Equity share for a 3rd member joining a small startup


1

I joined a small startup company roughly 1 year ago as the 3rd member of the company. At the time of joining, the company was roughly 6 months old; the company is contract work based and the 2 co-founders have a 50-50 share.

It was just the 3 of us for the large part of a year.... all 3 of us putting in long hours, late nights and weekend work to get through the project work that we had. The team has now grown to another 3 employees (all of which were found/recruited by me).

With regards to the equity share, I was initially given an offer of 5%... I was not happy with this offer given the following:

  • I had been earning well below market related salary.
  • I had worked incredibly hard (with plenty of overtime). I went out of my way to help out with anything and to offer advice on the running of the company.
  • I effectively grew the team to what it is now as I recruited the 3 employees that the company hired.
  • I also put complete trust in these guys upfront in that nothing was on paper at the start regarding equity share... I have also been very patient in allowing the whole process to unfold.

They then came back to me with the following offer:

  • 5% for free.
  • 5% as a repayable loan from the company based on 5% of a valuation done on the company.

I have 2 issues with this:

1) The percentage still seems quite low. I know that as companies grow and teams get larger, the chances of me securing more equity get tougher. I'm not sure if the 10% is worth my while at this stage... i would have expected higher as a 3rd member.

2) The valuation done on the company seems completely inflated... and is based on forecasts and projections over the next 5 years or so. The company has only been around for 1.5 years with no long term proven track record. My understanding of a young company is that it is difficult to take long forecasts into account and value it highly... I always thought a good general approach was to look at profits over the period and use some kind of multiplier between 1-3. The problem with the valuation that has been done is that the co-founders now expect me to take out a loan based on this and effectively lock me in by making the loan payable over several years.

I don't have a problem with the loan approach, however, the percentage seems low and the valuation incorrect. So my questions are:

  • What are some guidelines in determining if a percentage share is fair?
  • Are my concerns regarding the valuation valid at all?

Thanks!

Equity

asked Jun 13 '11 at 03:58
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User192585
6 points
  • Do you expect somebody to read the question that long? – Ross 5 years ago
  • You don't even have sentence ending with question mark. – Ross 5 years ago
  • I apologize for the long question... it was hard to explain the situation briefly. Any advice will be appreciated. – User192585 5 years ago
  • There is no question. As Ross pointed out, there isn't a single question mark in the entire dialog. – Elie 5 years ago
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4 Answers


1

Their offer is fair to them. Here's why:

  1. You didn't start the business. Their idea. Their risk. Their money. You are an employee. You are executing on their idea, their money and their risk.
  2. You agreed to the low salary, and that is OK. You also agreed to no equity. That is OK too. But they are not legally obligated to give you any more unless it was in a contract or employment offer.
  3. You are obviously not a co-founder. You are not entitled to more equity than they offered you.
  4. The other thing to keep in mind is that if they get funded by an investor, the investor won't care about you if you are not a co-founder.

What is fair to you is to get market value for your work (including overtime), and perhaps the 0.5% of common share options that a typical leading employee (non-executive) gets from a VC-funded company.

Valuations of early-stage companies are wishful thinking at best. If you can pull out your market wages, you have done well. The offer they gave you may help you here. For example, if the loan they make you is secured only by your equity in their company, then you're OK. Just take the loan, default on it, and then forfeit your equity.

If you take action on any suggestions, please talk to a lawyer or a financial adviser, especially if defaulting affects your credit rating.

Independent of that, you should get your salary adjusted to market levels.

answered Jun 14 '11 at 00:32
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Jay Godse
381 points

0

If you are unhappy, take your 5 or 10% and quit. Either they value you or they don't. Clearly you have differences of opinion about what your worth is to the company.

Either convince them to give you more, or leave. There is not much more to it.

answered Jun 13 '11 at 08:19
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Tim J
8,334 points

0

Its very tricky to decide a share once you have already done your work. In an year, 5% might be too , or a lot, it depends on who is running the company. Look at the other two partners, and yourself.

  • Do the other 2 look like that you can go together in a long partnership, their initial contribution or current contribution is more than you?
  • Can you leave and start another company with comparable business and better income prospective than you are doing now?
  • Do they want you to stay only to get them out of trouble? or they are looking at you as a partner in long term.
  • Whats their initial contribution in terms of money and time, it is key in deciding the initial share.

After a few years, what you earn will be based a lot on the input of you three guys, how much quality output you can produce together. How you run the business now. So as long as you cannot get a better share than this (unless you are able to start your own business or convince them to pay you more or join a similar company with better share), you might be ok with it.

On the other hand, do try your best to get a better share, make them define things, define your responsibilities, these should not be more than 10% of company's work (assuming it is a low investment company) when you are being payed 5% of profits. If they don't agree on paying you more, you can always negotiate on amount of work you input. I have been through a similar situation with 3 partners and ended up starting my own business as well as assisting them with minimal advice at small costs or free.

answered Jun 13 '11 at 18:01
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A B
171 points

0

It depends what do you have to offer as a member. Ask yourself some questions:

Do they needs you to complete the business? Do you have a large business networking related with this startup?

If you want 33% of share, are you disposal to put money on risk? If yes, propose them to invest money on the company and paying the work done by theirs.

answered Aug 17 '12 at 03:14
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Ed Pichler
201 points

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