How to negotiate for equity when joining a startup as one of the first employees?


1

I am looking to work at an early stage startup, and I am currently negotiating with founders of several such startups. All of these startups have just raised their first funding, and for each of them I will be part of the first layer of real employees. After learning about these startups, I know that being part of any one of them will be extremely exciting for me, and I intend to put in my heart and soul to make the startup succeed. However, I still have the final stage of the negotiations ahead of me, and I am a complete noob in the world of startups.

How do I negotiate so that I end up with a fair amount of equity? From what the founders told me so far about how they intend to divide ownership, it seems more or less along the lines of Joel Spolsky's method. I agree with this method, its principles look reasonable and fair: the founders get much more shares than me since they took a much greater risk, vesting is essential, investments dilute everyone etc.

However this is a just a declaration of the founders' intentions for how the ownership will end up being divided a few years from now. How do I know that these intentions will indeed become reality?

What questions should I be asking during the negotiations? Are there specific clauses I need to have in my contract? What are some scenarios that can occur down the line and that I should be considering now? Note that I am aware of the usual risks startups face. I know that most startups fail, and probably the one I'll end up joining will fail too. In that case whatever equity I may have will be worth squat, and what I've earned is just the experience of being part of an early stage startup. I'm willing to take that risk. What I'm scared of is that the startup will succeed, and I won't get my fair share, despite the founders current declarations.

Equity Negotiation Jobs

asked Feb 26 '13 at 06:23
Blank
Joe
108 points

1 Answer


2

There are some good blog posts about negotiating startup equity, in particular this and this.
See also this previous question: Review offer for being employee #1 To answer your main question: to make sure you're not offered an empty dream but actual stock options (founders are granted stock/RSU, employees are usually granted options to buy stock in the future), you should make sure:

  1. the company has a Stock Option Plan in place and
  2. the Board of Director issues you the options you end up negotiating. This is the only way to make sure (legally speaking) that you get the equity you've been promised in the offer letter.

Therefore, some good questions are:

  • have you issued a Stock Option Plan? If so, can I have a copy? If not, when will you do it?
  • How big is your option pool?
  • What's the total number of shares? (so you can calculate or double-check the percent of the company you are entitled to)
  • What's my strike price?
  • When do you plan to do the next round of funding? (this is always relevant as you are likely to get diluted then, unless you ask for a refill, and also this usually requires a new - higher - valuation that can modify the strike price, so it's pretty crucial your options are granted before a new valuation)

There's not a lot of "specific clauses", since employment contracts are really standardized. 4-year vesting, 1-year cliff, double trigger acceleration (if you can get single-trigger, better). I would keep an eye on the options qualification (ISO or NSO) as there are different tax considerations. And of course watch-out for overly broad non-compete clauses.

In any case, information is power. Gather as much as you can before you negotiate. Best of luck!

answered Feb 27 '13 at 06:59
Blank
Veronica
829 points

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Equity Negotiation Jobs