

Ask HN: Tips for evaluating a startup offer. - mwp

I have an offer to join a startup as a first hire and am trying to figure out if it is worth doing. There are two founders, one of which is putting his own money up to bootstrap with. In the first year, one founder will commit between 150k to 210k in cash, the other will work with no salary. Both founders are absolutely key to the idea working as they have the industry experience, smarts and contacts to get going with. They are looking at hiring two to three people, one of them being me. The offer that is on the table is this: 
Option a) take a salary at 40% market rate in year one and receive 3% equity. Option b) take no salary in year one and receive 6% equity. With both options, if we live into the second year, my salary would go to 80% of market value. If we live to year three, market value salary is restored. The exit that is being targeted is in the 30 to 50 million range. The company is not planning on taking VC with the founders sorting out more funding through personal finances and a little revenue in year two. The idea is solid. The problem is really interesting. We are all new to the startup world which is why I am a little worried about the offer on the table. We haven't started hacking yet so there is a load of risk around building the product and interest in it. I would be very grateful to hear what you think about the options on the table. I want to take the plunge, but only on terms that make sense.      
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joshu
How do you target an exit?

They are asking you to take founder-level risk. Probably not appropriate
ownership for that.

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mwp
Thanks for taking the time to answer.

I take your point about the exit. The numbers are the ball park that the
founders would be happy with to exit.

What would an appropriate level of ownership be for that kind of risk?

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iamelgringo
_What would an appropriate level of ownership be for that kind of risk?_

Working without a salary for a year implies founder level risk. Right now,
they only have an idea, and no code? I'd expect as much of an equity stake as
the other founder that's working without a salary, 30%.

Furthermore, if all the founders are willing to give me for my full time work
for an entire year was 6%, I'd run far, far away.

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clearheaded
One year without salary sounds pretty close to a founder level committment in
that first year. I am not so sure that 6% equity is adequate for your
troubles.

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trevelyan
I agree. If this guy is being asked to invest 100k for 6 percent of the
company, he should be able to justify a 1.5 million valuation for the
business.

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HardyLeung
First, I would recommend you spend some time to figure out the probability of
exit, and the valuation upon exit (including effect of dilution), and do that
based on your own analysis rather than just their sky-high optimism.

For example, say your base is $100K (at 100% market). The company has:

10% chance of exit at 50M in 2 years

20% chance of exit at 50M in 4 years with 2X dilution

10% chance of exit at 25M in 4 years with 2X dilution

25% chance of exit at 25M in 4 years with 4X dilution

35% chance of folding or exit at a valuation meaningless for common stock
holders

Assuming 3% at 40%, 80%, 100%, 100%

Case #1: = 1.5M + 40K + 80K + 100K + 100K = 1820K

Case #2: = 0.75M + 40K + 80K + 100K + 100K = 1070K

Case #3: = 0.375M + 40K + 80K + 80K + 80K = 655K

Case #4: = 0.185M + 40K + 80K + 60K + 60K = 425K

Case #5: = 40K + 80K + 60K + 60K = 240K

Average = 652K or 163K/yr (63% over base)

Is it good or bad? It depends on your perspective on risk/reward/experience.
It is not an immensely attractive offer based on these numbers -- in fact, I
would say an okay (not necessary great) offer from one of the hot startups or
solid name brand companies is superior to this offer -- but I just made them
up so you have to go through your own exercise and logic.

One thing you want to think about is that getting into the right company is
_far_ more important than being hired as a founding engineer. I think you'd do
yourself a favor in making a detailed evaluation of whether this company could
strike gold in comparison to the top ones out there. Is it ground-breaking? Or
me-too in a competitive landscape but acquirable? Keep in mind that by joining
this startup, you'd be making some commitment that comes with opportunity cost
(of working for something even better), so I would say spending more time
thinking whether this is a first-tier startup, or more of a second-tier. It is
okay to join a second-tier, but demand more.

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milan_cvejic
Hi, you should follow your dream, not others dream. If you are looking for
job, try to find one that offers best value. In this case, my assesment is
that option "a" is the best deal. You get some money, even if company does not
make it, and if company make it, you will get from 1M - 1.5M which is still
quite a lot of money.

Cheers, Milan

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brudgers
> _"We are all new to the startup world"_

That means the founders have no track record. That decreases the likelihood of
attracting funding should it be needed and substantially decreases the odds of
success.

According to Sivers it's not the idea which matters, it's the execution and
the exit numbers you are talking about require better than a brilliant idea
and better than brilliant execution. <http://sivers.org/multiply>

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staunch
I don't think it's by any means a total rip off. I'd rather have 3-6% of a
great company than 30% of a crappy one. If you really believe in these guys it
might be a good deal. No harm it pushing for more though.

