I recently met with a local start-up and was presented an offer. I spent the last few days reading on this board looking for insight into the start-up financing world. The start-up is technology based and and my role would be the sole programmer to start. The team currently consists of the founder and two people as advisory roles. At this point in time the future funding is reliant upon a proof of concept which I would be building.
Here are the details:
The start-up financing world is new to me so Im still trying to learn everything I can. I realize the stock has no value without knowing the total shares outstanding. I was told the company was setup with 10 million shares and that the majority of them will be used for future investors. I have not learned about option pool yet but it sounds as if this offer is for 0.0022% of the company and that every month of labor I would receive 0.00015% of the company.
Can this be right? Or is there something I am missing?
Maybe maybe not.
So consider this carefully because while this may be fun and potentially profitable it could also spell disaster if the business fails.
That's a mess. Here's a big problem: They are issuing you stock, which they claim to be worth $8/share. Over the course of a year, you're going to get stock "worth" $58,000. And then you'll have to pay tax on $58,000. Where's the money to pay the taxes going to come from?
If it were me, I'd drop the entire idea of getting paid my "market rate." I'd buy some stock of the company at its current value, which is realistically on the order of pennies, not dollars, per share. The stock may vest over time, but the vesting schedule is wrong -- as others have pointed out, I could be fired after 11 months. I'd expect monthly vesting, and I'd want to see how the company planned to divide up the rest of its stock -- how many shares go to the "founder" and "advisors"? If I'm going to produce the main intellectual property of the company and taking a big risk with it, then I'd expect to get at least 20% of the initial capitalization of the company (before selling shares to investors).
Also, I'd be very careful about any arrangement where I work now and get paid later. Those sorts of arrangements can be very tricky tax-wise -- messing up could mean a big tax hit for me, and liability for the company.
What they are trying to do is pay you your market rate in stock. They appear to have valued the venture at $80m ($8 x 10m) and worked backwards from there with the assumption every share equals $8 in cash. You only get rewarded (i.e get cash) if someone wants to buy your 22,000 shares instead of the other 10m shares.
As Alain points out, for the risks you are taking you should be getting a much bigger chunk. And the vesting schedule is not in your interests. What will stop them firing you in 6 months and nothing has vested?
You can "set something up to receive compensation for time invested upon receiving funding"?
Definitely don't do that. You should be getting a salary from Day 1. It can be deferred and then paid upon receiving funding, but don't take anything less than that.
You should be entitled to maybe 1% (or more- maybe 2-3%) of the company's shares, on a fully-diluted basis (which means 1% or whatever of all shares- not just common stock or whatever class you're getting0, upon consummation of the initial funding (Series A round- not convertible note round, or something earlier).
I wish everything in Life had that much Clarity, before we make our decisions, unfortunately does not work that way,
anyways why don't you put in both the options in your agreement.
7,330 shares at the end of the first year
Your hourly rate(some nominal rate probably 60-70% of the your standard rate) not too exorbitant.
and then make it your choice to pick either one of them at the end of vesting period,
that way even if they decide to fire you they would have to pay your salary for that period(say 11 months).
A lot of the answers here don't seem to be very helpful because they say things like 'You are getting screwed! Walk away!' without any detail. This is one part math problem (the part you've given us) and one part your relationship with these people. Your question should really be, "what's a normal equity distribution for a first technical hire?" That's an easier question to answer without all the emotional responses.
First, read Fred Wilson's blog on employee equity. And then ask them how much they've allocated for those brackets and where you fit in.
A few percent stake for a first technical hire is pretty good (5%). You are only getting 'screwed' if you don't fully understand how you could possibly be diluted in a way that was bad for you.
Dilution isn't always bad.
Let's say they value the company right now at $5MM. And they grant you 10% of the company. You're total option stake is worth $500,000. You build the prototype and everyone loves it and the VCs come along and they say they will value you at $50MM, and they want to buy 10% of the company. The company issues 10% more shares to sell to the VCs. You get diluted, so now you only own 9% of the company. But you own 9% of a company worth $50MM, which is worth $4.5 million. Yippeee!
What happened at Facebook that they tried to show in the Social Network was the company essentially issued A LOT more shares, and granted them all to everyone except the one guy, so that guy got screwed.
"On January 7, 2005, Mark caused Facebook to issue 9 million shares of common stock in the new company. He took 3.3. million shares for himself and gave 2 million to Sean Parker and 2 million to Dustin Moskovitz. This share issuance instantly diluted Eduardo's stake in the company from ~24% to below 10%."
To be honest, there really isn't much you can do to stop something like this, but it's probably very rare.