Ask HN: What's an appropriate multiplier for stock-as-salary w/ sm biz/startup?

https://news.ycombinator.com/item?id=2813152

by anorak • 15 years ago

10 7 15 years ago

news.ycombinator.com

Before you give the smart response "Get it in writing beforehand," I've learned that lesson. Now I need to decide how to move forward.

I was asked to sign on "full-time" with a small business (startup?) that's been around for a few years. The deal was that I'd be paid a small fee on a per-job basis (basically a deployment to a remote job site) so that I could pay bills, while growing the company. I was also to be compensated in the form of stock. (Privately held company) I had recently lost my full-time job and had enough safety pad to take the risk, so I jumped in.

I now know I shouldn't have been so optimistic as to enter the situation believing that I'd be taken care of, and instead should have gotten things in writing before I started the work. Hindsight is 20/20. I spoke with the owner of the company about stock compensation and was asked to make a request to them in terms of how much stock I should receive at the end of the year.

I thought it would be appropriate (having committed a year or so of my life to growing, improving, and developing for this company) to receive stock at a multiplier level (that is to say, not 1:1, but more like 2:1). So I submitted a stock plan of 2x - 3x of the standard American salary ($40,000/yr) for my yearly compensation in stock, to be awarded at the end of the fiscal year.

The owners were mortified that I'd make such a request, and without responding with a "no," made sure I knew that I wouldn't be getting my request. On the advice of a trusted business friend, I'm seeking out what is an appropriate multiplier to use in stock compensation of work performed, based on my situation.

Last bit of information/details: I've literally lived the job for almost a year now. Traveling, residence, 60-80 hr work weeks, sometimes done in four days; doing marketing, developing, sales, ... as though I were the boot-strapping founder of the company. The company is privately held, and I would be diluting the stock of others by whatever I am awarded - but I would be getting less than 5% of total shares if I were to receive my original request. If income continues at its current rate (which it will at this company), I will have made less than $20k of taxable income.

dreamux• 15 years ago

You don't need an estimate of an appropriate equity stake, what you need is leverage. Even if you asked for a single share tomorrow, it doesn't sound like they have any reason to give it to you. Find the places where the bus factor is low (a specific technology that only you hack on, something falling apart that only you can fix, etc.) and point out that the costs to keep you (in your example ~80-120k in equity) far outweigh the downside they'd be exposed to if you left. Basically, find out how much value you create, get leverage by showing them that you're a pivotal part of the business, and then approach them with an offer that balances the two.

anorak2• 15 years ago

Hm, thanks for the good perspective; I have some significant leverage, as the founders don't want to do the work any more and that's one of the reasons they enlisted my help. As one with integrity, I feel it appropriate to hand-off what I've developed gracefully, and so documentation has been a big part of what I've done. I'll definitely look at the leverage side though, thanks for the thoughts!

brudgers• 15 years ago

The appropriate multiplier is zero, because in this case it is time to leave and move on - there is no repairing the rift in the relationship; both sides see the other's position as outrageous and assess your role completely differently (hired help on the one hand and cofounder on the other). Finally, there is a significant difference between a small business and a startup when it comes to how closely the owners expect to hold the company (as you have discovered.)

Hindsight is the right word, because it's time to put this in the past.

Good luck.

trevelyan2• 15 years ago

I'm a single founder and disagree with the other posts here that this is unsalvageable. But first things first, remember that it isn't odd for employees to own around 10% of the business IN AGGREGATE after dilution with senior non-founders taking up to 2%. Double that number if there are no outside investors, and do the math based on whatever your company is worth. Then divide by four to factor in vesting....

If those numbers don't make you happy, the problem is that your company isn't valued at the speculative 5-10 million that would make what you are asking for reasonable. Assuming the business makes 100k a year, we can guesstimate you want at least 10% of the value of the company for a single year's work. That might be fair or it might not be, but it's clearly disproportionate given the time and risk the others have already put in.

Where does this leave you? In my opinion as a business owner, the best way to get around this is NOT to haggle over the valuation of the company because you have no control over it and neither do your partners. By all means throw the ball in their court and see what they offer, but whatever they come back with remember that you can probably do better by linking your ownership to growth and the amount of new revenue you drive. This will be easier for them to agree to since they'll only give up more ownership if the company performs better thanks to your work. And assuming your work makes the company money - you will be able to push your stake in the business much higher than you would get otherwise as an employee, possibly even up to founder levels.

anorak2• 15 years ago

Thanks for your hard numbers; they're enlightening to a worker-bee like myself. A few questions: "Double that number if there are no outside investors" - do you mean double the 10%, or double the 2%? (I'd like to pursue this vein so I can relate to the owner's perspective.) How do you recommend calculating what the company is worth? Assets and revenue? (Company is still trying to turn a year in the black.)

So you'd suggest that I propose a stock package based on growth of the company over a certain period? Say maybe, over the next six months (if I stay with the company), what the increased revenue is? [Or would you recommend doing that in retrospect over the last six months - to say "a growth of X makes it reasonable for a compensation of Y"?]

trevelyan2• 15 years ago

If there aren't outside investors and no-one is getting diluted the 5% you mention in your write-up is reasonable since there is usually around a 20% total allotment to employees. All I meant otherwise is that from the owner's perspective it can be psychologically difficult to give significant equity to a new hire if you've been running the business for several years. It is always easier to agree to something generous if it is funded out of growth and conditional on business improving generally, so arguing for conditional options or whatever based on performance can be a good way to align interests.

rdouble• 15 years ago

Stock in a small business like this is worthless. If you are truly making less than $20K/yr you need to move on. You can make more with better benefits at Starbucks.

Ask HN: What's an appropriate multiplier for stock-as-salary w/ sm biz/startup?

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