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

Post by sokoloff » Mon, Apr 13, 2009, 3:58 PM UTC

tptacek wrote: post #28

enjo wrote: post #27

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.

(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.

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).

Post by webwright » Mon, Apr 13, 2009, 4:31 PM UTC

tptacek wrote: post #29

webwright wrote: post #17

"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'…

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.

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.

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

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