
Ask YC: Thinking of joining a startup - is this a red-flag? - paulgb
I'm considering joining a startup as an early employee. The company has a promising product, a smart and passionate team, and a big client. However, the team hasn't decided what share of equity everyone will get and doesn't plan to until they have something to divide. While I trust the team and I'm sure they intend to fairly distribute the equity, I worry that this could potentially cause tension in the team. Am I worrying too much, or is this something I should be concerned about?
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dkokelley
Just tell them you'll join on the condition that equity is on paper. If
they're your friends, explain to them that it just makes sense to do this
right away in order to focus on your business and prevent any greed or
disagreements.

Imagine this hypothetical scenario: 1 Year from now, you have a decent amount
of cash flow, and are steaming along smoothly. As far as personal income is
concerned, you've all somehow survived on savings, credit, and a small salary.
Now an investor comes up and wishes to invest, or say that you have a buyer or
some other liquidation event. How will you split the harvest? Now each of the
founders looks back and evaluates how much they feel they've contributed.
Disagreements arise. The programmers claim that they built the product, the
sales guys claim that they brought the income in, and ultimately, the legal
owner with 100% equity gets the money and you never speak with each other
again.

The moral of the story: It's easier to divide a hypothetical pie now than a
real pie later. Get the equity worked out now.

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tptacek
I'll be the contrarian here.

Unless you control the company, or the founders (or whatever the
"board"-equivalent is at this nascent stage) are dumb, no matter what the
paper stock agreement is, you can get screwed.

All you people with private company options plans are pretty much deluding
yourselves about your recourse in the event of an unfavorable (to you)
liquidation. The pecking order is, latest VC, VC, founders, every executive,
and then you. No matter what your paper says, everyone above you in that chain
can screw you over.

I've seen this go both ways. Companies with 20-30MM+ in revenue have been
acquired by $5Bn gorillas, and the VCs and m-team walked with everything but a
few thousand dollars. And companies have gone public and larded everyone with
windfall options.

If you want to have some idea of how much your "equity" might be worth, you
need to know not only how many shares you're getting, but how many shares are
outstanding, how that pool is going to change after multiple rounds of
funding, and, finally, how much the company will liquidate for. A bunch of
those questions are basically unknowable.

So, you can work for people with this sketchy answer, or you can work for the
people who make shit up about their equity to make your questions go away, but
in neither case is the answer to this question really helping you. Do you
trust the team or not? Is the project worth it even if you don't trust them?

~~~
neilc
I think it is still a serious red flag if you're offered a job at a startup
but the equity terms haven't been settled yet. Sure, even if the terms are
fixed, it is possible to get screwed down the road. And of course, employees
are typically the last people to cash out if a liquidation event occurs. So
what? A written agreement in a nascent company might not be worth a whole lot,
but it's worth considerably more than a verbal one. If you aren't promised a
specific equity stake in writing (in addition to information about the total #
of outstanding shares etc.), then I'd assume you're not getting any equity --
you're probably not going to be too far off.

Furthermore, the fact that the equity hasn't been arranged is a sign that
these entrepreneurs seem pretty clueless. I doubt that any reputable investor
would sign on to invest in a company like that, for example. Not settling the
equity up front doesn't "save time", as you've suggested elsewhere: sorting
out the equity after the fact is likely to be _more_ time-consuming and
contentious than doing it earlier, when the company is smaller and consensus
is easier to reach.

~~~
davidw
Agreed - of course you can get screwed, but by running things that way, the
owner is showing how he operates, and it's a warning sign.

~~~
tptacek
You're out of your fucking mind if you think this is the major risk of joining
a startup.

If you want to see how the "owner" operates the company, ask questions about
the sales pipeline. Ask for concrete answers about what happens when the "big
customer" cuts them out of the budget.

If you don't know how the company's cash flows work, and you're reading tea
leaves about the founders state of mind from meaningless equity numbers, then
you're just wanking.

~~~
davidw
I'm simply stating that by not being clear and decisive from the get-go, you
can only expect more of same later on, possibly when it's more painful.

I didn't say anything about a 'major risk', just that it's a hint about how
the guy operates. Could be he's wishy washy, or that he's playing games, it's
not possible to know.

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dbc
If the promise isn't on paper, it doesn't exist. Don't let them guilt-trip you
by questioning your trust in them.

~~~
streblo
Agreed. You're doing volunteer work until you have your stake down on paper.

~~~
tptacek
He's using the word "employee". They're paying him.

~~~
slashcom
Start working if you're satisfied with the salary alone, but assume you have
0% equity until you've something on paper. If you really want equity, then it
needs to be negotiated now.

"It's all bullshit until it fits on a paycheck."

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brk
I'd be very concerned if I were you.

To me, that indicates that they haven't really thought the whole financial
model through very well, which isn't often a Good Thing.

Lot's of good opportunities out there right now, don't make a fast decision
that you'll later regret.

One thing you could do is get them to agree to some rough bracket, like you'll
get 10% of what the founders get, or at least 90% of what already-existing
employees similar to your role get.

~~~
tptacek
Say for the sake of argument the company has been in business for a year
before our friend arrived. Say there's another employee who has been there
since day 1, but is skills-wise pin compatible with our friend.

You think he should get 90% of what the day 1 guy gets?

~~~
brk
No, not at all. My post was a suggestion of some tactics he could try, not a
negotiation script to be followed to the word.

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skmurphy
They absolutely have something to divide, the current equity. You are working
against your own interest by helping to add value to the company without
setting your option price and share count. If the 100% owner isn't willing to
share now, something is wrong. There are a number of ways to address the issue
of actual performance: time based vesting, milestone completion vesting, a
cliff for a probationary period with no vesting (typically 6-12 months and
then the 6-12 months all drop in). This is a very serious red flag if they
have incorporated and tell you "they don't have something to divide." It's
much better to have the disagreements now (and perhaps let some folks go along
the way for poor performance) than effectively make it a competitive free for
all on an ongoing basis (can you imagine the discussion in 6-12 months "I did
more than you" "No I did a lot more than you, and I spent most of my time
fixing your mistakes"). You are right to worry about team dynamics.

~~~
tptacek
The company has a strong team, a strong product, and market traction. The
equity argument is as much about risk as it is about effort, and it looks like
everyone else on the team has borne far more of that than our friend here.
He's an employee, not a founder; his code contribution likely does not entitle
him to demand equity reallocation.

~~~
run4yourlives
His contribution entitles him to whatever he negotiates. That's why he needs
to have it very clear up front.

The fact that you and I disagree on his worth right now proves this.

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cstejerean
Definitely a red flag. There's nothing to be determined later. Later on they
will get more funding and be able to hire people without handing out (much)
equity and when there's a handful of developers already you won't have much
power to negotiate. Work out an acceptable deal now.

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theremora
issue of real estate and equity are not verbally binding. this has the
potential to turn bad. they have something to divide, the equity. are you
saying they have not incorporated and dont have stock? seems that you are not
paranoid and this is indeed a red flag. Keep looking or wait until the equity
issue is resolved.

~~~
paulgb
Thanks. They are incorporated, but one founder legally owns 100%.

~~~
jbyers
Don't even think about it. And tell them exactly why. The team will not
survive the stresses of early startup life with this decision put off. It's
going to be a hard discussion even now, just imagine how bad this will be with
revenue coming in the door, pressure to grow, some members of the team really
stepping up and others not working out.

~~~
tptacek
You have a BA in economics and have worked for some fairly large companies,
and, like me, you're a company founder. Tell me, is this ever a discussion
that is "easy"? And, is this discussion ever "settled"? Seems to me, it's
settled exactly until they (a) get funding or (b) hire a CEO, at which point
all bets are off anyhow.

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daveungerer
The people in the team you mention remind me of a mistake I made a few years
ago. It taught me a very valuable lesson though: Don't even think of
negotiating with someone unless you are prepared to walk away if no
satisfactory outcome is reached. But all the effort put in before splitting up
equity makes it virtually impossible to walk away. Talk about shooting
yourself in the foot.

These people obviously desire to be part of this business so much that they
don't care that they have no equity yet. Desire blinds.

Then again, my opinion is more than a little coloured by my personal
experience.

~~~
icky
> Don't even think of negotiating with someone unless you are prepared to walk
> away if no satisfactory outcome is reached.

Words to live by!

> But all the effort put in before splitting up equity makes it virtually
> impossible to walk away. Talk about shooting yourself in the foot.

If you're going into any sort of business transaction, always do it with a
watchful eye on sunk costs and opportunity costs.

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burnout1540
Get something written down on paper before you do any significant amount of
work for them. I went through this and spent several months working full time
for a startup only for them to try and screw me over. I had to quit and take
the issue to court.

The equity share was written down (although not in the form of a contract),
but the founder of the startup tried to add on a lot of ridiculous
restrictions which would essentially give him the right to strip me of all
equity for whatever reason he wanted. If I had had an actual contract he
couldn't have done that.

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bokonist
Oh god. That's an absolute disaster waiting to happen.

~~~
mixmax
Speaking from experience I can only second that.

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dazzawazza
While I am sure they intend to be fair, intentions aren't good enough. It's a
red flag, tell them why, if they can't fix it asap, walk away.

At the end of the day there is no 'fairness' in equity, just equity. Some
people will put in more units of work per equity unit then others. This
doesn't really matter if each person knows where they stand and what they
stand to gain and loose. This allows the members of the group to asses their
risks and rewards.

No one will be able to asses risk/reward so there could be a massive shock
when the reward is put in front of them.

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powerflex
You get what you negotiate going in. Period. Ive seen people negotiate
majority shares, get it, then request 300k salaries and leave in a huff. They
still get their millions of real stock.

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CoreyKossack
There are a few perspectives on this. The first one, which everyone else has
voiced, is that verbal promises are worth nothing. Things can always change
and you could be left behind...

However, in some ventures I have been involved in, equity distributions are
not decided in the very beginning because you don't know enough yet. If you
give equity too early, you can mess up big time in many ways. In my opinion,
the best thing you can do is sit down and talk through the terms. Figure out
what is going to impact the decision about how much equity you do receive, and
at what point in time that is expected to happen. Lay out some terms in
advance, even if the actual equity percentage is not laid out from the get-go.

The last thing to say is that contracts are only as good as the people who
sign them. Trust should be the #1 factor in your decision to deal with
business partners. That said, you have to protect yourself, so do what you are
comfortable with and roll with the punches. If you are not getting paid and
don't have a 100% promise of stock in the company, the time you are putting in
right now is "volunteer" time, and that is something that only you can decide
if it is worth to you. I wouldn't let the lack of set deal terms scare you off
just yet, if you think this is something you could really benefit from. But of
course, it's all your call!

Corey Kossack President Club E Network <http://www.ClubENetwork.com>

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DarrenStuart
get it in writing up front. if the company takes off and the founders get
greedy you will be kicking yourself that you didn't.

At the end of the day they may be paying you but you are taking the risk that
you might end up not getting paid if it goes wrong.

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bayareaguy
If they don't make you a good written offer then they haven't really done
anything to stop you from finding something better to do once the novelty of
working with them wears off (which will probably happen really fast the moment
you think you've been screwed, true or not).

It doesn't sound like they are complete fools, so the only rational
explaination is they aren't concerned with you staying or leaving, and neither
is their client.

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asisproperty
I agree with the comments below. Your worries are completely justified. In
fact, I'd call it wisdom and intuition, not worries.

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boredguy8
The problem that people have hinted at, but nobody's come out and said: Fair
changes when money's involved.

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flashgordon
do you know how much time you have before they may decide on the big equity
equation? Do you know how much the others are investing (especially money
wise)?

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pius
Be concerned: you've got to know what you're getting beforehand.

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foonamefoo
Huge warning flag.

~~~
tptacek
Because why? The team hasn't wasted their time dividing up their fictitious
millions?

~~~
run4yourlives
Actually, yes.

If you think fictitious millions are hard to divide, wait until they try to
handle real ones.

~~~
tptacek
Well, I don't have to wait; I've been through it. In my case, I had
essentially no documentation of what my equity was, just a handshake. And when
the company sold, I was treated profoundly well. Did I get lucky? I don't
know. I loved the project, loved the work, loved the company, and trusted the
founder who hired me.

On the other hand, look at anyone who held private company options in @stake,
a well-funded company with a solid 8 figure exit. All of them had their equity
positions spelled out on paper, and none of it meant anything, because VC
liquidation preferences trump your peon shares.

Look, I'm not trying to be petulant. I just want to point out that your
employee options are nowhere nearly as important as you think they are. If you
know how to negotiate and you're valuable and you keep your eyes open, you'll
do well. If not, no piece of paper is going to save you.

My advice to our friend is, if you love the project, trust the founders, and
don't have a much more solid job option, by all means, take the leap.

