

Ask HN: What is “significant” equity? - BayAreaSmayArea

I&#x27;ve been approached with an opportunity to work at a new startup. I&#x27;ve known the founders for several years, working with them at one point or another. They understand both the business and technology side and have had several successful exits.<p>They&#x27;re self funding, offering competitive, but reduced from my current, salary of 100k and 2% grant. My risk is essentially nil with how good the job market is, and my upside will be nice if we&#x27;re successful. The position is first employee and lead architect. It seems like a favorable offer and it seems like the numbers line up fairly well for what I see for post series A startups.<p>Theres always talk here about not working yourself to death for minimal equity and not getting blinded by it, but being new to the startup side of things I don&#x27;t really have a clue about what &quot;significant equity&quot; means and the self funded nature of the business makes things more confusing. I don&#x27;t expect to get rich from it, but I think we&#x27;ve got a good plan and  history of executing well so we&#x27;ve got a good shot at turning time into a good payoff.<p>So, HN, at what point in the ownership percentage do you go &quot;all in&quot; on? 2%, 5%, 10%, 25+?
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brudgers
In my deluded world, significant equity is enough that you get rich if the
founders get rich and get wealthy if the founders get wealthy even if less so
in both cases.

It's not the $100,000 in salary over three years you didn't get in exchange
for taking equity after a deal which made the founders rich if not wealthy.
Significant equity aligns your outcomes and interests and gives you a seat at
the table when liquidity events are going down.

Significance is more of a sliding ratio. 0.5% is significant if the founders
each have 6%. 10% is significant if they have about 25%. There should be only
one qualitative step between stakes, and that step should reflect the size of
the company.

A final tell on significance is if the ownership structure is relevant to the
discussion. Significant equity alters it in a...wait for it...significant way.
It signifies that the offer is about more than a hiring decision. If the next
programmer passing the interview process would get the same offer next week
then the equity isn't significant. Gates and Allen wanted Ballmer, nobody else
was going to get 6% with an option to 8 because there was nobody else.

Good luck.

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mtmail
And in this context it's especially important that you (the first employee)
have the same stock type/class as the founders. You have disadvantages if they
have stock and you only stock options. If they have preferred stock treatment
or grant other investors preferred stock treatment then the company might exit
at $100 million and you still receive nothing.

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BayAreaSmayArea
yeah, its a grant with vesting period, not options. As far as type I'll have
to get into with actual contracts to sign but I believe we're all the same
across the board, talking in terms of fully diluted percentage.

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hakanderyal
The stock they offer you is to compensate you for the risk you take by working
for an 'unproven' company, that may or may not be successful, with a below-
market salary.

In post series A startups, there is already some 'proof' of success (generally
in the terms of growth), so salary offerings gets high and stock options get
low than a pre-series A startup.

Stock options/grants are tricky because of dilution and preferences. The 2%
can mean many things. How much the company plans to raise in the future? Even
if it's not planned, circumstances can change overnight, and company may need
to raise.

It seems you have a connection with founders, so it probably won't hurt to
talk to them about this issues.

In the end, it all comes to how much risk you are taking, and the compensation
you are getting for it.

~~~
BayAreaSmayArea
So thats part of my dilemma, I don't think theres much risk at all and I'm a
bit confused by talk of risk in the startup world for software guys. The
market is hot and I have little doubt I could walk out tomorrow and get a
110-120k job, and maybe a bit more, so the risk is only that I'm gambling the
lower wages for the chances of bigger payout.

Seems pretty minor on the risk side for me and I'm not sure how I can
effectively argue for more.

~~~
seekingcharlie
You have to understand that a payout (which is very, VERY rare to be worth
anything to you) is likely to be years off.

Is it worth being below-market for 5 years for that supposed payout?

~~~
BayAreaSmayArea
Do people normally lock in that low forever?

We're talking about triggers for going up to an agreed upon market++ salary
with next fundraising round, or some significant sales for our product, etc.

~~~
seekingcharlie
Obviously not forever, but you just have to take into account that a funding
round is also likely to be a while off.

It's in your favour that the founders have had startups/exits before
(fundraising will be easier) but funding still takes months to close and you
still need to ship a product before you even get to that point.

I imagine you'll be hiring other employees too which increases the strain.

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mentat
If you're building the bones of the company and you're not getting double
digits of equity you're getting a raw deal. That percentage will get diluted
with every round too so it's not like 10% of 100M or something.

~~~
BayAreaSmayArea
So, I guess I don't understand how building the bones of the company equates
to equity. Is that based on the premise that ideas are cheap and execution is
expensive/rarer and should be compensated with a piece of it?

Looking at the wealthfront equity map,
[https://www.wealthfront.com/tools/startup-salary-equity-
comp...](https://www.wealthfront.com/tools/startup-salary-equity-
compensation), it seems like nobody in funded startups has more than about a
percentage. Is that tool off, are expectations too low?

~~~
seekingcharlie
Early stage companies (pre series A, perhaps even pre Seed in your case),
cannot afford market salaries - especially in cities like SFBA. Startup
compensation includes equity to make up for a below-market salary. Your "risk"
is your opportunity cost - is that 2% over 4 years worth the $300-400k you
could could have earned as part of a market salary somewhere else?

Ideas are very cheap - worthless actually, if you can't execute them into a
product, let alone a product that users will actually pay for.

I don't know your current salary, but it should be a hell of a lot more than
$100k in SF. So yes, 2% is low, especially given that it doesn't sound like
there is an MVP or demo product existing - i.e. you would be building this as
your role. Whether they like it or not, you're technically a cofounder,
however as you're receiving some salary, you're not taking anywhere near as
much risk and shouldn't receive as much equity as them - assuming they're not
paying themselves.

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BayAreaSmayArea
Yeah, not SF, not for me. I'm in the southern US so 130 is near the top end
for technical, non managerial, positions. The salary offered is a noticeable
but not terrible cut.

I've had friends tried to recruit me in other parts of the country and gotten
asked if I'm "king of my town" with what I'm making.

Agreed on the cofoundery-ness of it for the most part. They've been working on
the idea and getting things fleshed out of the last 9 months and aren't taking
a salary. I'd certainly like to make my way closer to the double digit mark,
but honestly its tough to put forward much of an argument when the startup
world is so capital centric.

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mentat
Getting it fleshed out isn't actually happening unless they're building a real
product in that time. Talking to people is not "getting it fleshed out".
Assuming 4 year vesting then you're talking about giving up a full year's
salary to work on something that has probably a less than 10% chance of
succeeding. You're also going to have expectations of your time that are
pretty extreme. If you want to do that, you need to participate in upside
beyond what you're investing in the company ($90,000 of foregone wages) so
that there's actual upside at at least 5x that. Consider you're investing
$90,000 with a 10% chance of getting $450,000. Are you going to get that with
2% when that will be diluted 30% each round? Without double digit equity it's
almost sure you won't. Even then you need change of control language and an
understanding of share classes.

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pskittle
Well, if its about the money then the deal seems fair. However you may wanto
talk about your growth within the company.

