Ask HN: Reasonable equity for early employees?

#1

Post by dfnord » Sat, Jan 15, 2011, 3:59 PM UTC

Hi. I've read quite a bit about this (ones that helped me a lot were pg's Equity Equation, http://www.paulgraham.com/equity.html, and Changing Equity Structures for Early Startup Employees, http://www.instigatorblog.com/equity-early-startup-employees/2009/09/11/).

The deal is: I've recently received a New York's startup offer to join as one of the first employees. The startup just got its series A round, and is already profitable (a bit more than ramen), which diminishes greatly the risks. The equity offered me (1% total) strongly reflects this. Taking the equity equation formula (considering the salary, which is a bit above market), if they didn't want any profit on my contributions, they are expecting me to increase the companies worth by 2,3% (conversely, if they are taking 900% profit, they expect me to increase the company's worth by 23%).

The second article I've mentioned quotes a table from Venture Hacks which may suggest this is a standard. The blog author rambles the table gives not enough equity.

Considering I'll be the first full engineer on the team (which had mostly interns and the founders which are kinda junior programmers, with a board member representing VC and helping with the boring part of the business legalities), is this deal any good?

Re: Ask HN: Reasonable equity for early employees?

#2

Post by tptacek » Sat, Jan 15, 2011, 5:21 PM UTC

1% + market salary at an A-round funded company is an extremely good deal for an engineering role.

Re: Ask HN: Reasonable equity for early employees?

#3

Post by elbrodeur » Sat, Jan 15, 2011, 5:32 PM UTC

tptacek wrote: post #2

1% + market salary at an A-round funded company is an extremely good deal for an engineering role.

I'll second this. Unless you're joining as CTO/VP of Engineering, 1% seems like a very generous grant.

By all means, you should try to negotiate for more, but as the first employee at one startup and the third at another I was never given more than about .5% initially, with additional grants later on as reward for high performance and to help offset some dilution in later rounds.

Your risk profile may be lower than theirs, but I would take 1% as a signal that they really really really want you. I can guarantee they are not going to be giving employees 5-10 anywhere near 1%.

Re: Ask HN: Reasonable equity for early employees?

#4

Post by brudgers » Sat, Jan 15, 2011, 5:54 PM UTC

The value of the equity is the value when you dispose of it. That is more likely to be zero than $1,000,000.

The the information needed to estimate its disposal value includes: the company's plans for future VC rounds, the terms of the 'A' round and prior investments, and the track record of the VC on the board. My opinion is that asking about the finances should not be an issue, since you are being asked to become a shareholder.

My concern is that 1% seems low for the primary technical person in a business which relies on code (assuming that this is) even if it is market rate.

On the other hand, you might want to this from Suster: http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for...

Re: Ask HN: Reasonable equity for early employees?

#5

Post by johnrob » Sat, Jan 15, 2011, 5:55 PM UTC

If they are paying you a salary that changes the equation, to reveal the true equity amount you'd have to convert your salary (times the number of vesting years) into stock at the current valuation. The 'real' number in this case is probably more like 10-20%.

Re: Ask HN: Reasonable equity for early employees?

#6

Post by ivanzhao » Sat, Jan 15, 2011, 6:30 PM UTC

I just got a bunch of offers from the valley. Here are some numbers:

3 big named, 10-40 people, post-A companies offered 100K-130K salary, and about 0.15%-0.2% equity.

One stealth, seed-funded company in which I would be a funding team member, offers 1%-3% equity with correspondent salary.

Re: Ask HN: Reasonable equity for early employees?

#7

Post by mattlong » Sat, Jan 15, 2011, 6:57 PM UTC

You'd be making above market and get 1% and get to lead the development effort? Amazing. That's like the holy trinity of tech startups if you ask me. :-)

Re: Ask HN: Reasonable equity for early employees?

#8

Post by jwedgwood » Sat, Jan 15, 2011, 7:02 PM UTC

The numbers you quote look in line with what I would expect, especially if you are getting close to a market rate salary. They are profitable and funded, which is a big milestone. It would help to know - Are they paying you a market salary? What is your past work history like? Does it include startups, and if so, in what role? How great is the rest of the team you are joining?

The Mark Suster link mentioned by brudgers is solid. My suggestion is to examine your motivations and goals, and then to be true to them. It will also help you evaluate your progress against those goals.

I'm going to presume this is your first startup, so these comments may be wildly off base if it isn't. The things I got out of my first startup were these:

(1) Money (we actually went public, though I had a very small piece of it). (2) Massive rapid skill development in circumstances where I could take on as much responsibility as I wanted and could learn from great people. (3) Connections to people that pretty much set me up for almost every job I had after that.

The value of (2) and (3) were huge. If I could give advice to my younger self it would be to focus on those two things first, then negotiate the best financial outcome that I could after maximizing those elements.

Re: Ask HN: Reasonable equity for early employees?

#9

Post by bluekite2000 » Sat, Jan 15, 2011, 7:10 PM UTC

ivanzhao wrote: post #6

I just got a bunch of offers from the valley. Here are some numbers: 3 big named, 10-40 people, post-A companies offered 100K-130K salary, and about 0.15%-0.2% equity. One stealth, seed-funded company in which I would be a funding team member, offers 1%-3% equity with correspondent salary.

so what will you decision be (working for a startup or doing ur own thing)? I remember you did your own stuff (iphone app) and stuff. I m in Sf now and in a similar situation so I d like to hear your take.

Re: Ask HN: Reasonable equity for early employees?

#10

Post by tptacek » Sat, Jan 15, 2011, 7:11 PM UTC

brudgers wrote: post #4

The value of the equity is the value when you dispose of it. That is more likely to be zero than $1,000,000. The the information needed to estimate its disposal value includes: the company's plans for future VC rounds, the terms of the 'A' round and prior investments, and the track record of the VC on the board. My opinion is that asking about the finances should not be an issue, since you are being asked to become a…

0.5% is roughly the market price for an otherwise well-compensated engineering role at a company with low financing risk.

Factors that increase equity:

* Founder incompetence, poor negotiating skill, impatience.

* Financing risk (near end-of-runway with no term sheets, &c).

* Sometimes, lack of revenue (at shoot-the-moon startups, revenue isn't expected early on and isn't a factor).

* Below-market salary.

* Non-substitutable technical expertise. Rare. Rails devs may earn a premium relative to the market, but there's still a market for them. SEO, on the other hand, is hard to acquire, because people who can actually do it can almost always earn more freelancing.

* Ownership of relevant core IP; ie, if you came up with the idea behind the company's product, or own an idea that would be key to improving it.

* Frothy talent markets (but, see "impatience" above). If you need someone RIGHT NOW and LOCAL in the NYC startup market, you may pay a premium.

Note that none of these factors are "the primary technical person in a code-based business". That ain't got nothing to do with anything. Yes, that person may be key in proving the business ahead of revenue or funding. But when you got funding and sharply reduced financing risk, you got yourself to a place where you don't have to pay the lead tech person a cofounder's equity grant.