Equity · Executive Compensation

What form should equity take for a co-founder in a really early stage startup hire (options, RSUs)?

Anonymous

May 3rd, 2016

I am considering joining a very early stage startup that has two co-founders currently and an MVP. They are pre-money and I would be joining for equity only - no salary or other compensation. 

What form should my equity grant be in? Options, RSUs or some other vehicle? 
Is it reasonable to seek an accelerated vesting schedule at this stage (2 or 3 years, vs 4) with monthly (not annual) vesting?
Do the original co-founders own equity right away or do they have a vesting schedule as well? I.e., what happens if one of them decides to leave 12 months into this?
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Michael Brill Technology startup exec focused on AI-driven products

May 3rd, 2016

You should get 15 minutes of legal advice, but you *should* be able to get founders' shares which is basically common stock priced at a nominal level which you purchase and it'll likely vest over their normal vesting term (e.g., 4 years). Once you get these, you file an 83(b) election within 30 days and then all of the shares (even the unvested) are treated as long term capital gains with the clock starting on when you purchased them.

This is hugely preferable to options or RSUs... but is typically only financial feasible for you if there is still nominal share price. And that's where you want to float the specifics past a lawyer. If the company raises money in a couple months after you join then it's probably a hard argument that it was worth so little when you joined... but if you have to plug away for longer and can argue that there was very little true value when you joined, then you may be able to get founders' shares.

It varies from company to company, but your garden variety tech startup founders will vest over 4 years. And if they just own stock outright or have accelerated vesting, this will typically get changed when professional investors come in. 

Steven T.A. Carter

May 3rd, 2016

Michael's advice is spot on. In my mind, if you aren't getting paid, then you are a founder, not an early stage employee. Therefore you should get founder type equity and that should be founders shares/preferred stock. Do not fall for the common stock trap. You could put years into this thing and walk away with nothing. The vesting schedule protects them so they don't spend a valuable resource (equity) and have someone bolt after 18 months with 4 years worth of equity. 

Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

May 3rd, 2016

The only portion of your question that is unanswered is "what happens if one of them decides to leave 12 months into this?" The answer-there should be repurchase  ('buy back') agreements structured amongst all 'working shareholders'. Here is just one example.

http://contracts.onecle.com/eyeblaster/common-repurchase.shtml

Mike Moyer

May 3rd, 2016

You should issue each founder a number of restricted shares or membership interests and file an 83(b) election.

Next, vest one share for you, which will give you 100% controlling interest.

Next, use the Slicing Pie model to determine how the rest of the shares will vest. This will ensure that each participant vests exactly what they deserve.

Slicing Pie is a formula that will vest the shares based on the fair market value of each person's at-risk contribution of time, money, ideas, etc. The formula gives each person a % of the equity that reflects their % of the at-risk contributions.

If you want to know more, email me through SlicingPie.com and I'll send you detailed instructions.