

Ask HN: How much equity for first employee? - paiprog

I am a web developer who was contracted by a previous employer to build a website. A year later, the website is live with traffic and revenue trickling in.<p>My contract is coming up for renewal, and they want me to join the company as the first and only technical employee. They want to offer me equity in the company, and I'm trying to find out how much is reasonable.<p>Some notes about the job:<p><pre><code>  * I have been the only one working on this website
  * I accepted a fair market rate for the job
  * The job turned out to require a lot more than originally asked (1.8x amount of hours)
  * Everything was completed on-time
  * I enjoy working with these guys
</code></pre>
To sum up my perceptions:<p><pre><code>  * I think I'm valuable to them
  * I think I have a lot to offer in terms of growing the company
  * I think they know this
</code></pre>
Considering the amount of hours I've worked, my fair market rate doesn't seem so fair anymore. I'm trying to offset this with negotiating for more equity.<p>I've done some research, and I've seen equity for non-founders range from 0.5% to 25%.<p>My question, is it out of the question for somebody in my position to ask for 10-15% equity?<p>This question has been asked before (http://news.ycombinator.com/item?id=73674 http://news.ycombinator.com/item?id=698469) but these didn't really answer my question.
======
grellas
First-employee equity grants are normally limited to the 1-2% range (at most),
as opposed to getting 10% and higher grants made to founders, for the
following reasons:

1\. First employees usually work for standard salary/benefits and therefore do
not take anywhere near the level of risk taken by the founders.

2\. First employees normally have no role in conceiving the core business
model that, in a good startup, will be perhaps the most valuable asset
available to the company.

3\. First employees normally compete with many other potential employees who
are ready to market their services to the company for salary/benefits, plus
some modest equity compensation.

4\. Once founders have reached the stage where they want to hire a first
employee, they have usually gotten past the stage at which the risk level is
at its highest (for example, here, someone obviously had to decide to pay you
for a year's worth of consulting time, which likely was not cheap, when the
prospects for getting any return on that investment were at their most
speculative).

Having said this, there is no magic formula in this area. To the extent that
the above elements do not apply to your case, you can argue that you should
get a larger grant in exchange for taking greater risk, for being
indispensable, or whatever.

In this type of scenario, you will likely get a restricted grant or an option
grant. The former is immediately taxable, the latter is not. Both constitute
equity grants and both will be subject to vesting. Thus, you will need to
negotiate not only the size of any grant but also the associated protections
for your position (how much to be immediately vested? what percent, if any,
accelerates on any termination without cause? or on acquisition?, etc.).

For a few basics on restricted stock, see
<http://grellas.com/faq_business_startup_006.html>.

Hope this helps.

------
jnaut
I will suggest make it a three phase deal.

In phase I

0\. Keep in mind your expectations and the fact that they are not to be let
loose in this phase.

1\. Put the (very) brief of what you have done for the company in the last one
year, so that all in the room are in the same picture. Also that you like the
company and the people and would definitely like to continue. This will help
you in point 3 below.

2\. let them know about the problems you are facing with the over hours from
what was commited (40 - 70).

3\. Express your intentions about joining with equity and are expecting
something fair that compensates for the extra efforts you have (and will be)
put, as specified in point 1,2.

4\. Ask them to put a proposition on the table.

5\. Try to scrounge here and there a bit, see if they have something more in
mind that has not come out yet.

6\. If the deal is at your liking - take it.! - done. Else, just tell them
that this is less than what you expect and you will get back to them in a
couple of days.

This will also give them time to review and upgrade the offer. Since you
didn't like it and as you said that they know your value, hopefully they will
consider upgrading the offer.

\------

Phase II

Talk to people or ask on HN at that point again, you will get better advice
with better information at hand.

Prepare two cases in mind:

1\. Worst: If they don't think that you are that important as you think and no
negotiation is allowed - no analysis paralysis - just Y/N

2\. They are looking to upgrade the offer:

    
    
        2.1 Avergage: Not to your likeliness but to some midway
            Decide you lower limit and keep one thought in 
            mind for anything below that - Y/N. 
    
        2.2 Best: To your likeliness - Y
    
    

Remember: this is where the lines are drawn, you cannot go back on the Y/N of
1, 2.1 once decided form here.

Give them a call to check what have been thinking, are they looking for an
upgrade in offer or not and accordingly fix the next meeting.

\---------------

Phase 3

With completely figured out Y/N for all 1, 2.1 just behave and negotiate hard
in the room.

If the meeting has a conclusion - good.

Else, if they ask for, give them some but limited (a week max) to turn around.

------
brk
_My question, is it out of the question for somebody in my position to ask for
10-15% equity?_

This is most likely WAY too high.

Are they offering you _equity_ or _stock options_? These are very different
things.

What is the value of the company (even if approximate)?

What value does the website and this position in general (ie: not you, just
any random webmin) add to the companies value?

What do you think you bring to the table over and above a web developer/techie
in general?

What other high-level adds do you see them reasonably hiring in the next 18
months?

~~~
paiprog
Thanks for the reply.

From my understanding it would be equity. I'm not sure what the valuation
would be. I do know between the 4 partners, they've invested a little over
100K.

The website is the company. I took the project from an idea to reality, so
over the last year I've learned their industry inside and out.

In addition to all of the technical stuff, I have handled all marketing for
the website which has resulted in visitors and revenue. I also do lots of
strategy planning for ways to grow the business.

I don't see them hiring any high-level positions in the next 18 months. I
suspect in the next year one of the partners will move to the CEO role and
I'll move to a CTO role.

~~~
brk
The amount they've invested is some what irrelevant, except to maybe establish
a minimum valuation.

I figured that the website was the company, but thanks for confirming. You
also should establish how many other people in their world could have done
what you did (and be realistic here). The less uniqueness you bring to the
scenario, the less valuable you are overall. This is simply a datapoint.

On the plus side, it does sound like you are a valuable player to the company.

You probably do NOT want equity though. Equity has immediate value, which
means you will have to pay capital gains taxes on that. If the company is
valued at $500K and you get a 10% stake, that 10% is worth $50K. Are you
prepared to pay taxes on that amount? Options are probably better. (IANAL, and
this is a gross summarization).

You mention there are 4 partners. Let's even say that you all are equal (and
in reality from what you described I think they would value their stake above
yours). If you each got 10%, that sucks up 50% of the stock and will (again,
summarization) make raising any future capital more difficult.

It also sounds from your other posts that you are somewhat very green to this
kind of negotiating, and that can hurt you. I would spend a LOT of time
googling and reading about topics like equity vs. options and golden
parachutes and the like.

Based on the few words that you've posted, _I_ would probably look at
something like: 5% stake as stock options. 1 year cliff, 4 year vest 110%
market rate salary Some sort of MBO bonus (either on top of the salary or a
90% salary and MBO plan to get you to 105-110%) Contract assuring you 6 months
severance plus 1 month for every year of employment upon termination for any
reason (basic golden parachute and not terribly uncommon).

10% _seems_ high for stock. 5% is probably more realistic. In any case you'll
likely end up with no more than 75% of what any of the founders have allocated
to themselves.

Given the situation you should get a salary slightly above market. This is
"fair" for everyone.

The contract would be a negotiating point and you'll probably have a hard time
with that one. But I would personally probably still ask for it.

A lot of this hinges on how experienced the founders are all well. If they are
also new to this they may be offended and think you are over-reaching. If
they've done this before, probably not. I'm also assuming that you carry
yourself day-to-day in a manner that is commensurate with my suggestions. If
you act like a child and have a cube full of action figures, it's harder to
negotiate...

------
credo
>>My question, is it out of the question for somebody in my position to ask
for 10-15% equity?

10-15% seems too high. As you mention, the 0.5% equity is more common However,
I think that it is hard to come up with a percentage without knowing how big
the pie is.

If you expect the company to be worth $200million in n years, 0.5% is a great
number (as long as n is reasonable). If you think the company may be worth
$100K in n years, 0.5% is peanuts.

Perhaps you should hedge your bets with a decent salary + some equity.

------
javery
The important question is if they will be paying a salary and what kind of
salary will it be? (will you be taking a lower rate then you make now, etc).

If you are being paid a good salary it would be harder to justify a larger
piece of the pie. If you are working for peanuts, or even free, then the sky
is the limit.

~~~
paiprog
The initial salary I negotiated for I thought was fair. It was market rate in
my area.

The problem is I ended up working way more than 40 hours/week, which diluted
my hourly rate.

I see this as a continuing trend. I would have a big problem working 70 hours
a week for my current salary, which is why I'm trying to figure out what % of
equity would be reasonable.

------
sharpn
One approach you can use:

If you're working 1.8x fair rate, work out what 0.8x your salary is & imagine
you were an investor with this sum to put to work - how much equity would you
require? That's a starting base for your negotiation. Good luck.

------
seasoup
Have a percent in mind when you come in, but try and make them offer before
you say the amount you have in mind. It's good negotiation to get the other
guy to say the first number. Then, if they come in way below what you want,
tell them that this number represents significantly less then you were hoping
for.

Keep in mind that if they do lowball you, you can always walk and start your
own company. You now have the experience building a site from scratch and you
can do it again yourself.

------
cgherb911
Do they have an evaluation? When negotiating equity before an evaluation is
set, there is always funny money going on. What do you really bring to the
table? What will be your position in the long run? Will you be more of a CTO
position or a programer? If you're the only one actually creating the website,
creating the technology then without you, it's just a good idea. Whatever
percent you choose to negotiate for, be prepared to have a well documented,
planned argument.

~~~
paiprog
I definitely see myself more in the CTO role than programmer, which is why I
feel justified asking for so much.

 __ _be prepared to have a well documented, planned argument._ __

Thank you, this is good advice.

