Startups · Founder equity

How much equity I should ask when joining a startup?

Duc Duong

June 6th, 2016

I'm in discussion with a startup that started operation about 6 months ago. It has contracts with several potential corporate clients and has a revenue of about $20k monthly. 

The startup currently has the 2 founders, one just joined 2 months ago as a technical co-founder. The technical cofounder is pretty junior and only work 15-20 hours/week. The business cofounder is working full time on the startup and very dedicated.

If I join them as a technical cofounder now, I think I will have to do most of the development work. The current system was a simple MVP and is in need of a complete rebuild, the business cannot be operated/scaled well without it (the current version was created by an outsourcing firm).

The startup doesn't have any funding yet but in the process of discussion (so nothing is secured). I will work part time and was promised to get a salary of $5k after 3 months.

So, given the above information, what is the realistic/reasonable equity I should ask for? 

Joe PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 6th, 2016

You might want to look at this similar question on Quora:

Here are a few things to consider: 
  • A company can only give away 100% of its equity -- so think of all the people who will want a piece of the pie. 
  • Responsible distribution of equity is always in service of increasing the value of the enterprise. 
  • 1% of $1B beats 100% of $1MM by a factor of 10:1 
  • Equity should never be confused for deferred compensation.
  • The current value of startup equity is nearly always zero - and (statistically) likely to remain that way.
  • Do you need cash now or the (slim) possibility of value later?   
Founders and early employees get wrapped around the axle about equity all the time ... what's "fair" turns out to be variable and subjective. I spend a lot of my time with early stage companies working through these issues and few want to have the conversations until things go badly. 

Joe PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 7th, 2016

I'm detecting a misconception that derails a lot of equity conversations.

Equity is notdeferred compensation. You can't get "paid what you're worth" in the form of equity for al least these reasons:
  • Valuationsat this phase are a fantasy at best. If you are anything other than a manufacturing operation you probably have no physical assets, you have no "run rate" with respect to revenue, and that IP you're developing (but haven't quitecommercializedyet) isprobablyworth a lot less than what you think it is.

  • The "job" of equity at this point is to get people investedin creating the future value of the company, not compensate them for the contributions they have made in the past.

  • At this point the company isprobablyworth a lot less than the sum of its parts. I've had many conversations that go something like this:
Employee (E): I've been working for X long and the market rate for what I do is Y so my contribution is worth $100 (just a number - don't get all upset about it)

Owner (O): So what do you think the business is worth at this point? We have no investors, no consistently paying clients, etc. We don't have $100 to offer you.

E: Well if I had taken a job with an established company my salary would have been more like $135, so I'm really giving you a break.

O: What do you think the company is worth at this point in time? That is, if we HAD to sell this thing AND we could find a willing buyer, what do you think a fair price would be?

For sake of argument, let's assume that E and O agree that the current value of the company (with an early stage product and no established run rate) is $75. What usually follows is a 3 hour conversation (it's amazing how consistent this length is) about how it is impossible to take a $100 slice out of a pie worth $75. Multiply this by a few employees and the distortion increases. How do you get $1,000 worth of slices (the total "contribution" of all employees) out of a $100 pie?

Then the argument turns it two ways first is "future valuation" (the employee version of a convertible note) - so what converts when? what is the "trigger event" for valuation and conversion? what if the pie still isn't big enough to cover all founders, employees, and investors?

The second major theme of the argument is "what I'm worth" or "what I could have made if I had taken another job" ... You join a startup because you believe in what's possible (and you can come to an agreement about how and when that will be compensated), not for security. If you want security and can get a "real" job that pays you "what you're worth" -- you should probably take the job.

Rafiq Ahmed

June 6th, 2016

One way is to calculate the value of your part-time service for the first three months and receive that amount in equity based on the founders' current valuation for the company. Since they have not yet taken outside investment this is unfortunately very subjective. 

If you are going to play a long term role and are essentially rewriting the product as the first hire outside of the founders, add equity for that. Ask the CEO to make the offer rather than setting a % yourself. Make the case that you have more experience, will work more hours than the other tech cofounder. I don't see why you would not get something close to what he has (but likely less).

Expect your equity to vest over time rather than just be granted. 

There isn't a perfect answer, hope this helps.

Thomas Eide Global Payments & Fintech Expert

June 6th, 2016

Believe it or not....still not enough information to give you an accurate answer. The math is simple but the facts you're sharing aren't the right

Michael Barnathan

June 6th, 2016

  • "1% of $1B beats 100% of $1MM by a factor of 10:1"

Not when you factor in the likelihood of the venture reaching and sustaining that valuation. Certainly run the $1b scenario, but the $10m one should be the one you view as a realistic definition of "upside". Also assess the risk that the startup will make nothing whatsoever; it seems particularly high to me in this scenario based on prior experience with this sort of team / set of circumstances.

Don't use the company's valuation projections unless they've already been appraised by an actual investor. Most founders will quote something in the $m range without any justification, but a broken MVP with no traction doesn't warrant it.

Is that $5k/year or $5k/month? How do the business co-founder and the other tech co-founder get along? What's the plan for that tech co-founder's future with you coming onboard?

Basically, it's all situation dependent. Your contribution to this venture as the primary product builder will likely be large enough that you should be asking what the other team members do to deserve their stakes, not vice versa. The founder sounds like a hard worker, which is great! But does his strategy make sense? Is he bringing in business / selling the product? Does he have good leads with investors? Has he done this before / does he bring experience to the table? What about the other tech co-founder? Junior and at 15 hours/week doesn't sound like a winning formula for a co-founder at all to me, but is the situation working out? Are products being built and shipped?

Based on raw intuition, I suspect you'll probably get an initial offer somewhere in the vicinity of 15%. Whatever they offer you, weigh it against those answers and see if it makes sense to you.

Eric Morgan Senior Sales at RoomsToGo

June 7th, 2016

If you are to basically rebuild an idea , see the revenues for the startup period, then have them tell you what your worth to them will ne. Nothing less than 26@

Derek Liu Founder and CEO at Homing Systems

June 7th, 2016

Here is my two cents. 
1. It would be more important to know if you really want to dive in. Startup is not for anyone, especially those don't have a belief and long term view of it. So the most important questions to ask yourself is: do you view this startup as a job or an opportunity. 
2. When it comes to compensation, the key is to determine what role and how important that role is you can play and play well. If you are going to single hand the technical part, I would say you can ask for half the company, like the two Steves. If not, you need to take a broader view how to distribute the shares that to make the company more attractive to talents. You'd better think as a founder because after all, the company need to succeed so everybody can get something in return. 
Also, when do the estimation and communication, I'd suggest to do it proactively with a broader view of the company's future plan. 

Diego Notaris Corporate Troubleshooter, Creative Investor

June 6th, 2016

Settle on a current company valuation based on the amount of work everybody has put in. Calculate your work in the next 3 months based on amount of hours. Settled on a valuation of your work in term of hourly rate. Then do the math...