Ask HN: In this situation, what's a fair equity share?

https://news.ycombinator.com/item?id=559070

by wyvern • 17 years ago

13 25 17 years ago

news.ycombinator.com

I'm sure I'm not the first person to ask this, and know each case is individual, but what guidelines should one use?

I'm the third person, and my percentage is pretty low (low single digits). I came in pre-money, and I accepted the percentage given because (1) I was fine with the salary offered (deferred until funding) and expected money to come imminently (it took a bit longer, but we're getting customer revenue) and (2) realized I didn't have the full picture (how many points were in the option pool, saved for legal counsel, etc.) and couldn't evaluate what a fair share was.

It looks like funding is coming via customer revenue about... now. We'll be incorporating soon, which seems like a convenient time to revisit the equity question. I don't feel entitled to a 1/3 split, since the other two guys have been working on the project a lot longer than I have, but I did come in 7 months pre-money, so I feel entitled to all the trappings of founder status, and an equity share that would reflect that.

What's a good guideline for whether or not I'm getting a fair share? Is it wise or unwise to negotiate a higher share, and at what point (pre- or post-revenue)?

Also, how do board seats work? If I enjoy hacking more than business, do I want one, and how do I go about determining if I deserve one? (E.g., if there are 3 board seats, I don't feel entitled to one; if there are 5+, I'll be pissed if I don't get one.)

jojoleflaire• 17 years ago

You are a minor player. Not being harsh, but it's just a job for you. Don't worry about the corporate details, if you believe in the vision. If the company is successful, you will be too. But make sure that as the company grows, you grow (career wise) too. You might get rich some day from it.

wyvern7• 17 years ago

I disagree, because I've put 7 months of opportunity cost on the line, which is about $60k, so I definitely feel entitled to the trappings of founderdom. I'd almost certainly leave if I found out that a post-money marketing guy got more equity than I did.

geoffw8• 17 years ago

wyvern - I agree.

I have to say, as someone who is massively new to this - this is no right or wrong. There's no harm in asking the question, if you raise your concerns and walk away with any additional % - excellent. But the thing you don't want to do is alienate the others, so be sure of your approach before you voice concerns.

Nobody here will ever be able to understand the effort/risk you have all put in comparably apart from yourself, so the only advice I'd give is go for what you can get, nicely.

vaksel• 17 years ago

What exactly do the other founders stand to gain by giving you even more equity now?

If you thought the original deal was unfair, you shouldn't have signed.

wyvern7• 17 years ago

I figured the deal was fair because I thought salaries would be coming in imminently, and that I'd only be putting a few grand on the line. That turned out not to be the case.

In truth, I don't know what fair is, because I don't see the whole picture: who else will get equity in the future, what does the option pool look like, etc.?

trevelyan• 17 years ago

A high single digit stake is a lot of money if things go well. Just make sure you don't get screwed over by dilution and you'll be fine. Get your promised equity in writing and be happy that you're with people who are delivering what they promised.

You can't re-price risk after it has been fully assumed and if I was one of your colleagues I would be pissed off at your attempting to re-negotiate a previous agreement. You seem to believe your co-workers have an obligation to see you get a certain level of compensation and that your equity stake should grow or shrink depending on that compensation. That is the attitude of an employee not an owner.

ericb• 17 years ago

>> What exactly do the other founders stand to gain by giving you even more equity now?

Presumably he knows the lay of the land, and is someone that they would not want to lose--there may be a significant cost associated with losing him. That said, his leverage is way lower now that the work has been done.

khangtoh• 17 years ago

Whatever it is, you agreed to the original offer and technically the other founders do not have to re-negotiate the offer with you.

Since you accepted the offer with salary although deferred. I think it is fair, assuming the other founders did not get salary, in lieu of the low equity you are receiving.

wyvern7• 17 years ago

The other founders have deferred salary as well.

Obviously, no one has to renegotiate anything, but I'm asking what's fair. I can't evaluate my own number because I don't know what's happening at the bigger picture. If 30 programmers more skilled than I am are hired tomorrow, I'm probably getting a fair share. If some post-money marketing VP gets, say, 8%, I'm going to ask for a raise to at least that level or quit.

mrtron• 17 years ago

That sounds like bad news waiting to happen.

The other 2 people have no idea you are upset with the current arrangement. Waiting to see what happens with other hires and then getting angry just seems spiteful and jealous.

If you are unhappy with the current situation, you need to figure out if it is enough to force you to quit. If so, give them the option to re-negotiate to a favorable arrangement for both, or quit.

If you aren't willing to quit over it, ignore that factor completely and learn from the experience.

bayareaguy• 17 years ago

These things are never simple but a fair distribution should take into account the risk each person took and the value of their contribution. For example if they worked twice as long as you and they took twice the risk you did then it would be difficult for you to justify more than a 1/9 stake.

If they were stuck before you got there and you played an important part in getting a 3-person company to some measure of profitability then you probably deserve closer to a double-digit percentage.

A board seat is probably out of the question at this point but I'd recommend you negotiate for the same class of shares and vesting/acceleration options that your co-founders get.

wyvern7• 17 years ago

For example if they worked twice as long as you and they took twice the risk you did then it would be difficult for you to justify more than a 1/9 stake.

That seems about right. I figure I'm worth about 9-10% of the work up to now, considering time spent and what we'd command on the market. That number needs to be docked according to the pool reserved for future employees, and raised if we go longer without salaries. There are enough variables that I'm not aware of, so I don't know what fair is although I have a general sense of the range.

A board seat is probably out of the question at this point but I'd recommend you negotiate for the same class of shares and vesting/acceleration options that your co-founders get.

Why is a board seat out of the question? Should I want one? I'm really naive about this question, and don't even know if I necessarily want one. What are the benefits and drawbacks?

jack• 17 years ago

First, read pg's essay on the subject, if you haven't already: http://www.paulgraham.com/equity.html.

Although it's tough to revisit this question after you've already established a deal (it would easy be perceived as opportunistic), it can't hurt to ask.

At worst, the other founders should be able to justify the allocation you've been given and their reasons for not upping your share; at best, they might revisit their decision given how much value you've delivered over the past 7 months.

Just make sure raising the question doesn't come across as blackmail.

webwright2• 17 years ago

"salary offered (deferred until funding)..."

I'm assuming you don't mean that you get paid back for salary you didn't get paid before funding. FWIW, investors are REALLY not keen to give $ to a startup and have a big slice of it go to to back-earnings.

Onto the question/situation, though. How long did they work on it before you? Do you all work the same amount?

Depending on the answer to those questions, I think you're entitled to a close to even share, assuming you all vest.

A way to get around the inevitable response is to vest. If you want to own 25% of the company, suggest that it vest over 3 years (you should ALL be vesting anyways). A good way to pitch it is this: "You guys have been working on this for 12 months. I've been working on it for 7. By the time I vest, the difference will be 41 months versus 36 months of time in. What do you think a reasonable percentage of my contribution will be at that point?" If time is the only facture, that's a fair point. If they poured cash in, have amazing connections, or had higher paying careers they set aside, they might be entitled to more.

Regarding board seats, those get re-assigned if you get funding oftentimes. Board meetings aren't particularly fun-- I'd avoid it unless you think your board will do something screwy. Only thing I'd offer is that you want founders to have control of the board-- if not, the board can fire the founders. If you are the odd-man-out, the board can fire you whether you are on it or not. So being on it offers little protection unless you have unanimity clauses written in. You can always ask to have regular optional attendance for the board meetings.

tptacek2• 17 years ago

Close to equal? Surprising answer from a successful founder. If he signed on, say, 6 months after the other two founders, that's valuing their previous contributions at 0.

webwright2• 17 years ago

I didn't throw out a # other than a 25% wag, but there are several outstanding questions. If they had a 4 month head start (11 months in versus the poster's 7 months) that'd give them 37.5% each to his 25%. But, as I said, there are lots of other factors to consider in the buckets of "contribution" and "risk". For all I know, the third founder might have a TON more to contribute and deserve MORE than a third!

In general, though-- I think people attach a lot of emotional weight to "I had the idea" and "I've been working at this a few months before you came on board" (UNLESS that few months reduced the risk-- i.e. customer acquisition/validation reduces a lot of risk while futzing with code for a few months really doesn't). In 5+ years, the idea is going to change and that original few months of contribution is going to be pretty meaningless in the grand scheme of things.

Regardless, the contribution in the FUTURE is likely what's going to matter most... Which is why vesting is important.

enjo• 17 years ago

As to what is "fair" that's between you and the founders.

You do need to be ready for some serious shock come tax time if you do take on additional equity. Equity (from the IRS perspective) is income, and is taxed as such. If the valuation of the company is high (not the cash value, the fair market valuation) then taxes are going to be through the roof even though you haven't received any cash.

tptacek2• 17 years ago

(a) You only owe based on the fair market value of the stock, which is not simply what a VC pays for it, and (b) you only owe when your stock vests, and (c) if this actually worries you, you arrange to file an 83b election and pay some nominal up-front fee, and pay only cap gains when you liquidate.

sokoloff• 17 years ago

a) It's hard to argue that the FMV is less than what the VC paid for it, though.

b) ISO/NQSO's are income only when exercised, not when vested. When the stock price is expected to climb (such as when you can vest pre-IPO and you're pretty sure you will IPO), then it's wisest to exercise as soon as you vest to start the clock on long term CG holding period, but the key moment for the IRS is exercise, not vest.

All of the above reflects only my understanding of US tax law from being a (non-founder) employee at 3 past startups with some kind of public exit (two acquisitions and one IPO).

Ask HN: In this situation, what's a fair equity share?

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