

Ask HN: In this situation, what's a fair equity share? - wyvern

I'm sure I'm not the first person to ask this, and know each case is individual, but what guidelines should one use?<p>I'm the third person, and my percentage is pretty low (low single digits). I came in pre-money, and I accepted the percentage given because (1) I  was fine with the salary offered (deferred until funding) and expected money to come imminently (it took a bit longer, but we're getting customer revenue) and (2) realized I didn't have the full picture (how many points were in the option pool, saved for legal counsel, etc.) and couldn't evaluate what a fair share was.<p>It looks like funding is coming via customer revenue about... now. We'll be incorporating soon, which seems like a convenient time to revisit the equity question. I don't feel entitled to a 1/3 split, since the other two guys have been working on the project a lot longer than I have, but I did come in 7 months pre-money, so I feel entitled to all the trappings of founder status, and an equity share that would reflect that.<p>What's a good guideline for whether or not I'm getting a fair share? Is it wise or unwise to negotiate a higher share, and at what point (pre- or post-revenue)?<p>Also, how do board seats work? If I enjoy hacking more than business, do I want one, and how do I go about determining if I deserve one? (E.g., if there are 3 board seats, I don't feel entitled to one; if there are 5+, I'll be pissed if I don't get one.)
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webwright
"salary offered (deferred until funding)..."

I'm assuming you don't mean that you get paid back for salary you didn't get
paid before funding. FWIW, investors are REALLY not keen to give $ to a
startup and have a big slice of it go to to back-earnings.

Onto the question/situation, though. How long did they work on it before you?
Do you all work the same amount?

Depending on the answer to those questions, I think you're entitled to a close
to even share, assuming you all vest.

A way to get around the inevitable response is to vest. If you want to own 25%
of the company, suggest that it vest over 3 years (you should ALL be vesting
anyways). A good way to pitch it is this: "You guys have been working on this
for 12 months. I've been working on it for 7. By the time I vest, the
difference will be 41 months versus 36 months of time in. What do you think a
reasonable percentage of my contribution will be at that point?" If time is
the only facture, that's a fair point. If they poured cash in, have amazing
connections, or had higher paying careers they set aside, they might be
entitled to more.

Regarding board seats, those get re-assigned if you get funding oftentimes.
Board meetings aren't particularly fun-- I'd avoid it unless you think your
board will do something screwy. Only thing I'd offer is that you want founders
to have control of the board-- if not, the board can fire the founders. If you
are the odd-man-out, the board can fire you whether you are on it or not. So
being on it offers little protection unless you have unanimity clauses written
in. You can always ask to have regular optional attendance for the board
meetings.

~~~
tptacek
Close to equal? Surprising answer from a successful founder. If he signed on,
say, 6 months after the other two founders, that's valuing their previous
contributions at 0.

~~~
webwright
I didn't throw out a # other than a 25% wag, but there are several outstanding
questions. If they had a 4 month head start (11 months in versus the poster's
7 months) that'd give them 37.5% each to his 25%. But, as I said, there are
_lots_ of other factors to consider in the buckets of "contribution" and
"risk". For all I know, the third founder might have a TON more to contribute
and deserve MORE than a third!

In general, though-- I think people attach a lot of emotional weight to "I had
the idea" and "I've been working at this a few months before you came on
board" (UNLESS that few months reduced the risk-- i.e. customer
acquisition/validation reduces a lot of risk while futzing with code for a few
months really doesn't). In 5+ years, the idea is going to change and that
original few months of contribution is going to be pretty meaningless in the
grand scheme of things.

Regardless, the contribution in the FUTURE is likely what's going to matter
most... Which is why vesting is important.

------
vaksel
What exactly do the other founders stand to gain by giving you even more
equity now?

If you thought the original deal was unfair, you shouldn't have signed.

~~~
wyvern
I figured the deal was fair because I thought salaries would be coming in
imminently, and that I'd only be putting a few grand on the line. That turned
out not to be the case.

In truth, I don't know what fair _is_ , because I don't see the whole picture:
who else will get equity in the future, what does the option pool look like,
etc.?

~~~
trevelyan
A high single digit stake is a lot of money if things go well. Just make sure
you don't get screwed over by dilution and you'll be fine. Get your promised
equity in writing and be happy that you're with people who are delivering what
they promised.

You can't re-price risk after it has been fully assumed and if I was one of
your colleagues I would be pissed off at your attempting to re-negotiate a
previous agreement. You seem to believe your co-workers have an obligation to
see you get a certain level of compensation and that your equity stake should
grow or shrink depending on that compensation. That is the attitude of an
employee not an owner.

------
jack
First, read pg's essay on the subject, if you haven't already:
<http://www.paulgraham.com/equity.html>.

Although it's tough to revisit this question after you've already established
a deal (it would easy be perceived as opportunistic), it can't hurt to ask.

At worst, the other founders should be able to justify the allocation you've
been given and their reasons for not upping your share; at best, they might
revisit their decision given how much value you've delivered over the past 7
months.

Just make sure raising the question doesn't come across as blackmail.

------
bayareaguy
These things are never simple but a fair distribution should take into account
the risk each person took and the value of their contribution. For example if
they worked twice as long as you and they took twice the risk you did then it
would be difficult for you to justify more than a 1/9 stake.

If they were stuck before you got there and you played an important part in
getting a 3-person company to some measure of profitability then you probably
deserve closer to a double-digit percentage.

A board seat is probably out of the question at this point but I'd recommend
you negotiate for the same class of shares and vesting/acceleration options
that your co-founders get.

~~~
wyvern
_For example if they worked twice as long as you and they took twice the risk
you did then it would be difficult for you to justify more than a 1/9 stake._

That seems about right. I figure I'm worth about 9-10% of the work up to now,
considering time spent and what we'd command on the market. That number needs
to be docked according to the pool reserved for future employees, and raised
if we go longer without salaries. There are enough variables that I'm not
aware of, so I don't know what fair is although I have a general sense of the
range.

 _A board seat is probably out of the question at this point but I'd recommend
you negotiate for the same class of shares and vesting/acceleration options
that your co-founders get._

Why is a board seat out of the question? Should I want one? I'm really naive
about this question, and don't even know if I necessarily want one. What are
the benefits and drawbacks?

------
enjo
As to what is "fair" that's between you and the founders.

You do need to be ready for some serious shock come tax time if you do take on
additional equity. Equity (from the IRS perspective) is income, and is taxed
as such. If the valuation of the company is high (not the cash value, the fair
market valuation) then taxes are going to be through the roof even though you
haven't received any cash.

~~~
tptacek
(a) You only owe based on the fair market value of the stock, which is not
simply what a VC pays for it, and (b) you only owe when your stock vests, and
(c) if this actually worries you, you arrange to file an 83b election and pay
some nominal up-front fee, and pay only cap gains when you liquidate.

~~~
sokoloff
a) It's hard to argue that the FMV is _less_ than what the VC paid for it,
though.

b) ISO/NQSO's are income only when exercised, not when vested. When the stock
price is expected to climb (such as when you can vest pre-IPO and you're
pretty sure you will IPO), then it's wisest to exercise as soon as you vest to
start the clock on long term CG holding period, but the key moment for the IRS
is exercise, not vest.

All of the above reflects only my understanding of US tax law from being a
(non-founder) employee at 3 past startups with some kind of public exit (two
acquisitions and one IPO).

------
khangtoh
Whatever it is, you agreed to the original offer and technically the other
founders do not have to re-negotiate the offer with you.

Since you accepted the offer with salary although deferred. I think it is
fair, assuming the other founders did not get salary, in lieu of the low
equity you are receiving.

~~~
wyvern
The other founders have deferred salary as well.

Obviously, no one has to renegotiate anything, but I'm asking what's fair. I
can't evaluate my own number because I don't know what's happening at the
bigger picture. If 30 programmers more skilled than I am are hired tomorrow,
I'm probably getting a fair share. If some post-money marketing VP gets, say,
8%, I'm going to ask for a raise to at least that level or quit.

~~~
mrtron
That sounds like bad news waiting to happen.

The other 2 people have no idea you are upset with the current arrangement.
Waiting to see what happens with other hires and then getting angry just seems
spiteful and jealous.

If you are unhappy with the current situation, you need to figure out if it is
enough to force you to quit. If so, give them the option to re-negotiate to a
favorable arrangement for both, or quit.

If you aren't willing to quit over it, ignore that factor completely and learn
from the experience.

------
jojoleflaire
You are a minor player. Not being harsh, but it's just a job for you. Don't
worry about the corporate details, if you believe in the vision. If the
company is successful, you will be too. But make sure that as the company
grows, you grow (career wise) too. You might get rich some day from it.

~~~
wyvern
I disagree, because I've put 7 months of opportunity cost on the line, which
is about $60k, so I definitely feel entitled to the trappings of founderdom.
I'd almost certainly leave if I found out that a post-money marketing guy got
more equity than I did.

~~~
geoffw8
wyvern - I agree.

I have to say, as someone who is massively new to this - this is no right or
wrong. There's no harm in asking the question, if you raise your concerns and
walk away with any additional % - excellent. But the thing you don't want to
do is alienate the others, so be sure of your approach before you voice
concerns.

Nobody here will ever be able to understand the effort/risk you have all put
in comparably apart from yourself, so the only advice I'd give is go for what
you can get, nicely.

~~~
wyvern
My plan is to wait until we're ready to formally incorporate before I raise
the issue, because I'll have a better sense of what the numbers mean. I'm sure
there were external people given equity (legal counsel, etc.) so it's
premature to judge what's a fair share.

~~~
bokonist
No it's not premature to figure out what your fair share is. The proper time
to negotiate is immediately, it only gets harder the longer you wait. You
should negotiate your share relative to the current other members of the
startup, and then everyone should dilute at the same rate when you add an
option pool.

Unfortunately, you have already made the mistake of waiting seven months. As
soon as they reneged on paying you the "imminent" cash salary, you should have
demanded a much higher equity stake than low single digits.

At this point, you have the right to ask for whatever you can get. It's just a
matter of what your alternative is, and how valuable you are to them.

~~~
wyvern
Thanks.

Should I try to line up a job before negotiating?

~~~
bokonist
That's usually not necessary, but I don't know enough about your situation to
comment.

~~~
wyvern
Situation: so-so. 4 jobs in 4 years, but good performance/references, obvious
talent that comes across in an interview. Sour notes are that I have an
unfinished graduate degree (left academia for Wall St) and was laid off and
unemployed for 5 months in 2008 because of health problems. Because I've been
working for deferred cash for a while, I don't have a lot of savings. Once my
back pay comes through, though, I'll be on better ground, but right now I
wouldn't want to be out in the cold. Also, I really like the other founders
and the work, so leaving lightly might be a dumb decision.

~~~
bokonist
That's a tough call. Take any advice here with a grain of salt, because I
don't know you or the people involved. But if I was in that situation, I might
ask nicely for a greater stake, and then if they refused, and I thought I was
getting below market compensation, I might quietly look for another job.

