Ask HN: How much equity should I ask for?

Besides another poster has mentioned (how much salary you are missing), you would also need to know how much money the founders put in personally (as opposed to seed round), how the company is doing, how much of the options pool is currently reserved for all employees, or even how much money are they planning to raise in the next round. Those numbers don't affect your contribution directly, but it affects what you can negotiate for.

I was about to say asking for 2-5% vesting over a 2-3 years. But at 10 people in the company, that sounds like a tough sell to ask for.

* How much would someone with your skills make in terms of salary, bonus and stock at a large stable company inyourmarket (think IBM, Apple, Google, Amazon, Oracle, etc. -- basically any Fortune 500 that might consider hiring you)

* When do you think you'll be able to sell your shares (whether through an acquisition, IPO, private market sale, etc.)? Remember, vested shares are only valuable if someone will buy them.

* What do you think your company will be worth in the future? What will your share be worth? How does that compare with what your founders think it will be worth?

* Is your company willing to continue issuing shares to you in the future as part of a compensation plan, or is this a one-shot allocation?

* Finally, what's your risk tolerance? Are you okay making less than you could in a "soul-crushing big company job" (possibly a lot less) for the chance of a big pay day?

I'm going to ignore a lot of the other big/small tradeoffs around benefits and culture. But you should be thinking about these too.

Let me give you a concrete example. Let's imagine that Oracle would have hired you for $60k / year, with a 15% bonus plan, and 600 shares as restricted stock units vesting over a 4 year period. At current market prices, that works out to about $75k in total compensation per year before raises, market fluctuations, additional stock grants and high performance bonuses -- and, for well performing individuals, you can reasonably expect all of these things to be awarded you like clockwork at any healthy, respectable company.

Now, let's imagine that, 4 years after your start date, your company will be worth $50m and that you don't get any more stock. I'm guessing this company isn't big on bonuses (after all, it's a start up), but let's assume they average out to 10% over those 4 years. This, then, also works out to about $75k over that span. You'll probably have to fight and argue over every raise and additional stock grant unless your founders are amazing.

And that's the rub: most startups don't end up being worth $50m after 4 years. They are often (understandably) very poor about bonuses and salary increases. It often takes a lot more than 3 or 4 years to reach the point where the shares can be traded for money (if ever!)

Now, if your company hits it out of the park and is worth $500m, then that 0.2% sounds a whole lot better. But that's basically like hitting the lottery -- you shouldn't bet on it happening.

Similarly, if your company goes bankrupt, you get nothing for the shares except the memories and maybe a few t-shirts. And, unfortunately, you should absolutely expect this to be a possibility. Other possibilities include working for them for 7-10 years with the stock never becoming a tradable commodity and the company only being worth $20m or so.

Also, you're an early employee. The company will likely live or die by what you do. Your company should be viewing you as an investment with opportunity costs and expected returns. The opportunity cost of the shares is not too hard to compute (that's what I did above). The return is, in a sense, what the company ends up being worth.

I would go to your bosses with your version of these considerations in hand, and demand a plan that accounts for your concerns. And I would show them, with math, why anything else doesn't make good financial sense for you.

You plan to stay there 4 years and in that time if all goes well, you hope the company to exit for $25M. I assume a low exit because the company is raising a 2nd seed implying that it isn't a moonshot business and seems to be struggling. This means you're looking for a very minimum of $100K in post-tax returns in 4 years and assuming you have not purchased your options yet and filed a 83b, will be subject to AMT (roughly 35%). Assuming the FMV strike price values the company at $1M today, you'd need to spend $ to buy those options as well so let's increase what you need by 1/25.

Sooo... to break even on missing $100K in salary over 4 years you need to own at least $160,000 in stoke or about 0.64% of the company AT EXIT. Over the 4 years, I'd anticipate a conservative 25% of dilution so now you need 0.85% of total equity in options.

To just break even on a $25M exit compared to salary loss, you need 0.85% of the company's total value today. Let's say that the company has a 33% shot of exiting for $25M meaning that you need 2.55% in options to break even on expected value. I'm guessing that if there's a $25M exit, you'd also like some upside beyond making up for loss salary so let's double it to 5.1% in options. If I'm being purely logical, I think 5.1% of the company in options is fair today for you.

Based on the model, if there's a $25M exit: You'll own 3.82% at exit. Pretax is $956,250 Post-tax is $583,312 Less salary loss = $483,312 This is a fair reward for 4 years of working hard and taking on risk.

Okay. Now some sanity. I don't think this founder is going to give you 5.1% of total equity in form of options. He just doesn't sound like the guy and given the undermarket salary, you also don't sound like a long term lead engineer. I could also be wrong to suggest that the company would only be worth $25M and could be worth $25B instead. That obviously makes a big difference so you could ask for less.

What would I ask for? I'd ask to be brought to market rate after the next round closes and threaten to leave if not. I'd also ask him what an optimistic outcome looks like and when then I'd cut that number in half and extend the time table by 2 and run the above calculation to come to an equity number.