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Ask YC: Help in negotiating my stake in a start-up

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Ask YC: Help in negotiating my stake in a start-up

#1

Post by SamanthaG »

I have been asked to join a start-up recently and will be the 5th member. The original founders go back about 18 months and have up to now been the driving force behind the business. I have been offered a 2% stake with share options to 4%. This is the same as was offered to the 4th member. The 3 original founders each have 31% each. The remaining 3% is to go to certain other smaller investors.

This is a banking services/technology start-up and I am to be the legal and compliance director,I am a banking lawyer by profession.

My gut feeling is that I am not being offered enough equity here and that there is too much disparity between my % and the original founder's 30.1%. I had expected to receive nearer to 8%.

We will shortly be approaching angels/vcs for round 1 funding and the 3 founders proposals is that they will dilute their shareholdings for the VC etc and my stake will be protected from dilution at all stages.

Does this seem fair and equitable to you guys or am I being ripped off here? I have thought about it so much I can't think clearly about it at the moment. I am taking no salary and working for "free" in return for this stake, though I will get some salary though much below market rate probably year 2 or 3.

Re: Ask YC: Help in negotiating my stake in a start-up

#3

Post by SamanthaG »

aneesh wrote: post #2

Several factors to consider: Are the other founders taking salary? How will they protect you from dilution? Why won't they pay you at all even if they raise money now? But generally, 8% is pretty high for someone joining 18 months after founding.

If funding comes in, we will all have some salary, albeit well below market rate, which I suppose is fine, its a start-up. Why is 8% high for a late joiner?

Re: Ask YC: Help in negotiating my stake in a start-up

#4

Post by bdfh42 »

My feeling would be that 2-4% plus a market rate salary would be about right post the first VC funding round. Ahead of that, then the offer feels too low - particularly as you are effectively investing your salary on a monthly basis.

One mechanism you could apply - take your personal valuation of the current worth of the business IP and divide it by your notional annual salary for the next couple of years. What percentage does that come out at?

Re: Ask YC: Help in negotiating my stake in a start-up

#5

Post by ericb »

4% non-dilutable (if it really is so) and 8% dilutable may not be so different if there may be more rounds. And 8% is a LOT if they have cumulatively invested 4.5 man-years and you have invested none so far.

If they give large percentages to every new person, the math doesn't add up and they'd have little left at the end.

Re: Ask YC: Help in negotiating my stake in a start-up

#6

Post by sonink »

On the outset if you think the startup would do well, then I would suggest to join even at a 4% rate - the reason being that its better to join a more promising startup at a below market compensation rather than the other way round.

One way of coming with a good figure is as follows:

Assuming your market salary is x /mnth and the founders is y /mnt. Also, assuming that you get funding in about an year. Then finally based on the assumption that the startup equity is a function of hte risk that you take, then each founders total investment comes to:

12y + 18y

and your investment comes to:

12x

So essentially your stake in the company should be around

12x / 3*(12y + 18y) + 12x

Also, there is no basis for your stake to not get diluted and incase the startup goes for multiple rounds 4% might looks like a very high figure which the founders might end up not being very comfortable with.I would suggest, and for other reasons also, that you might consider negotiating a bigger stake and accept dilution.

Re: Ask YC: Help in negotiating my stake in a start-up

#7

Post by SamanthaG »

sonink wrote: post #6

On the outset if you think the startup would do well, then I would suggest to join even at a 4% rate - the reason being that its better to join a more promising startup at a below market compensation rather than the other way round. One way of coming with a good figure is as follows: Assuming your market salary is x /mnth and the founders is y /mnt. Also, assuming that you get funding in about an year. Then finally b…

Yeah, I am trying to negotiate a bigger stake but with dilution.

None of the founders have been working on this full time over the last 18 months, I would say about 50% of their time, it is only now that everyone is coming on board full time. We have lots of customers knocking on the door for the product which is down to them. I am being told the figures being presented to VCs indicate the company may be worth about £6m today, though we have no contracts in place yet.

Re: Ask YC: Help in negotiating my stake in a start-up

#8

Post by lisper »

SamanthaG wrote: post #3
aneesh wrote: post #2

Several factors to consider: Are the other founders taking salary? How will they protect you from dilution? Why won't they pay you at all even if they raise money now? But generally, 8% is pretty high for someone joining 18 months after founding.

If funding comes in, we will all have some salary, albeit well below market rate, which I suppose is fine, its a start-up. Why is 8% high for a late joiner?

Because the people who came before you have mitigated a lot of the risk.

Re: Ask YC: Help in negotiating my stake in a start-up

#10

Post by tptacek »

I can't imagine that in any real company, employee shares would be "protected from dilution at all stages". It is, for what it's worth, largely not up to the founders; if they want a VC round, they're going to alter the structure of the company to suit the VC.

4% of a company that has been operating for 18 months is a huge stake.

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