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Ask YC: Divvying up Equity
6 points by nated on Sept 20, 2008 | hide | past | web | favorite | 5 comments
This question is regarding equity division within a very young startup. I will try to explain the situation as best as I can in this short text. I am an undergraduate computer science student at a well-known public university.

I have worked for two startups in the past which didn't end up going anywhere but this was usually due to mismanagement. I used multiple platforms at these at both of those jobs for web development and was a major contributer to the code-base.

When I started looking for a new startup, I came into contact with a computer science professor at my college who was starting a company co-founding it with a business guy who was privately funding it during these early stages.

I was hired by them a year and a few months ago as the only "consistent contributer" in the company. I primarily started out on mostly development but quickly started participating in the meetings to help work out requirements, design and business aspects regarding where the company was going. We have up to this point currently still retained the same situation.

In a nutshell, two co-founders (one a professor, one business) and me as a key player in designing and implementing the database, the design flow, the architecture, and all other aspects of the site. The professor is primarily serving as programming the mathematical models and algorithms of the site (part of the core competency). We have contractors which have done aspects of the overall service such as create a photoshop view of the site, worked on other extensions which are thin layers on top of the infrastructure and api that I partially designed and also implemented.

The actual site as far as the data back-end, the integration of all the parts, working with the contractors on technical details, was worked out by me and the professor co-founder. I would say it is mutually agreed upon by all parties that through my contributions, I have played a variety of roles. Most of what we have today to show for the company was either designed and implemented or integrated into the overall service by me (through collaboration with the founders). I was there since virtually day one as far as when the product began to actually be designed and developed.

I graduate this year from the university and I have thinking long and hard of what's to come in the future. I am really invested in this startup both through lots of time and effort but also just that I like the idea and I would love to work with them for the foreseeable future. However, I am graduating and I have had several job offers in addition to having my own company that I co-founded in which my time could also be spent. The startup in question has been giving me a salary per hour which as a student is competitive but certainly not quite near market rate for a similar developer who has about 5 years of relevant work experience and just chose not to go to college.

I began negotiating with them about getting equity over time because I feel I have been a key force in the success of the company thus far. The company is also not generating any revenue at this point but there is a plan to make some in the recent foreseeable future. As far as funding, we have not yet achieved any angel or VC funding but are currently being privately funded. Sorry this is long setup, but can anyone give me advice as to what's in the ballpark of "fair" given the situation. What recommendations do you have helping us negotiate to a reasonable amount of equity for me?

Long post. Suggest you cut it down and use a different title. The current title doesn't inspire people to click.

From what you've said so far, you are the first hire in a startup with a technical founder. There are factors that we're missing here like are you a full-time or part-time hire? What's the role of the mathematical models? How "replaceable" are you? Could the technical founder have done this without you, or with a different hire? How much of an impact will it be to the company if you walk away?

It's impossible for anyone to tell you how much is "fair" in your situation since every situation is different. But for what it's worth, 1%-3% with competitive salary is pretty good for a non-founding first hire in my experience. YMMV depending on how you answer the questions I mentioned above.

I think a good way to calculate equity compensation is via "opportunity cost". Will you be working for reduced salary after graduation for this startup? If you're going to be getting reduced salary, then the equity compensation should match the salary that you'll be missing out on.

Here are some old threads about this topic.

http://discuss.joelonsoftware.com/default.asp?biz.5.416439.2... http://news.ycombinator.com/item?id=185882 http://news.ycombinator.com/item?id=79952 http://news.ycombinator.com/item?id=28465

Yeah I suspected that I fail as a yc poster. Bad title + long narrative means few replies. Still, I appreciate the response.

I work part-time for this company at a salary of about 65% less than market value amortized over my entire work period.

The mathematical models serve as predictions based on data collected. This is one of the main competencies of the service. However without the integration and infrastructure this wouldn't be too useful. I am probably replaceable in the sense that they could have found someone else but if that person was willing to work for cheap as me for no equity from the beginning and do same quality work is unlikely.

If I were to walk away, since I have pretty much designed and implemented most of the code base and infrastructure, this would probably be quite a bad position to leave them in as we have no other coders right now and we have looked to hire for several months with no avail.

The idea is I would continue working for a reduced salary after graduation. Probably reduced about 40-50% below market value.

I appreciate any additional comments.

You said in your post you were paid competitive salary. Why is it 65% less now? What are you basing your salary on?

From what you've said, it sounds like the mathematical models play a pretty significant role. If the product is like Digg, then the algorithms are 90% of the company (in fact I think K. Rose outsourced the site). If the product is like Myspace, however, then your contribution will be the other way around.

In your situation, the best bet is to negotiate your equity compensation based on opportunity cost. I recommend getting the negotiation finalized before the company does find a hire, since this gives you more leverage. I say start with 3% and negotiate downward.

None of us can say too much without more info (which paradoxically wouldn't help b/c we'd all "tl;dr") but let me ask this: if you were to quit, what is the chance they would succeed without you?

I also think you messed up by doing the hard work up front and then asking for equity. As it sounds to me, you were paid for the work you did therefore you get no equity; you were "hired" as you put it with a competitive salary for your position/experience so I don't see why you feel you deserve any equity TBH. If you get no equity, then mark it as a lesson learned and go work for another company out of school or your other startup.

Just an outsider looking in though. Good luck :)

Ask for 5%. See what they say. You can base this on staying at the company for a year - they can ask you to sign something saying you will return the equity if you leave before then.

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