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:
They then came back to me with the following offer:
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:
Their offer is fair to them. Here's why:
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.
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.
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.
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.