
Ask HN: About to give 5% equity, any pitfalls to avoid? - abbadadda
I&#x27;m planning on allocating 5% equity to a co-founder &#x2F; dev. Are there any pitfalls to avoid? Any preferred structures with good incentives? Possible horror stories with valuable lessons?
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mchannon
Having done a 95%/5% or similar arrangement in the past, here are a few things
I didn't consider:

• Unless the company's already been generating substantial revenue, 5% is an
implicit message that what you've brought to the table already (an idea maybe)
outweighs what this person could contribute working their hardest by a factor
of ~10. That's out the window if there's salary on top of that, but if it's
straight equity, it's an "I'm 10x better than you" implicit message that will
color the relationship for the duration.

• Say you take on another 20% from a cash investor. Do you both get diluted
evenly or do you cover it out of your lion's share?

• Make an effort to value it for them. Telling them you have 10M shares
outstanding and you're offering them for $0.10 apiece, even though those
numbers are subject to change, sounds a lot better than "will award you
100,000 RSU's at a strike price of $0.005 per" without making clear what those
currently are priced at to investors, or the total number of ownership units
outstanding. Always resented companies that didn't figure this out.

• Find a way to make it common, non-voting stock. You don't want to get in a
situation where they have to be present for votes (or worse yet their votes
are necessary to get your way after you get diluted with additional
investors).

• If you're an "egg" of a company, pre-revenue, based on your idea and both of
your hard work, there's really not much case to be made for your share being
95% instead of 50%. Greed, for lack of a better term, may be good, but a large
amount of equity says "I'm going all in on you" and inspires the best people
to stick around and contribute in ways you can't, even carrying you when you
stumble. If someone offered to marry you and wanted to split the marital
rewards 95/5, with you getting the 5, would that sell it?

• If the person's only 5% material then I'd suggest they're 0% material and
you should simply pay them a salary, avoiding the potential perceived insults
and headaches associated with equity.

• Do this as a C corporation, not an LLC. Everyone understands C corporation
rules. Everyone makes up their own LLC rules and this can cause huge headaches
down the road.

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rajacombinator
So long as you have some form of vesting (for everyone) you should be good to
go. Edit: if you want to be an extra good person there’s some tax filings your
employee could benefit from that you should make them aware of, in case the
stock is ever worth something. (83-b election I believe...?)

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skndr
Make sure you have vesting (and check the footnotes):
[https://blog.ycombinator.com/splitting-equity-among-
founders...](https://blog.ycombinator.com/splitting-equity-among-founders/)

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remilouf
I don’t know how this works in the US but what comes to mind is voting rights.
It may seem unimportant now, but might come and bite you in the a __later. It
really depends on your relationship with this person.

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tinktank
reverse vesting on a 36 month schedule is the way to do it IMPO

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ihavelorda
Never give any equity. In future 5% might be worth million which could be a
nice gift to your future wife or kids.

Would you give 5% to a developer whoes skills you can buy off the market for
cheap? Think twice.

~~~
cm2012
It's far more likely to be worth $0. And there is absolutely a marginal return
to happiness with more money anyway.

