Ask YC: Normal Options/Equity for Employee Number 1

https://news.ycombinator.com/item?id=239206

by auston • 18 years ago

15 9 18 years ago

news.ycombinator.com

Not sure if this has been posted before, but I have a few questions.

1. What would be considered fair equity for employee number one, in a startup, considering there is another developer and slightly below market pay (let's say... 25% below market, 75k when market is 100k) with an incomplete product?

2. What is considered a normal/common vesting period for equity?

3. Lastly, what are the downsides of a revenue share only package?

pjackson2• 18 years ago

As with most things: it depends.

How much risk have you taken out of your business? What is the market size and upside potential? What is employee #1's contribution expected to be? Is employee #1 your chief technologist, your CMO, or something different?

Have you closed angel or A-round funding, or are you paying them out of your pocket?

I am an East Coast startup person. Employee #1 at a post angel pre-A startup out here wants at least 1-2% with some hedging against dilution when the VCs enter.

Equity at the startups I've worked for is 4-year vesting with a 1-year cliff and monthly vesting at month 13. Most savvy negotiators will want a nut of options that vest immediately on acceptance.

If your product is not complete and you can't show that the market is itching to buy your product, a revenue-share-only package will be impossible to value.

But then again, same with the options.

timr• 18 years ago

It also depends on the quality of the employee, and the amount of incentive you want to offer her to stay with your company over the long term.

I think that founders (due to their enthusiasm/optimism) tend to forget two important truths about option grants:

1) Options aren't salary. They don't "make up" for below-market wages.

2) Options are time-delayed bonuses that provide incentives for your early employees to stick around.

If you try to economize by offering piddling option grants that vest over a long period of time, you're just defeating their purpose as an incentive. Moreover, a rational employee isn't going to accept or reject your offer based on the option grant alone; they'll decide if they like the rest of the offer/company/work first, then treat the options grant as a hypothetical bonus for taking the risk of working for an tiny company that will probably fail very quickly anyway.

My advice is to offer your first engineer enough to give them a reasonable shot of becoming a millionaire in the event of a $50M exit (so, at least 2%).

auston• 18 years ago

Not much. Approx 5 million businesses. Employees expected contribution is to finish development of system. Yes (Chief Technologist).

Thanks for the advice.

pjackson2• 18 years ago

Without knowing much about your particular business, I'd say you should expect to yield 2 percent of the equity and hold out for a proven rock star.

I'd avoid any instant-vesting grants if it comes up unless that employee is bringing you customer #1 or #2, or a significant partnership out of the gate.

blader• 18 years ago

1. It depends (mostly on company financing stage and valuation).

2. 4 years, 1 year cliff.

3. It's an uncommon structure that won't align the company's interests with your employee's. Revenue up front and value building don't always go hand in hand.

erdos2• 18 years ago

1. Zero

2. Infinity

3. It fails to maximize your expected utility while minimizing everyone else's.

dshah• 18 years ago

Lets remove the word fair, and I'll submit the following:

1. Options: 1% - 5% since this is a "non-founder" early employee and you already have another developer.

2. 4 years vesting with 1 year cliff seems to be "market" (i.e. the most common). After the cliff, vesting is usually pro-rata on a monthly basis.

3. The big downside of a revenue-only structure is that it does not attract the best candidates. The risk is skewed too much (the person you're trying to recruit is taking too much risk).

My two cents. Situations vary widely (on #1), so the standard deviation is pretty high.

vaksel• 18 years ago

From #3, are you asking what equity someone would want to work for free? Because if you are you'll never find anyone who'll want to do that.

ojbyrne• 18 years ago

As an aside, http://venturehacks.com is a great site for questions like this.

Ask YC: Normal Options/Equity for Employee Number 1

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