

Ask YC: What's a reasonable share of equity to get as the first developer? - myoung8

So there are 2 guys that have an idea for a company. Granted it's a great idea, if executed properly. They are offering the first developer (also the first employee) a 2% equity stake and no compensation at this point. Being that it's a web company, said developer will probably be doing just as much work as the founders.<p>Is 2% reasonable? I don't think so...I would expect an "unofficial" co-founder to get at least 10-30%.<p>What do you guys think? Do you have any experience in this kind of situation?
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geebee
There are two extremes in the equity situation. The first is where the early
employee is essentially a founder. There is no security, no salary, no office.
In this case, I'd think 2% is far too low.

The second is where the employee isn't a founder at all. This usually happens
once the company is stable enough to be around at least for a year or two. The
job comes with a normal, market salary. In this case 2% probably wouldn't be
too objectionable - the equity is a nice perk, but really you're hired to do a
job.

It sounds like these guys are trying to pay a category 1 salary and a category
2 equity package. If that's the case, I'd walk. Not only are these guys being
unfair, they sound pretty clueless.

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ekanes
The fact that they're offering you 2% for equal work/risk (after all, you lose
just as much as they do if it fails) says more about them than whatever idea
they're pursuing. I'd walk away.

~~~
Shooter
I'd RUN away.

They don't respect you at all and they're a completely lost cause. They're
likely to screw you over or replace you at the first opportunity and blame you
for any failures.

Two percent is insulting for the sole tech guy on a team of three. Even if
they had an absolutely BRILLIANT idea and SUBSTANTIAL experience in the given
industry.

~~~
brk
Insulting? In my experience it's actually not that uncommon. The "sole tech
guy" is only going to be that for a short period. Unless the company plans to
create something extremely simple and boring.

I'm not sure what you're basing your statements on. But it sounds like you've
gotten a very bad deal in the past. Or, you've had no deals in the past....

~~~
anamax
They're also going to bring in more suits later and yet the first suits don't
see that as an argument against giving them substantial equity.

We can argue about how much the superstar VP of marketing is worth, but we
both know that the question doesn't come up if the first few tech guys don't
hit a home run.

~~~
brk
"more suits"? C'mon, that just sounds childish.

Often the "first few tech guys" don't have to do much more than create a
working prototype.

It's extremely common (I'd venture to guess 80+% of the time) that the product
that is launched is substantially different than the original concept. So, the
initial coders are there to help prove the viability of the idea, not always
to write 100% production-ready code.

~~~
anamax
"Suits" is no more insulting than "tech guys" or "hackers".

As to the difference between the initial product and the initial launch,
that's just as true of the idea as the code.

In fact, experience with the prototype and its development is what reveals
what the viable idea actually is.

If the difference between the prototype and the product is large, the
prototype development clearly had huge value, and it was largely due to the
"tech guy".

If it's not large, the relative contribution of the tech guy ranges from
secretarial to huge, depending on the idea.

------
cperciva
Rather than asking if 2% is reasonable, look at it the other way: If you had
started a company and were looking at hiring these two people, would you give
them 98% of the equity?

~~~
brk
Interesting analogy, but I think it's flawed because he DIDN'T start the
company. I would say "if you DID start a similar company, would you give the
first random coder a double-digit stake"?

Then what do you give to the second developer? That guy is likely to do a
significant amount of work also. Then you need to hire other key positions.
Pretty soon you've allocated 300% of your company. Unless you're starting a
hotel in Vegas, that doesn't usually work well.

~~~
davidw
"The Company" sounds like it's worth nothing without code, though. You'd have
to know more about that aspect of it prior to making more precise judgements.

~~~
brk
I've seen more rounds raised with no code than I've seen raised with lots of
code and no business plan/idea.

Without more data, it's hard to know what the actual situation is here.

~~~
blader
We have enough data to know that the company can't even pay their first
employee.

~~~
brk
Technically we have enough data to know that the company PREFERS not to pay
their first employee.

~~~
sbraford
brk - while it's sometimes nice to have varied opinions here on News.YC, I can
tell yours will be modded down quite a bit.

This isn't "Suits News" or "B-school Guy News", it's Hacker News. I would view
reading this as more of a learning experience to see how hackers view the
world of startups, than trying to convert us to your viewpoint. Just my $.02,
and welcome to News.YC!

~~~
brk
Thanks for the info.

I hack a fair bit (mostly LAMP, where P = perl). I've created a few apps, both
web and desktop, and have built a few various departments for companies, and
have hired hackers in the past to work for me.

I've been on both sides of this 2% equity "problem".

If you guys all want to rally around the idea that the first developer in any
startup is worth a double-digit stake based on nothing other than a spirit of
camaraderie, that's fine with me, and I'm not offended by being modded down.

If you look at my various posts, I never said this guy WASN'T worth more than
2%, but I did say that there are more factors to consider.

Anyway, thanks for the info.

~~~
anamax
It's not the title, it's the reward for risk and contribution.

Right now, it's an unfundable idea. If his contribution makes it fundable,
that's significant.

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gnaritas
Um... no pay for working with 2 guys with an idea... full 33%. You have
talent, they have nothing but an idea (everyone has ideas, they're mostly
worthless), you should be treated as an equal.

~~~
brk
33%. And then what do they attract developer #2 with? A cheeze stick and a
case of Ramen noodles?

~~~
gnaritas
Wrong way to look at it. They aren't looking for developers... that requires
paying a salary. By offering no salary they're looking for another founder,
which means full share. If they want more founders, they all contribute shares
to bring then next on board as well.

~~~
brk
How the hell does everyone equate no-salary == founder?

An employee (that's what this guy can be) can do work for whatever
compensation model both parties mutually agree on.

The founders of this company are offering him employment terms. It's difficult
to say if those terms are truly fair or not because none of us have enough
info to judge fully.

I've known people who have worked for stock, "expenses" (leased apartment,
etc), product trade (I'll write your docs if you'll host my server farm), and
all sorts of other arrangements.

I think that too many people here are getting hung up on trying to achieve
"founder" titles.

In this case, they are looking for a developer, not another founder.

~~~
geebee
I agree that often no salary != founder. For instance, a recruiter, legal
advice, or short term contractor might agree to a small equity share instead
of a payment. Without more information, we can't be sure about the current
situation.

But it sounds like there are only 2 other founders, no employees, and no
product. I'm not sure if there is any funding or investment at this point
either. Because the original poster would be the first technical employee, I'm
going to guess there hasn't been much prototyping either.

Considering that this guy would be the third in the company and would be the
first guy with a technical background, I think it sounds like a no salary ==
founder situation.

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webwright
That's ridiculous.... Assuming it's really in "idea" stage, you should shoot
for close to equal partnership OR a decent salary PLUS 2%, unless:

-the business is extremely capital-intensive (which a web business usually isn't). If these guys need to dump their time AND millions of dollars into it, it devalues what you have to offer.

-they're far along in the process. Sounds like they aren't, but if they've got months of value ploughed into the business, you don't deserve an equal cut.

-they have tons of strategic value. If the business is selling toys on the internet and these guys have decades of relationships in the industry, that might skew the value.

Do the math on what 2% works out to in various exit events and do a bit of
research about dilution if you think this idea might get financing some day.
If you DO get a better deal, make sure to understand dilution and have a
decent buy/sell agreement that keeps you from getting screwed.

------
augustus
I have some experience in this area. I currently get 2% of a 7 year old
startup along with market pay. I used to have my own company too.

If I were you, I would give them options. Option 1. 2% is great if you can get
it along with market rate in salary. The other option is to get maybe 10% with
half of your market rate in salary. The final option might be 20% with third
of your market rate in salary. You get the idea.

This way you will find out if they are serious and maybe something will work
out.

I don't think you should take 2% with no salary under any circumstances.

------
hugh
Another way to think about it: let $x be the salary you could earn elsewhere,
and N be the number of years you'd wind up working for free. It doesn't matter
who you are, $Nx is a pretty substantial amount of money.

You're basically being asked to pay $Nx for 2% of a company at the "two guys
and an idea" stage. That doesn't sound like much of a deal. If I were an angel
investor I'd be wanting a much more substantial stake in the company for that
kind of money. Even YC usually winds up with at least three times that, and
they generally put in a lot less than whatever $Nx is.

~~~
brk
Good points. But keep in mind that YC and typical Angel's bring some things of
value like:

\- Other high-level industry contacts \- Experience \- Proven track record.

How does the OP compare in those regards, because that is (IMO) what
establishes value more than what your head count is in proportion to the rest
of the company.

------
yubrew
It's whatever you guys decide is fair, and that depends. There are web
businesses that rely on a strong sales team and you can actually hire an off-
shore team, so the dev guy is not too important. There are businesses that
rely on a technologically superior product, and a great dev with special
background knowledge. It all really depends on what their competitive
advantage is based on.

2% does seem to be on the low side though. Will you indefinitely make 2%, or
will you eventually make a salary? Yet another way to look at it is comparing
what you could be making at another start up, and dividing by 2% to get what
should be the present value of the company. For instance, if you could be
making $50k somewhere else, then $50k/.02 = $2.5 million. If it's just an
idea, I suspect it is worth much less than $2.5 million.

If you really do believe in the idea, you can always ask them how they came up
with the X% figure. Do this over the phone or in person, not e-mail. This way,
you can see their real time reaction.

------
brl
2% and no compensation? If it's such a great idea, walk away and go build it
yourself.

~~~
myoung8
Is that even legal? Lol.

~~~
falsestprophet
Yes it is absolutely legal. Unless you signed a non disclosure agreement or
they have a rock solid series of patents you can go right ahead and build it
yourself.

You don't owe these mba clowns a damn thing. They are trying to cheat you. I
wouldn't lose any sleep over it.

That said, these people sound pretty stupid. If I had to bet, I would say the
idea is dumb.

------
blader
You can't be serious. That is less than what I was offered at my first job, as
employee #6, WITH salary. Tell them to go stick it and work for somebody with
ethics.

~~~
myoung8
Do you mind telling us how much equity you were offered?

~~~
blader
Around 3%.

------
prakster
Agree with gnaritas. If there is no code at present, and you will be putting
in as many hours as each of the others, then the starting point for your share
is 33%. From there, add or subtract percentages for relative experience. If
one of the founders has tremendous experience in the field at hand, and you
have great experience in coding (but not "tremendous"), then you might agree
to say 20%...and so on.

------
brk
This is where the Equity Equation, and some other common sense factors should
be considered for your situation.

Will your contribution grow the company by more than 2% in value? (I would
guess most likely yes).

How easy it is to find someone else willing to take their deal (more
competition drives the price down).

Will you be "coding to spec", or "nurturing the idea"? Having an idea, and
executing an idea are 2 very different items. I personally have an idea for a
startup that I am working on with a friend. To bring it to life, I'll need a
couple of web developers. Those first couple of developers will be key to
turning my idea into a product, BUT there are many many people I can choose
from. Thus, I wouldn't expect to give them a double digit stock percentage.

You can't allocate all of the stock out on day 1 (well, you can, but it's not
a good idea).

Also, IME, there is no such thing as an "unofficial" co-founder. It's like
being sort of pregnant. You will either have an equal say/vote in critical
areas of the company (how much money will we raise. How do we lay out the cap
table. How much to we pay. When do we hire, etc). If you will not be
participating in those discussions, you are not an "unofficial co-founder".
You are employee #1. Big difference.

What is your 2% likely to be worth? What are the plans for the company? What's
the trigger point for pay (and how much)? What can you do to get more stock at
a later date? You might very well be able to come to some agreements like "If
I get features X, Y, Z and 27 done by 1-Jan, then I get another 2% share.

Also, you mention 2% equity stake. Is that a stock _grant_ or _options_ to
purchase stock.

Lot's of unanswered questions here, but I can tell you that stock isn't
metered out in proportion to your employee number. It's metered out in
proportion to what you are uniquely qualified to bring to the organization.

~~~
oditogre
>you are not an "unofficial co-founder". You are employee #1. Big difference.

If you're not getting paid, how are you an employee? If your only compensation
is equity, that means that you're putting as much on the line as the co-
founders, with an equal level of odds of getting a return on your commitment.
In that case, your payout on the gamble should be, if not the same, at least
comparable. If they're unwilling to offer that, then there needs to be a fair
salary from day 1.

~~~
brk
Employee is a pretty loose term. He is doing some work (coding) in return for
something of assumed value (stock or options). Just because he is not getting
an actual paycheck does not necessarily mean that is not an employee of sorts.

There is also no mention of how much of a track record the OP has in terms of
creating success. Everyone is going on about how this is such a raw deal for
him. If he has no real wins on his resume, this could be a huge opportunity to
create something that he can take a lot of credit for, and leverage that to
either co-found his next venture, or join an early stage startup with the
ability to demand a good overall package.

Sometimes you have to actually take a less-than-optimal deal to build up a
platform under yourself from which you can shout your next requirements from.

~~~
anamax
> Employee is a pretty loose term. He is doing some work (coding) in return
> for something of assumed value (stock or options). Just because he is not
> getting an actual paycheck does not necessarily mean that is not an employee
> of sorts.

That's true of them as well.

------
randomhack
Lets calculate. Assuming u work for $70k/year usually .. the expected payout
shud be $3.5m after 1 year for the offer to be reasonable. This is an expected
payout .. assuming a 33% chances of success given that its a "good" idea ..
the company shud be worth at least $10.5m a year later. Given that u are
taking such a risk .. and will do lots of the work .. u want 3-5 times that
money at the very least .. so do u think the company might be worth $50m one
year down the road with a proability of 33%?

Hmm .. the calculation is really slightly orthogonal to ur question perhaps

~~~
ajkates
haha, wtf?

I understand what you're trying to achieve with this mathematical model, but I
couldn't follow your logic at all...

~~~
randomhack
Sorry .. that was just a random thought in my brain .. heres the reasoning in
reverse .. assuming the company is worth $50m after an year with a probability
of 33% and worth zilch with probability of 67%, and assuming that u have a 2%
stake .. expected payout = 0.33 x 50 x 0.02 = 330k.

the estimate was optimistic in my opinion. so i wud say a 2% stake is not
worth it. its probably better to spend 1 year building ur own company i.e. one
in which u have a significantly higher share.

but of course it still doesnt answer the question i guess

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samwise
It all depends on their history/track record. I will take 2% of whatever terd
Mark Zuckerberg pops out next, just because of the hype and what he has done
so far.

~~~
anaphoric
Yes but he could pay you... These guys evidently don't have a pot to pee in.
No pay means no track record.

------
eusman
If thats their offer stay away from them and the next time discuss this before
hearing the idea.

Probably even if you never go after this idea with others, these type of guys
would even accuse you for their failure..

------
prometheus
This sounds typical to me, and I've been through this a number of times in
various forms. It's a classic example of why so many people are heading off to
do their own thing. Nice, eh? "8 million for me... 10K for you."

Imagine it's your company, your idea, your co-founder and you stay up late for
weeks, you incorporate, you structure 8M shares each, and 2M aside to "dole
out" to hire in people.

How much do you give your employees as you hire them?

Do you give them a bunch of equity "out of the goodness of your heart"?

Or do you do the Socratic thing and ask them, "what would it take?" Or make
your best guess at what it would take?

Or do you believe in ensuring long-term motivation of strong employees, and
give them a worthy amount? What if they turn out to be an underperformer?

On one hand, you could argue that ideas are cheap -- execution is hard. On the
other, plenty of people don't have many ideas, and need a leader to show them
the way and press them to excel. I claim that the real challenge is to both
have a great idea, and to execute well, and even if you do that, chances of
failure are still very high.

If you're not happy with the level of equity, look elsewhere.

If you don't have confidence and respect and faith in the founders, look
elsewhere.

If you're surprised that the founders are doing a poker-table-style "8M for
me, 10K for you...", pulling a huge pile toward themselves and giving you the
small peanut pile... get used to it, buddy.

------
sharpshoot
You should value how much equity you deserve based upon your expected future
value. Sure - you can crank out a prototype, but can you scale a development
team, speak at a conference, provide 'non-obvious' contributions to the
product? Can you hire other developers, make wide-ranging decisions about
which technology platform to use or are you a sockpuppet? If you are hell bent
on proving your value - what is your expected future value.

------
ajkates
It really depends upon a number of factors, though 2% does seem a bit low. In
my startup, the development end is receiving 50% of the total equity stake.
The other 50% is shared by those working on the business end (currently 1), in
addition to those contributing the initial capital contributions. I think this
is fair overall, since we currently have three developers, each receiving
16.67%

------
rms
Those guys are going to fail miserably.

~~~
DarrenStuart
If they are not going to pay you how are you being employed would be my first
question. I would walk away unless they offer at least 30%. I'll be honest I
wouldn't touch it with a bargepole. Lets face it they might have an idea but
you will not get any credit for building it and whats stopping them from
replacing you at anytime. 2% of nothing is worth less than nothing.

------
breck
Please tell them to read this message thread. You'll be doing them a favor.

------
coffeemug
While there are many ways to skin this cat, it seems like the right way to
approach it is to consider the offer from your POV, not from an obscure
universal concept of fairness.

Assuming you believe in the idea and in the ability of the two people to
execute, what do you think the valuation will be at the time of acquisition? I
know it's black magic, but suppose you arrive at a number of ten million. Once
you arrive at this number, make an estimate for the time frame of the project.
Suppose you decide the acquisition will happen in two years. Is 2% of ten
million ($200,000) after two years of work for no pay acceptable to you given
the high risk of the enterprise? If so, and you feel you won't be able to make
more money elsewhere, take the opportunity. If not, look for something else.

The valuation and time frame estimation is voodoo, but figuring that out is a
whole separate issue.

------
pius
I couldn't speak intelligently to your question without knowing the
particulars. Is there an existing codebase? Are the other people working full-
time while you're merely working part-time? Generally, how much skin will they
have in the game versus yours? Are you "Employee #1" or really a co-founder?
In particular, are you the first of, say, 10 other employees being hired?

There are a lot of people here making big statements about your situation, but
most of them don't seem to know what they don't know. Why don't you give us
more info so that you can get better informed feedback?

------
devnull
You need to provide a lot more info if you expect us to make a rational
suggestion. There are a lot of good questions and thoughts in the comments.
But at this point it's only speculations.

------
waleedka
You didn't mention what they're putting in!! If they're putting in their time
only, just like you, then you should get 33%.

However, if they're also funding it, paying rent, bills, marketing budget,
...etc, then you have to consider the amount of money they're investing in
your calculations.

And, sometimes, there are other things founders can offer in addition to time
and money. Does the startup require certain type of connections that they only
have? Things like that should also be considered.

~~~
brl
If they can't even afford to pay even a single paltry developer salary then a
can't see what they could possibly be bringing to the table.

------
ardit33
"Is 2% reasonable? " -- fuck no. What kind of loser would accept this term?

2% is only reasonable when there is funding, and the developer is getting paid
reasonably.

------
yrashk
I don't think 2% is reasonable, too.

