Normal equity offer in startup for early employee

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Planner
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Normal equity offer in startup for early employee

Post by Planner » Wed Jun 13, 2018 7:47 am

What is a normal equity offer for one of the first full-time employees at a technology startup? And how does dilution of that offer occur? Just as valuation increases?

A hypothetical example that I'm wondering about is the following: if an engineer joins a risky startup with one founder and, after a low-salary trial period, is offered 1% in a company currently valued at $1 million, but with large potential value, should they take it, or negotiate higher, or leave?

What ranges of numbers would be acceptable? Is 0.1% fair? Or 10%? And how many of the first employees would get the best employee equity offer? 3? 10? And how does dilution of that ownership work?

Any general commentary would be great.

6 dollar ribs
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Re: Normal equity offer in startup for early employee

Post by 6 dollar ribs » Wed Jun 13, 2018 8:06 am

Dilution occurs when additional stock is offered to other employees or investors. You would receive 1% of issued and outstanding stock, but the company will be authorized to issue many more shares. You could be diluted if your company takes on additional rounds of funding or if other employees receive a lot of stock in the future as compensation and you do not receive a ratable share as well.

golfCaddy
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Re: Normal equity offer in startup for early employee

Post by golfCaddy » Wed Jun 13, 2018 10:20 am

Read this: Is it Time for You to Earn or Learn https://bothsidesofthetable.com/is-it-t ... 4270acd2f4. It's somewhat dated, but the same ideas still apply.

AlohaJoe
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Re: Normal equity offer in startup for early employee

Post by AlohaJoe » Wed Jun 13, 2018 10:37 am

Planner wrote:
Wed Jun 13, 2018 7:47 am
A hypothetical example that I'm wondering about is the following: if an engineer joins a risky startup with one founder and, after a low-salary trial period, is offered 1% in a company currently valued at $1 million, but with large potential value, should they take it, or negotiate higher, or leave?

What ranges of numbers would be acceptable? Is 0.1% fair? Or 10%? And how many of the first employees would get the best employee equity offer? 3? 10? And how does dilution of that ownership work?
1% is pretty common -- maybe even a "default" -- for the first 1 or 2 employees. And then it ramps down from there. 0.1% wouldn't be fair. 10% would be extremely generous. (It isn't clear but you mean the hypothetical startup doesn't have any employees yet? And you'd be Hire #1?)

Sam Altman suggests[1] "As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher."

However, just because that is what companies are likely to offer isn't what makes it "fair". There is a growing consensus among developers that low equity stakes for early employees are too low, given the amount of risk taken by the early employee (the founder may take on more risk but is he really taking on 20x or 50x or 100x the risk?), the long-long-long time to payouts (10 years is a pretty common time frame for an exit and your options have all kinds of issues that make it hard to keep them for that long), and so on.

For way more read this recent HackerNews thread "Pros and cons of working at a startup in 2018?" https://news.ycombinator.com/item?id=17286939

[1]: http://blog.samaltman.com/employee-equity

golfCaddy
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Re: Normal equity offer in startup for early employee

Post by golfCaddy » Wed Jun 13, 2018 11:08 am

Here's a good hypothetical to think about the situation. If you didn't work there and were offered the opportunity to be an angel investor, would you still want to invest in this company? What valuation would you put on the company right now. If it's $1M, then 1% of that is worth $10k. $10k vested over 4 years is $2500/year. Would a $2500/year bonus have any impact on your decision to work at this company? If not, ignore it and focus on whether it make sense to stay there, assuming the equity turns out to be worth zero.

Read these links for information on angel investing:

Why Angel Investors Don’t Make Money
https://techcrunch.com/2012/09/30/why-a ... ls-anyway/

Angel Investors Do Make Money
https://techcrunch.com/2012/10/13/angel ... s-overall/

MotoTrojan
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Re: Normal equity offer in startup for early employee

Post by MotoTrojan » Wed Jun 13, 2018 11:39 am

Very difficult to answer as it is situational. Is the company expected to be $100M or $10B? Does it have a 50%, 10%, or 95% chance of hitting that target and having a liquid exit (sale, buyback, public)? At the end of the day it is a lottery ticket with a potential payout and probability; thus an expected value.

What would the salary be after the trial period? If I were taking substantially below market, I think I'd want 2%+. 1/2-1% seems reasonable for first 3-5 employees with a more standard salary.

Also a rough estimate of dilution would be that your stake is cut in half after every round of fundraising. Hopefully that is the main component and they aren't just offering new hires 1% for eternity via additional shares/dilution. I would not expect that though, as it would be diluting the investors/founders too in most cases (assuming founders also have common stock).

I took somewhere in that ~1% range for a lottery-ticket start-up (would be life-changing exit, but not super likely) but I also was able to nab a far above market salary so it was an easy choice.

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gunn_show
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Re: Normal equity offer in startup for early employee

Post by gunn_show » Wed Jun 13, 2018 12:44 pm

MotoTrojan wrote:
Wed Jun 13, 2018 11:39 am
Very difficult to answer as it is situational.

....

I took somewhere in that ~1% range for a lottery-ticket start-up (would be life-changing exit, but not super likely) but I also was able to nab a far above market salary so it was an easy choice.
MotoTrojan hits it on the head across the board. #1, it is nearly impossible to answer this due to so many variables and unknowns. You can do a lot of reading and researching and get anecdotal feedback from folks in similar situations, but ultimately it's up to you to determine what is fair and worth gambling on.

Like Moto, a friend of mine left his online megacorp retailer in Seattle for a startup, got 1%+ equity (stated value currently at $1M+), but also has a very favorable market salary and has ascended to Director title during the 2-3 year growth period. So I would say as of today he is winning on both ends - he has an appropriate salary and nice title, but also the huge lottery ticket in his back pocket.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

CFOKevin
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Re: Normal equity offer in startup for early employee

Post by CFOKevin » Wed Jun 13, 2018 1:23 pm

It depends on your role and title. If you are expected to be a member of the management team (say running your functional area as the Company grows to 100 employees), then 1-2% is about right. If you are a developer or marketer doing start-up tasks but not expected to fill a VP role, then .1-.2% is about right.

In either case, your dilution will be due to additional capital that is raised. A reasonable assumption would be that the Company will sell one third of itself a couple of times and you'll suffer dilution of 50-75%. Some may be offset by future equity grants. Future funding rounds will be celebrated as that validation is a sign of success.

Good Luck,

Kevin

engin33r
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Re: Normal equity offer in startup for early employee

Post by engin33r » Wed Jun 13, 2018 1:30 pm

Being an early employee of a startup is a sucker's deal. The most likely chance of an exit is acquisition for a single-digit number of millions after a few years of work. The founders might make a couple mil (FI achieved!!), and the early employees will make on the order of $100k. The early employee is definitely better off at a bigger company with liquid RSUs.

Now, if you can be a founder instead, that's the ticket. I worked at a couple of startups...even got 2% at one of them. I worked my tail off for years and the equity went to zero. I vowed to never invest so much of myself into my work unless it was for my own startup.

Edited to add: the recruiters or founders will blow a lot of smoke about the value of the equity package and their chances for success. I'd discount that all very, very highly. After a decade and a half in Silicon Valley, my recommendation is to do the startup if you're comfortable assigning a $0 value to the equity. Otherwise, pick a larger, more established startup (think Airbnb, Uber, Lyft, Nextdoor, etc) if you want your equity to be worth something. The surest route to success is via the public tech cos FAANG(ALPHABETSOUP).

MotoTrojan
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Re: Normal equity offer in startup for early employee

Post by MotoTrojan » Wed Jun 13, 2018 3:08 pm

engin33r wrote:
Wed Jun 13, 2018 1:30 pm
Being an early employee of a startup is a sucker's deal. The most likely chance of an exit is acquisition for a single-digit number of millions after a few years of work. The founders might make a couple mil (FI achieved!!), and the early employees will make on the order of $100k. The early employee is definitely better off at a bigger company with liquid RSUs.

Now, if you can be a founder instead, that's the ticket. I worked at a couple of startups...even got 2% at one of them. I worked my tail off for years and the equity went to zero. I vowed to never invest so much of myself into my work unless it was for my own startup.

Edited to add: the recruiters or founders will blow a lot of smoke about the value of the equity package and their chances for success. I'd discount that all very, very highly. After a decade and a half in Silicon Valley, my recommendation is to do the startup if you're comfortable assigning a $0 value to the equity. Otherwise, pick a larger, more established startup (think Airbnb, Uber, Lyft, Nextdoor, etc) if you want your equity to be worth something. The surest route to success is via the public tech cos FAANG(ALPHABETSOUP).
There are other reasons as alluded to above to join a start-up, especially earlier in your career when it can enable more responsibility, learning, and career growth. My current role is quite binary; the company will fail, or have a $B+ valuation. Time will tell :sharebeer .

golfCaddy
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Re: Normal equity offer in startup for early employee

Post by golfCaddy » Wed Jun 13, 2018 3:26 pm

CFOKevin wrote:
Wed Jun 13, 2018 1:23 pm
It depends on your role and title. If you are expected to be a member of the management team (say running your functional area as the Company grows to 100 employees), then 1-2% is about right. If you are a developer or marketer doing start-up tasks but not expected to fill a VP role, then .1-.2% is about right.

Good Luck,

Kevin
You seem to be analyzing this like it's a more mature company. 0.1-0.2% seems low for a seed startup where the OP would literally be the first full time employee.

cj2018
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Re: Normal equity offer in startup for early employee

Post by cj2018 » Wed Jun 13, 2018 3:37 pm

Planner wrote:
Wed Jun 13, 2018 7:47 am
What is a normal equity offer for one of the first full-time employees at a technology startup? And how does dilution of that offer occur? Just as valuation increases?

A hypothetical example that I'm wondering about is the following: if an engineer joins a risky startup with one founder and, after a low-salary trial period, is offered 1% in a company currently valued at $1 million, but with large potential value, should they take it, or negotiate higher, or leave?

What ranges of numbers would be acceptable? Is 0.1% fair? Or 10%? And how many of the first employees would get the best employee equity offer? 3? 10? And how does dilution of that ownership work?

Any general commentary would be great.
My advice would be - don't do startup at all unless you are either the founder or you know the founder is a experienced guy with track record of success (think Marc Lore of Jet etc or Travis of Uber etc.). Having worked at a once high-flying SF startup, it's not worth your time especially given you will get higher base comp at bigger public tech with more liquid share in the form of RSU.

Having said that, if you determined startup is your next move, I'd advise the following:
  • what's the alternative option on the table? Are you currently working at a nonstartup or you have offers from other startups etc? If the answer is yes, compare the total comp between the 2 and discount your startup equity to 0
  • if you are the first engineering hire (looks like you are): ask for 5% and founder will balk and you will probably get 2% or 3% after negotiation
  • all employee will get stock option in Silicon Valley - it's just a matter of 1% or 0.1% or 0.001%

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dm200
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Re: Normal equity offer in startup for early employee

Post by dm200 » Wed Jun 13, 2018 4:21 pm

A VERY HARD LEARNED and expensive lesson:

If you have ANY ownership/equity in such a startup, you are (or may be) considered an "insider" and any "debt" or other financial obligation (outside of worthless equity) may be put at the end of the line if the startup declares bankruptcy.

Do not lend money to the startup. Do not allow significant payroll past due obligations. Do not defer reimbursement for reimbursed expenses.

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