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

#1

Post by hellocoins » Sun, Mar 20, 2011, 3:06 PM UTC

Hi Everyone,

This community is great at giving advice on various topics. I felt I should post this to see if you can help me with my decision.

A couple of months ago, I was approached by a founder of a new startup to help build his company's online presence and build software to integrate with his partners. For this he offered me a 5% stake in his new company, an LLC, for 1000 hours of development time. As I get closer to making a decision, I would like know what I should be worried about in these kinds of deals? What questions should I be asking? Are there any legal ramifications I need to think about?

I don't have any experience with startups, besides what I read about on HN, so any questions, comments, recommendations are appreciated.

I won't be going into too much detail about what the company does, and I'm using a throw-away account to post this, but I will try to answer any questions you may have.

Thanks!

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

#2

Post by jaltucher » Sun, Mar 20, 2011, 3:11 PM UTC

- Do you vest?

- If you vest, what metrics determine if your vesting stops? Can they do it arbitrarily, etc

- what if you finish your work in less than 1000 hours?

- you should have some benefit if you finish the work and then continue with the company.

- Does the 5% already have a value? In which case, if you get your stock up front you might have a tax implication.

- whats your anti-dilution rights? You should have the opportunity to participate pro-rata in any dilutive event (eg. a fundraising)

- the other founders should have a non-compete (so they cant sell the assets to a brand new company)

- if vesting, they should vest immediately on any change of control

- what if your responsibilities change so you are not doing development but some other work (biz dev, sales, etc.

- i would do basic due diligence on founder and current investors. background checks, etc.

- what does "5%" mean? Do they have an option pool set aside already? Can they issue arbitrarily more options?

If you have any questions on these I'll check back and answer.

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

#3

Post by thewordpainter » Sun, Mar 20, 2011, 3:38 PM UTC

I think it's strange that the percentage is tied to a set time period for your contribution. Who knows exactly how long it will take at this stage?

If I were you, the biggest question I would have would be posed in the mirror: do I believe in this company? 5% -- or better yet, 100% of nothing is......nothing.

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

#4

Post by binarysoul » Sun, Mar 20, 2011, 3:46 PM UTC

I always recommend getting some kind of hourly rate, as well as a percentage. That way if the stock ends up worthless, you still got paid something.

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

#5

Post by hellocoins » Sun, Mar 20, 2011, 3:48 PM UTC

jaltucher wrote: post #2

- Do you vest? - If you vest, what metrics determine if your vesting stops? Can they do it arbitrarily, etc - what if you finish your work in less than 1000 hours? - you should have some benefit if you finish the work and then continue with the company. - Does the 5% already have a value? In which case, if you get your stock up front you might have a tax implication. - whats your anti-dilution rights? You should have…

Not sure I understand vesting in general, but I will do some research to have the questions you have here answered. Thanks!

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

#6

Post by patio11 » Sun, Mar 20, 2011, 3:59 PM UTC

1000 hours is half a year of work. Do you have an indication that this guy is not a bozo? Because I have one piece of evidence which strongly suggests bozo: he's trying to get a technical cofounder for 5%.

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

#7

Post by hellocoins » Sun, Mar 20, 2011, 4:01 PM UTC

thewordpainter wrote: post #3

I think it's strange that the percentage is tied to a set time period for your contribution. Who knows exactly how long it will take at this stage? If I were you, the biggest question I would have would be posed in the mirror: do I believe in this company? 5% -- or better yet, 100% of nothing is......nothing.

From what I have seen, it is a great team of people. And yes I do believe in what the company is trying to accomplish.

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

#8

Post by jaltucher » Sun, Mar 20, 2011, 4:13 PM UTC

hellocoins wrote: post #5

jaltucher wrote: post #2

- Do you vest? - If you vest, what metrics determine if your vesting stops? Can they do it arbitrarily, etc - what if you finish your work in less than 1000 hours? - you should have some benefit if you finish the work and then continue with the company. - Does the 5% already have a value? In which case, if you get your stock up front you might have a tax implication. - whats your anti-dilution rights? You should have…

Not sure I understand vesting in general, but I will do some research to have the questions you have here answered. Thanks!

Vesting means that you get your shares over time. there's several things that can be happening in your deal:

1) you get your shares right away but they are restricted until you put in your 1000 hrs (this might be best because it starts the long-term cap gains clock ticking)

2) you get your shares in 1000 hrs (i dont like this. what if he raises money at a 20mm valuation. you might have a serious tax implication). This is a form of vesting.

3) the 1000 hours happen and then you get your shares over time (vesting) after that

4) all of the above, but you get options instead of shares. Not sure if I like this either but depends.

But all the other things I mention (anti-dilution rights, non-competes, change of control, change of responsibilities, etc) are all very important. you can't do a deal without everything spelled out.

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

#9

Post by mdink » Sun, Mar 20, 2011, 4:17 PM UTC

This is strictly business. I would get / create a full contract that immediately clarifies how and when you get your percentage. Also what type of stock is this? I second jaltucher's response.

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

#10

Post by wtvanhest » Sun, Mar 20, 2011, 4:19 PM UTC

I'll give you 6% for my "startup" for 950 hours of work.

Jokes aside, the MBA way of thinking is as follows: 1) What has he already provided for the other 95% (customers, revenue etc)? 2) What is the chance that this startup will be successful and yield a big enough return on your investment?

Here is the math:

Amount of cash the 5% will yield on exit needs to exceed the Salary for $1000 hours of work multiplied by (1/(probability of success).

If the two above make sense, then you need to consider the opportunity cost of spending the 1000 hours on his project over another one.

Other way of looking at it: Do you really like working with the guy? Is he brilliant, a good team and your not sure where it will end up? If so, maybe it is worth negotiating either some up front cash or a bigger percentage if the math doesn't work and just go for it. Worst case scenario you loose some opportunity to work at another startup and you get some business experience and programming experience you wouldn't have otherwise.