%

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damoncali
Talk to a tax accountant _now_ \- before you take any stock/options. You need
to understand the tax and cash flow consequences of options. If you don't plan
this right, you can wind up with a huge tax bill and no money to pay it with.
To make things worse, if the stock then goes to zero, you'll still have to pay
the taxes, even though you never saw a cent.

Negotiate vesting. Negotiate triggers (what happens if you get
acquired/fired/relocated). Negotiate the length of time you have to exercise
options after you no longer work there.

As for how much? As much as you can get. It's that simple.

~~~
robfitz
Agreed that options can be a bit of a tax chore. Since you're on board before
the incorporation, ideally you can just have your shares allocated in the same
way as the founders do, for a value of a ten-thousandth of a cent (or
whatever) per share.

Exit triggers don't apply to core engineers. They exist for roles which help
you get to an exit situation but don't have a role to play within the future
owner. Relocation as a trigger might be worth considering though.

And no, don't negotiate for as much as you can get =/.

~~~
damoncali
_And no, don't negotiate for as much as you can get =/._

Why not?

~~~
planckscnst
He outlined it in the first paragraph of his answer.

~~~
damoncali
That seems like a rather academic view of the world. I'll take my chances
asking for as much as I can get from people who are smart enough to know the
value of what they're offering.

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trussi
There are a bunch of triggers you want to include in the agreement, like what
if one of the founders become incapacitated or gets divorced? Will the
survivor/ex-wife now be your boss? You'll need to either dig up a well-written
agreement or get some good legal advice.

If you're attorney costs less than their attorney, you're most likely going to
leave an opening for you to get screwed in the future. Even if your other
founders aren't dicks, a future investor might be (i.e. screw over bob and
kick him out or you don't get my money).

Remember, this is like a pre-nuptial agreement. You have to write the
agreement as if you are going to get a divorce.

You want to make sure you cover owner equity distribution in the agreement. If
the other founders are pulling money out of the company, you should get an
equal share.

And you might want to consider a buy-out clause. This gives the other founders
an option to buy your shares. They will really like this. And you might give
up some upside, but still walk away with a nice pile of cash. Make sure to
structure it as best you can, so it's your option to take or not take. This
gets tricky, but is doable.

If you really think there is some potential for the company to make some
serious profit, you need to go find a $350-500/hr attorney to help you get
into the right agreement.

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chsonnu
Engineer's Guide to Silicon Valley goes over a couple of these questions and
scenarios.

