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Ask YC: Help in negotiating my stake in a start-up
14 points by SamanthaG on May 1, 2008 | hide | past | favorite | 28 comments
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.




It comes down to an investment decision. Do you want to invest 2 years worth of salary into a company without a product in exchange for 4%? You're basically giving the company a yearly salary x 50 valuation. Pretend you're an angel investor and think about whether or not this is a good investment.


| 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.


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.


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


I don't think you can make that assumption unless you have preferred stock.


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.


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 :)


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.


4% isn't in any way an unreasonable share for a first or second hire, especially when they're asking you to take no salary.


I agree, it's not unreasonable. Just high.


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


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.


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.


As the 5th member that's pretty low. Last year I was offered 1.5% and would have been the 12th employee at a company that had been around just under a year, the only reason I didn't take it was the salary was too low to live any kind of half-enjoyable life. Now of course the company has about 35 employees and they seem to be doing well, although they're in a saturated market and I can't imagine them fairing very well in an economic depression. At this point I'll only kick myself if they get acquired and my 1.5% is suddenly worth upper 6 to low 7 figures.

If you're to be the 5th and crucial member, I'd fight for more or don't bother. The fact is most startups don't get acquired and you aren't going to get rewarded for your 80 hour weeks and below market salary - but you will have learned a lot and you'll probably have less hair.


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?


2-4% and a market rate salary after a VC funding round is about market rate for an experienced executive, eg someone brought in to be a VP of Engineering.


It's hard to see how they can guarantee that you won't be diluted.

There's a lot of variability in these kinds of negotiations. If you really think the company is going places, negotiate for as much as you can and say "yes" before it puts a strain on your relationship.

FWIW, if the other cofounders are close to having customers and a functional service, I think their offer is in the ballpark and you could easily justify taking it.


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.


There is a solution to giving large percentages to every new person: pay them a salary, even if below market. If you're paying someone with equity only you're asking them to assume all the risk of the company failing, which is fine, but you'll need to compensate them for that risk in addition to compensating them for the work they will put in.


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.


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.


VC money and salary is on the way in 2 to 3 years (according to the initial post). And having an idea of something customers want is good, but without a product it's still a huge risk.


read http://blog.guykawasaki.com/2006/03/nine_questions_.html




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