Ask HN: My employee equity?

[fokker]

Hey HN,

I Have been working my butt off for a startup for approx 1 year and I have just recently brought up the discussion regarding my equity in the company.

There were no formalities such as a contract in place, it was purely based on trust but with a promise of equity towards the end of the year. I agreed to by paid far less than normal.

I wore a number of hats as you do in startup land, especially in the early days. I was a Project Manager, Tech Lead, Designer & Developer. Not to be arrogant here, but somebody with this skill set was absolutely crucial to get us to where we are today. Solid deliverables were delivered and the founders were always so pleased and excited to have me on the team.

Before I came on board, they were trying to outsource their technology to india. Sending bad looking designs and technical specs written by a non-techy. The final result was always so average. A company specialising in delivering tech, couldn't deliver tech.

When I started, we continued with the outsourcing for sometime but with my oversight and redesign of the platforms.. After some time, it simply was not working. I had the connections to bring on a new developer so we could start building things in-house, with proper development cycles, oversight & accountability. So we did that. Over the course of the year the team grew. We're now at 6.

Once this happened, we started landing some pretty cool projects thanks to the teams work. The capability and the quality of work we were putting forward and the character of us all helped significantly with getting these projects on board. A year has passed and I have poured my heart and soul in to the company. I'm pulling 70-80 hour weeks every few weeks- working till all hours of the morning getting things done. Not to forget I'm not on a cushy funded start-up salary (far from it). HN, what would you value somebody like myself on your team? What are people like myself usually rewarded with?

Cheers HN!

[poof131]

1. A promise of equity is a red flag. A professional startup puts this in writing. If things don’t work out, that’s what vesting is for.

2. Wearing all the hats and the only technical hat initially puts you a lot closer to founder status.

3. “landing projects” doesn’t sound like a startup, sounds like a consultancy. Taking reduced market salary here for equity doesn’t seem right, the equity will never likely payoff to justify it.

Step 1. Interview at big companies. Figure out how much you could earn (total comp: salary, bonus, and guaranteed equity). Also to get a BATNA.

Step 2. Value the startup. Account for professional investors, market size, likelihood of success, etc. Don't just go off what the founders tell you. Look at comparable startups and their exits.

Step 3. Figure out how much the money you gave up is worth. Multiply it by 4 (last year plus the next 3) then figure out the percent of the company. Would also probably double it for the risk you are taking. (Note: You should immediately vest the prior year and have no cliff for the three remaining).

Step 4. Negotiate from a higher starting point (I’m a sucker for putting out what I think is fair and having it cut). Be ready to walk with your BATNA. 5-10 percent might not be unreasonable with what you are bringing to the table, especially if this is more of a lifestyle business than a professionally backed startup.

Good luck and don't be afraid to move.

[dman]

Do not leave such critical things under specified. If the response from the founders goes even slightly short of your expectations you run a real risk of burnout because you have obviously gone over and above for an extended period of time. Make sure that there is a reconciliation on your value add between you and the founders as soon as possible.

Try to also put yourself in the founders shoes and see how you would approach such a situation rationally. Its best to have a number in mind before you speak to the founders and have thresholds on either side representing delight / time to put in the papers.

[paulcole]

Your only leverage is getting a new job and/or straight up quitting. Unless you're willing to do either of those, they're going to keep dangling that carrot.

Force their hand and say you'll have to seriously consider other offers unless there's an equity package coming from them within a week.

Only do this, however, if you're willing to have your bluff called. If you're not, you have no negotiating power and will be relying on their kindness.

[NhanH → paulcole]

This is good advice. However, realistically you will have to rely on their kindness in the end.

No matter how much equity you will negotiate right now, in the next 5-6 years there are ten of thousands things that will dilute/ make it obsolete. You should ask for your equity right now. But take note that if the negotiation doesn't go well, whatever you got might not be of any value, act accordingly.

[meric → NhanH]

>> This is good advice. However, realistically you will have to rely on their kindness in the end.

I agree. Maybe one way to go about it, organise a one-to-one coffee, talk about what you've been through, basically what you've told us, and tell them how you feel about equity, and what you're worried about. This will build the rapport that will make it easier for them to be kind.

[fokker → meric]

Absolutely aware of dilution and all - it's more a matter of principle. I've worked my ass off and surely should have some entitlement to the company of helped build.

I was originally offered stock options in a staff pool - but I'm not happy with that. That will dilute so much and be worth nothing eventually. They're aware of this which is why we're discussing equity.

So hard..

[meric → fokker]

Yes, you have more leverage before you sign the contract to join the company than after...Use it or lose it...Your contract is your entitlement.

[fokker → paulcole]

I do have some upper-hand in that they simply cannot afford to replace me - they'd need to employ 2-3 new people plus all overheads of getting them up-to-speed with our process, adjusting to team dynamics etc..

Thanks for the advice.

[paulcole → fokker]

How many people have you worked with who have required 2+ people to replace them when they left? Personally, in about 10 years "professional" experience, I've worked with 0.

I'm willing to accept that perhaps I've worked with non-exceptional people (I am one myself). But really consider whether your employer would actually hire 2+ people to replace you. Your domain knowledge is worth something and the cost of switching is high, but if your employer is paying below market, would they really pay below market for 2+ new people?

What I'm trying to get at is the fact that your perception of your value might be significantly different from your employer's perception. And if that's the case, you really don't have much leverage.

[AznHisoka → fokker]

You only have the upper hand if they can't replace you. If push comes to shove, and they can 3 people to replace you, that's not as strong a hand.

[JSeymourATL]

> I have poured my heart and soul in to the company.

First-- take out the emotional aspect of your contribution (I know this is difficult).

Can you calculate your impact on the bottom line? How did you help them save money/make money?

Breakdown all of your job deliverables-- compare & contrast difference with what they would likely pay at market rates. Based on your brief description, you might easily be the equivalent of a $200K/year guy and a full-partner in the business.

Assuming they agree conceptually-- and recognize your contributions have been vital to the teams success. Give them options (not ultimatums) on moving forward from here.

[rajacombinator]

Just get out. They're exploiting you. Leave, start your own consultancy, poach their clients. You'll probably be surprised how much they're willing to pay.

[mtmail]

Who are you negotiating with? Does one person own all equity or several founders plus investors?

[fokker → mtmail]

Just the 2 founders, no investors.

[kasey_junk]

It sounds like you are the first employee? If so 1-2% seems to be the norm.

[fokker → kasey_junk]

Ok cool, this is roughly what I had in mind. Yes, first employee.

[icedchai → fokker]

1% is way too low as a first employee, unless this is something that's literally going to be worth 50 to 100 million USD.

Ask for 10%. Accept 5%. Walk away at 1%.

[kasey_junk → icedchai]

This doesn't seem to jibe with reality^. Most of the literature [0] [1] [2] suggests that the first 10 employees split 10% of the equity (with founders receiving 50% and the rest left over for VC and later employee pools). Y Combinator for instance only takes 6%. Sequoia is said to take 30%. Suggesting that an employee (any employee) is worth the same as YC to the markets seems like a hard sell.

[0] http://themacro.com/articles/2015/12/splitting-equity-among-...

[1] https://gist.github.com/isaacsanders/1653078

[2] http://blog.samaltman.com/employee-equity

^ I'm no expert on equity and am a "get paid with american dollars" kind of guy...

[poof131 → kasey_junk]

Saying there should be a standard number for the first employee is like saying there should be a standard valuation for every startup. Sure, YC throws out a fairly generous standard valuation, but they are choosing top notch startups and trying to cultivate an entrepreneur first mindset.

To roll into any random startup and say, “I guess 1 percent seems fair” is silly. 1-3 percent is fairly standard for the first employee of a well-backed (YC / VC / Quality Angel) startup, where professionals are taking a calculated risk because the payout could be huge. They are really overvaluing every startup, but know that 1 out of 10 will pay off enough to make it up.

One percent probably isn’t fair for someone taking a reduced salary at a “startup” financed by someone’s uncle targeting a niche market. The limited upside will never pay enough to justify the money lost. If the startup isn’t financed by professionals, I don’t see 1-3 percent and reduced market as reasonable. Even then, I think it’s questionable and really depends on the product, market, founders, how far along things are, and what you bring to the table.

Certainly the value you provide and what you can negotiate are the critical parts, but I feel that a lot of startup pay is exploitative, taking advantage of younger workers who don’t understand what is going on, that the real payday in a startup is the equity and they probably aren’t getting a large enough percent to justify the risk. Why do startups payout so handsomely for founders and investors, but employees are supposed to be learning and doing it for the love?

[icedchai → kasey_junk]

All those investors are getting preferred stock, liquidation preferences, etc. Not all equity is treated the same and common stock is generally last in line.

For a 6 person startup where someone has made significant contributions, will continue to make them, and has taken a pay cut (in an economy with full employment), 5% does not seem unreasonable to me. If he's taken a pay cut, they probably don't even have funding yet, which means he should ask for more since it's going to be diluted massively later anyway.

Obviously if you don't ask for it, you won't get it. If you don't think you're worth 5%, why would they?

[bobby_9x]

You are replacable. You can try to give them an ultimatium and threaten to leave. But they may just show you the door.

Even if they don’t now, when things get better, they will probably be thinking about ways to reeuce their risks by replacing you or dividing your responsibilities.

Most people in your position don‘t get much equity. Even if you do, it‘s usually diluted down to nothing with rounds of funding or you never see anything when the company crashes and burns.

I’ve been there more than once. It’s much better to just work for a salary that you are worth and forget about equity.

It’s a carrot used to prevent you from leaving when things get bad.

[LifeQuestioner]

Also, ask for a pay rise it's been a year dammit.