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Ask HN: Reasonable equity for early employees?
65 points by dfnord on Jan 15, 2011 | hide | past | web | favorite | 19 comments
Hi. I've read quite a bit about this (ones that helped me a lot were pg's Equity Equation, http://www.paulgraham.com/equity.html, and Changing Equity Structures for Early Startup Employees, http://www.instigatorblog.com/equity-early-startup-employees/2009/09/11/).

The deal is: I've recently received a New York's startup offer to join as one of the first employees. The startup just got its series A round, and is already profitable (a bit more than ramen), which diminishes greatly the risks. The equity offered me (1% total) strongly reflects this. Taking the equity equation formula (considering the salary, which is a bit above market), if they didn't want any profit on my contributions, they are expecting me to increase the companies worth by 2,3% (conversely, if they are taking 900% profit, they expect me to increase the company's worth by 23%).

The second article I've mentioned quotes a table from Venture Hacks which may suggest this is a standard. The blog author rambles the table gives not enough equity.

Considering I'll be the first full engineer on the team (which had mostly interns and the founders which are kinda junior programmers, with a board member representing VC and helping with the boring part of the business legalities), is this deal any good?

1% + market salary at an A-round funded company is an extremely good deal for an engineering role.

I'll second this. Unless you're joining as CTO/VP of Engineering, 1% seems like a very generous grant.

By all means, you should try to negotiate for more, but as the first employee at one startup and the third at another I was never given more than about .5% initially, with additional grants later on as reward for high performance and to help offset some dilution in later rounds.

Your risk profile may be lower than theirs, but I would take 1% as a signal that they really really really want you. I can guarantee they are not going to be giving employees 5-10 anywhere near 1%.

Is not a solely engineering role. I am leading a team and a product as well (which will most likely be just me for a couple of months). Which is actually what I'd expect from first engineer hires on a startup. But thanks a lot for the perspective.

How do you determine "market salary"?

The value of the equity is the value when you dispose of it. That is more likely to be zero than $1,000,000.

The the information needed to estimate its disposal value includes: the company's plans for future VC rounds, the terms of the 'A' round and prior investments, and the track record of the VC on the board. My opinion is that asking about the finances should not be an issue, since you are being asked to become a shareholder.

My concern is that 1% seems low for the primary technical person in a business which relies on code (assuming that this is) even if it is market rate.

On the other hand, you might want to this from Suster: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

0.5% is roughly the market price for an otherwise well-compensated engineering role at a company with low financing risk.

Factors that increase equity:

* Founder incompetence, poor negotiating skill, impatience.

* Financing risk (near end-of-runway with no term sheets, &c).

* Sometimes, lack of revenue (at shoot-the-moon startups, revenue isn't expected early on and isn't a factor).

* Below-market salary.

* Non-substitutable technical expertise. Rare. Rails devs may earn a premium relative to the market, but there's still a market for them. SEO, on the other hand, is hard to acquire, because people who can actually do it can almost always earn more freelancing.

* Ownership of relevant core IP; ie, if you came up with the idea behind the company's product, or own an idea that would be key to improving it.

* Frothy talent markets (but, see "impatience" above). If you need someone RIGHT NOW and LOCAL in the NYC startup market, you may pay a premium.

Note that none of these factors are "the primary technical person in a code-based business". That ain't got nothing to do with anything. Yes, that person may be key in proving the business ahead of revenue or funding. But when you got funding and sharply reduced financing risk, you got yourself to a place where you don't have to pay the lead tech person a cofounder's equity grant.

>"But when you got funding and sharply reduced financing risk, you got yourself to a place where you don't have to pay the lead tech person a cofounder's equity grant."

I agree that you may not have to and if you don't you can still be successful. On the other hand, if you are making a hire to fill a key position for the long term, it may make a great deal of sense to do so because a person hired at or close to the market rate can by definition find an equivalent position elsewhere.

1% of the company probably won't amount to much once the risk of failure, liquidation preferences and future dilution are considered. Not to mention a potential lack of technical chops among the co-founders.

In my opinion, hiring a key position at or near market rate is an indicator that the company views the hire as filling out the organization chart rather than as finding the person who creates significant value to the company, i.e. another entrepreneur.

I'm not saying it is a bad offer, only that it isn't structured in a way which will satisfy someone with entrepreneurial ambitions.

Thanks for giving more of a entrepreneur perspective. I agree with you on that it is not a co-founder equity. However, I get the impression that VC would have a heart attack before even considering a better deal.

Considering the deal includes a trigger with very beneficial acceleration mechanism, I don't see them giving in more, on what already seams like an outstanding deal from the VC's perspective (the founders are relying on the VC's expertise on such deals, as they are not that familiar on what is standard and what is not).

Without considering the deal side, an above market salary is attractive from an employee standpoint and if you will be satisfied as an employee the job deserves strong consideration. 1% equity is a nice fringe benefit of the job even if it ultimately pays out very little.

But from a deal standpoint, there really doesn't appear to be one. Acceleration won't trump liquidation preference and it is likely the equity is simply being pulled from the options pool. The slice assigned to filling the position reflects the value placed on the role you are considering. It's not Steve Balmer's 8% as employee #30 and it probably won't cure the entrepreneurial virus if you are infected.

Good luck.

The numbers you quote look in line with what I would expect, especially if you are getting close to a market rate salary. They are profitable and funded, which is a big milestone. It would help to know - Are they paying you a market salary? What is your past work history like? Does it include startups, and if so, in what role? How great is the rest of the team you are joining?

The Mark Suster link mentioned by brudgers is solid. My suggestion is to examine your motivations and goals, and then to be true to them. It will also help you evaluate your progress against those goals.

I'm going to presume this is your first startup, so these comments may be wildly off base if it isn't. The things I got out of my first startup were these:

(1) Money (we actually went public, though I had a very small piece of it). (2) Massive rapid skill development in circumstances where I could take on as much responsibility as I wanted and could learn from great people. (3) Connections to people that pretty much set me up for almost every job I had after that.

The value of (2) and (3) were huge. If I could give advice to my younger self it would be to focus on those two things first, then negotiate the best financial outcome that I could after maximizing those elements.

I mentioned I'd be getting a bit higher than market salary. I've worked on my own startup for a few months until my co-founders split, and I was unselected for a seed incubator program as a solo founder (no big surprises here). The rest of team is pretty much being built, but they are seriously taking into consideration Sequoia's tips (which is referred from pg's lib http://ycombinator.com/lib.html): http://www.sequoiacap.com/ideas

I just got a bunch of offers from the valley. Here are some numbers:

3 big named, 10-40 people, post-A companies offered 100K-130K salary, and about 0.15%-0.2% equity.

One stealth, seed-funded company in which I would be a funding team member, offers 1%-3% equity with correspondent salary.

so what will you decision be (working for a startup or doing ur own thing)? I remember you did your own stuff (iphone app) and stuff. I m in Sf now and in a similar situation so I d like to hear your take.

I plan to work in a startup first, learn while figuring out my visa situation (I am Canadian), and eventually have my own.

You'd be making above market and get 1% and get to lead the development effort? Amazing. That's like the holy trinity of tech startups if you ask me. :-)

All you need to know via Fred Wilson http://www.avc.com/a_vc/2010/11/employee-equity-how-much.htm...

In short, the first few in terms of percentage, then move to Wilson's multiplier factor model.

If they are paying you a salary that changes the equation, to reveal the true equity amount you'd have to convert your salary (times the number of vesting years) into stock at the current valuation. The 'real' number in this case is probably more like 10-20%.

Yes, I took that into consideration. The explicit equation, all from PG's article is:

i = 1 / (1 - n) + sp


i: the amount I'll increase the company's worth divided by the profit multiplier (which is 1 + profit(%)/ 100, eg: 1.5 for a 50% profit)

n: equity received

sp: salary price. Which is anual salary * overhead (pg suggest 1.5) / company's valuation

In short, my values are:

n = 1%

i = 1.023 (2,3% which with a profit of 900% means they'd expect me to increase the company's value by 23%)

sp = a bit above market's salary (can't say much more, sorry)

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