Ask HN: I've been offered 5% stake in a startup. What should I think about?

1000 hours sounds like a lot of hours for a contract to work with a startup. Does this mean that he's considering bringing you on as a cofounder, or would this be more of an advisory role?

Even if I plan to potentially come on full time and take a significant equity stake, I've learned (the hard) way to always charge for my work. Equity is essentially meaningless before a certain point in the startup's lifecycle. While this potentially allows you to get in early on in the startup, a number like 5% means that the guy doesn't really value the equity all that highly yet. Considering that a lot of founders don't give their first employee 5% (and that vests over 4 years), he either thinks that you are awesome, or doesn't really know what he's doing. I have seen new startups bring an advisor on at 5%, but that implied A LOT of work, vested over several years, and it always seemed like they were being too generous.

If the company is structured as an LLC, it probably isn't going to be a standard startup. If you want real investors, you have to form a C Corp (since there are too many restrictions on transfer of shares in an LLC).

In summary, I would take cash, and setup a contract for 100 hours at most. Feel free to take a significant hit on your normal consulting rate, but charge him something. Also structure the contract so that there are well-defined milestones, and you get compensated as you hit the milestones.

I think you forgot the most important thing: How much this startup makes? Did it raise any money?

And since he is looking for free work, so the startup did raise no money and did make no money, too.

P.S. HN users, I have got a startup and I just need 500 hours of work for 20% stake.

If the company raises money 900 work hours from now at $1 per share and they have 20 million shares then 1% of the company is worth $200,000 then. If he is granted the shares then he has to pay taxes on that (he can get away with a discount to that but he still has to pay taxes of some sort).

Right now the shares are probably worth zero. So if he's granted stock now there are no tax implications.

Don't worry about the hours, it's the 5% you should be thinking about, specifically dilution. Watch the movie "The Social Network" and what (allegedly) happens to Eduardo. He had 30% and then ultimately had 0.03% ... unfortunately you have to watch the whole movie to see how that works.

Here's Fred Wilson: http://www.avc.com/a_vc/2010/10/employee-equity-dilution.htm...

BOE scenarios. For simplicity, I assume you earn $100/hour. So the deal offered is #100000 for 5% of the company. That suggests a $2,000,000 valuation of the venture at the present time. Is that reasonable? Would you invest $100000 of your own money in the venture? If you were to put your own money into the venture, what kind of return would you expect in a year? five years? ten years?

What is the vesting schedule? What is the actual cost to you of the stock, that is, what is the current value? What is the cash-out strategy? Are you OK with all your compensation being in stock for which there is no market? Has the company been funded? What about dilution of your share by future investors? What happens to you after the six months is up? Are you critical to the success of the venture? Who owns whatever intellectual property you generate in the course of your work with the venture? How do you participate in the upside if the company is a huge success? What happens it the venture fails? what if it just ends up as the living dead, surviving but not prospering?