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

news.ycombinator.com

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

#11

Post by bigtoga »

| my stake will be protected from dilution at all stages.

So you are being given preferred stock? That's the only stock that I can think of that would prevent dilution during later stages. I find it difficult to believe that a smart startup company that would give out preferred stock to employees. I also can't imagine VCs/angels who would invest in a company that had just given preferred stock to a "Legal and compliance director" (no offense but that title isn't necessarily thought of in terms of bringing revenue in as highly as a developer or salesperson).

A 2% stake could easily get chopped down to 1% or .5% on liquidation due to various means. Assuming a five year growth-to-liquidation, does 1% of a $100m sale ($1m) justify taking no salary for 2-3 years and then a below-marketing salary for the remaining time? Balance that with the risk that the startup may fail, not raise as much money as they thought, etc...

A least two key factors you need to think about are (1) what you expect the company to get acquired for, and (2) when you expect to be acquired. A $10m sale in year 1 means you get $50k-$100k (being optimistic) for one year of work. A $10m sale in year 3 means you get $50-$100k for three years.

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

#12

Post by SamanthaG »

tptacek wrote: post #10

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.

Thanks, this is useful and gives me a better perspective.

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

#13

Post by SamanthaG »

bigtoga wrote: post #11

| my stake will be protected from dilution at all stages. So you are being given preferred stock? That's the only stock that I can think of that would prevent dilution during later stages. I find it difficult to believe that a smart startup company that would give out preferred stock to employees. I also can't imagine VCs/angels who would invest in a company that had just given preferred stock to a "Legal and complia…

Thanks for this.

We're still in early discussions. No it wouldn't be preferred stock, just ordinary. They seem to be proposing that a shareholders agreement will contract for my stake to be protected, but, as you know, a VC will restructure all the shareholders if it wants to, so that doesn't work.

My calculations are based around a sale value of around £50million to £90million in about 5 years which at 2% would make my stake worth £1million in 5 years time (if £50mill sale price) but that assumes I don't get diluted below 2% etc and that is why I think it is a too low % stake for me to accept since it would only give me double the salary I could otherwise earn over the same period.

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

#14

Post by SamanthaG »

tptacek wrote: post #10

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.

What do you mean by "operating"? You could well be right but there is no hackin or anything going on here, its more the founders going round looking for customers and creating relationships with strategic partners etc. There are no contracts signed yet, no shareholders invested yet. Don't get me wrong, I am not trying to discount in anyway what they have done, I am just trying to get to a situation where I can understand the best way to "value" what I am being offered a stake in, so I can compare what they are offering me against their stake.

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

#15

Post by mrtron »

SamanthaG wrote: post #14
tptacek wrote: post #10

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.

What do you mean by "operating"? You could well be right but there is no hackin or anything going on here, its more the founders going round looking for customers and creating relationships with strategic partners etc. There are no contracts signed yet, no shareholders invested yet. Don't get me wrong, I am not trying to discount in anyway what they have done, I am just trying to get to a situation where I can unders…

We hackers like to underestimate the amount of work involved in finding customers and creating relationships.

18 months of their efforts within their expertise is 18 months regardless of whether it is hacking :)

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

#17

Post by cstejerean »

mpc wrote: post #16

4% is pretty high coming into a startup over a year after its founding. You're coming in at a point where there will be significantly less risk.

I started my company 1 year ago. I haven't found any clients and haven't built a product, but I've traveled around the country talking to potenatial customers. Want to come work for me with no salary for the next 2 years in exchange for a 4% stake?

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

#18

Post by mpc »

cstejerean wrote: post #17
mpc wrote: post #16

4% is pretty high coming into a startup over a year after its founding. You're coming in at a point where there will be significantly less risk.

I started my company 1 year ago. I haven't found any clients and haven't built a product, but I've traveled around the country talking to potenatial customers. Want to come work for me with no salary for the next 2 years in exchange for a 4% stake?

I understand your point here, but this situation appears to be a bit different.

- VC money and some salary is on the way shortly http://news.ycombinator.com/item?id=178290

- The idea seems to have matured and people want it.

Sounds like a good deal to me.

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

#19

Post by tptacek »

SamanthaG wrote: post #14
tptacek wrote: post #10

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.

What do you mean by "operating"? You could well be right but there is no hackin or anything going on here, its more the founders going round looking for customers and creating relationships with strategic partners etc. There are no contracts signed yet, no shareholders invested yet. Don't get me wrong, I am not trying to discount in anyway what they have done, I am just trying to get to a situation where I can unders…

18 months of 50% effort at no salary = 9 months full time no salary. Why do you think a 21% gap is too high for that?

Again: 4% is a very large share for an employee. When the company comes to its senses, nobody else is going to get anything even in that neighborhood.

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

#20

Post by aneesh »

SamanthaG wrote: post #13
bigtoga wrote: post #11

| my stake will be protected from dilution at all stages. So you are being given preferred stock? That's the only stock that I can think of that would prevent dilution during later stages. I find it difficult to believe that a smart startup company that would give out preferred stock to employees. I also can't imagine VCs/angels who would invest in a company that had just given preferred stock to a "Legal and complia…

Thanks for this. We're still in early discussions. No it wouldn't be preferred stock, just ordinary. They seem to be proposing that a shareholders agreement will contract for my stake to be protected, but, as you know, a VC will restructure all the shareholders if it wants to, so that doesn't work. My calculations are based around a sale value of around £50million to £90million in about 5 years which at 2% would make…

Okay, then it's easy ...don't take the job!
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