What do I need to research & understand to negotiate equity?

https://news.ycombinator.com/item?id=2928339

by planckscnst • 15 years ago

12 8 15 years ago

news.ycombinator.com

Contrary to the advice I've seen on HN many times, I took a position at a startup with a compensation much lower than I could have gotten elsewhere, with the understanding that I would get some kind of payoff when we make it big.

Now the company is finally incorporating, so we're going to have the chance to make that official. The problem is, I really don't know all the issues involved in how shares/options work.

-Is it simply saying I'd like x% or I'd like y shares, or is there more to it?

-Is it worth using vesting as part of the negotiation?

-Are there things to negotiate other than amount and vesting?

-I know this last question is a big 'it depends', and not useful for the majority of people reading, but I have no idea how much it's appropriate to ask for; any suggestion would be useful. Some insight into my negotiation position follows. We have several engineers, but there are two that would _really_ hurt if either left. One of those is myself. They would of course get along, but it would be very costly for them. The other engineer is a founding member. I love the company, the people, and the work I do. However, I love my family more, and I have to make long-term plans, so I am willing to leave if we can't come to an agreement.

damoncali3• 15 years ago

Talk to a tax accountant now - before you take any stock/options. You need to understand the tax and cash flow consequences of options. If you don't plan this right, you can wind up with a huge tax bill and no money to pay it with. To make things worse, if the stock then goes to zero, you'll still have to pay the taxes, even though you never saw a cent.

Negotiate vesting. Negotiate triggers (what happens if you get acquired/fired/relocated). Negotiate the length of time you have to exercise options after you no longer work there.

As for how much? As much as you can get. It's that simple.

robfitz2• 15 years ago

Agreed that options can be a bit of a tax chore. Since you're on board before the incorporation, ideally you can just have your shares allocated in the same way as the founders do, for a value of a ten-thousandth of a cent (or whatever) per share.

Exit triggers don't apply to core engineers. They exist for roles which help you get to an exit situation but don't have a role to play within the future owner. Relocation as a trigger might be worth considering though.

And no, don't negotiate for as much as you can get =/.

damoncali3• 15 years ago

And no, don't negotiate for as much as you can get =/.

Why not?

robfitz2• 15 years ago

First off, it strongly benefits both sides to reach the 'correct' agreement here. If you over-negotiate and get too much equity, the CEO is duty-bound to fire you once they realize their blunder, since it's irresponsible to the other stakeholders not to. Similarly, if you are given too little, you'll come to begrudge them and quit, significantly hurting them.

If you started with any salary at all, you don't have a good argument for a founder-sized chunk. An early, key engineer is going to be somewhere in the 2%-10% range.

If you started without salary, and thus took founder-style risk, you might be playing more in the 5-20% space.

For the overall company breakdown, You can assume the structure is something like 10-25% employees/option pool, 75-90% founders.

For example, the founders might choose to give 5% to each of 2 key engineers, leave another 10% to spread among all future employees & advisors, and divide 80% between the founders.

Vesting is a clear "yes", for everyone on the team including the founders. Founders & employees should be on a 4 year vest with a 1 year cliff (if you get fired or leave within the first year you get nothing, at the end of year 1 you get 25% of the equity you are entitled to, and then another 1/48th of the total each month from then on).

The vesting thing is more like... if the founders don't do it, you don't want to work for them because they're clueless. So you should insist on it because otherwise the company isn't being run properly. If the founders don't vest themselves, quit immediately because they are mis-aligning themselves with the future of the company.

You always talk about equity in %, not a # of shares. Companies can be started with an arbitrary number of shares (my last one had 7 million, some go with 10 million, some 100,000). # of shares is totally meaningless -- talk in percent ownership. Founders saying "And you get 20,000 shares!" are trying to trick you.

My advice here is to make yourself a mock cap table, and try to play with how you would set it up to keep everyone properly incentivized, as if you were an outside board member wanting it all to run smoothly.

So assuming there are 3 founders (1 of whom is the engineer), plus you, plus 4 other engineers, you might end up with something like this (where you are the high-value engineer):

Founders: 75% (30/25/20), Current engineers: 15% (8/2/2/2/1), Future Pool: 10%

trussi• 15 years ago

There are a bunch of triggers you want to include in the agreement, like what if one of the founders become incapacitated or gets divorced? Will the survivor/ex-wife now be your boss? You'll need to either dig up a well-written agreement or get some good legal advice.

If you're attorney costs less than their attorney, you're most likely going to leave an opening for you to get screwed in the future. Even if your other founders aren't dicks, a future investor might be (i.e. screw over bob and kick him out or you don't get my money).

Remember, this is like a pre-nuptial agreement. You have to write the agreement as if you are going to get a divorce.

You want to make sure you cover owner equity distribution in the agreement. If the other founders are pulling money out of the company, you should get an equal share.

And you might want to consider a buy-out clause. This gives the other founders an option to buy your shares. They will really like this. And you might give up some upside, but still walk away with a nice pile of cash. Make sure to structure it as best you can, so it's your option to take or not take. This gets tricky, but is doable.

If you really think there is some potential for the company to make some serious profit, you need to go find a $350-500/hr attorney to help you get into the right agreement.

chsonnu• 15 years ago

Engineer's Guide to Silicon Valley goes over a couple of these questions and scenarios.

What do I need to research & understand to negotiate equity?

Related Stories