

Ask HN: I need equity advice. - ericmsimons

Hi HN! My company recently got funded by a prominent YC-like incubator (will not name for now, but they're closely tied to YC). I'm having trouble figuring out "deserved" equity for each of my team members.<p>To preface, I started working on this project two years ago. It was not a business, just a side project with no funding. It gained 3000 users and I decided to take it on full time. I made this decision nine months ago.<p>Enter Jake. I had a feature for my product that I wanted built and he was perfect for the part. He has worked with me for the past 4 months and we just received our incubator funding. I offered him 10% of the company (vested) when we first started. Some people have told me that I should have offered him 1-3%...what are you thoughts on this? Not that it matters, I'm locked into this agreement now but...<p>On the other hand, we have my friend John. John hasn't touched a line of code in our project so far (he just finished up his year in college), but he is an obvious choice to us because we need another talented programmer on our team. I offered him 5% to join us if we got funded. After the successful interview, he said he wanted 7.5% because he's leaving school to come and work for me (and his parents aren't particularly happy with that).<p>I feel like 7.5% is way too much for someone who is joining after we have been accepted into an incubator. The risk is now so much lower than before. Did I give Jake too much? Is John asking for too much? HELP!<p>UPDATE: Thanks for all the replies. I got the answer I was looking for and feel validated in my decisions. I'm going to leave this thread here for future founders to look at; the comments are gold. Thanks again HN :)
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axiom
Working without a salary, pre angel funding = co-founder

You should be giving them 20%+ equity. If you treat them like employees, they
will act like employees. At this early stage in the startup you need dedicated
fanatics who will obsess about the project 24/7 and work 70 hours a week. With
5-10% equity, it's not rational for them to do so.

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lacker
You are omitting critical information. Are you paying these people a salary,
or just equity? If you're paying them a salary, then 1-3% is reasonable. If
you're not paying them a salary, then they are pretty much cofounders. Getting
into a non-YC incubator does not really reduce your risk by much, nor does
getting 3k users as a side project.

~~~
ericmsimons
No salary. So 7.5% is reasonable post-acceptance to incubator?

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michaelochurch
At no salary, 7.5 is small.

What you should do is come up with fair salaries and rate each person's work
accordingly. What I mean is this. Let's say that you're 30 and fairly senior
with a moderate amount of team lead experience-- $150,000 / year-- and have
been working for 18 months. Your junior co-founder, who's just out of
college-- $80,000 / year-- has been working for 12 months. So your investment
(opportunity cost) is $225,000 and his is $80,000. The market valuation of the
company may or may not be $305,000... it could be effectively zero, or it
could be an order of magnitude higher, but this gives you a sense of what the
proportions should be. The younger person should have 80/225 of what you have.
If he stays longer, that number should evolve in his favor, which is one of
the things vesting is for.

Of course, it's not clear what these time-of-stay amounts will be from the
outset, which is why you need vesting and other provisions.

In your situation, rate yourself around $120,000/year (intermediate seniority
with a promising product) and a promising, out-of-college programmer around
$90,000/year. You're not going to actually pay these amounts to anyone, but
these numbers should be the basis for equity amounts. Also scale for above-
board effort, giving a 1.5 multiplier on people who really give their all (set
aside some equity for this).

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mikepk
I'm surprised no one linked to this, it being HN and all:
<http://www.paulgraham.com/equity.html>

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mv1
One other thing to consider, besides the rational aspects to equity
assignment, is fairness. People will talk about their equity allocation sooner
or later and if there is a major differential between people who perceive
themselves as similar (e.g., similar skills, similar job, came on board around
the same time), it could hurt productivity and morale. People know the world
isn't fair but they still get angry/demotivated when they are on the wrong end
of the perceived unfairness.

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vgurgov
this is brilliant point that many founders underestimate. fairness and
motivation. it happens left and right when inexperienced tech founders just
"calculate" equity. it might be calulated 100% corectly and co-founder might
agree with it, but something will "not feel right" for him and greatly affect
his performance. please pay attention.

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d0m
And also, are you profitable? Because 7.5% or 50% of 0 is zero.

And what work still need to be done? Is it a next 5 years of 20h/day full-time
commitment or it's just a "small contract"?

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vl
7.5% sounds reasonable, may be even too little if he is truly valuable
candidate.

Don't forget that everything you give should vest over time (for obvious
reasons), giving 10% vested like you did is not a good idea.

Also, timely 83(b) election is your friend.

~~~
michaelochurch
_7.5% sounds reasonable, may be even too little if he is truly valuable
candidate._

Equity numbers are weird. Some times, 10% equity means the other founder has
90% and any dilution is going to hit that... meaning that a 20% grant to
someone else moves the split to 72/8/20 not 70/10/20. So it's important to
know what events can trigger general dilution. If the option pool is not set
aside, that will trigger dilution too.

Sometimes, 10% means "I'm giving you 10 but I'm only giving myself 25 and the
other 65 is for new talent, option pools, and to offset investor dilution".
Other times, it means, "you're subject to all dilution, the only constant
being that I have 9 times as much as you do". Two entirely different things.

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michaelochurch
The risk is still quite high. Incubator funding != VC funding.

7.5% is not "way too much" at this point. Are you paying $85-100k for a fresh
out-of-college developer? If no, then he's putting capital at risk
(opportunity cost) and 7.5% is a quite reasonable slice.

Really, though, it comes down to this: does hiring him (and getting N years of
his work, where N is the vesting period) make the company 7.5 percent more
valuable? If yes, then you're not really giving anything up by cutting him a
7.5% slice.

~~~
ericmsimons
Perfect advice. Thanks so much!

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suking
Also, please do vesting for this next guy. It not only protects you, it
protects them. The guy you gave 10% could be gone tomorrow and he has 10%. Do
a 4 yr vesting, 1 yr-cliff, monthly thereafter.

