Payment methods and conditions for fresh startup
I am an Interface designer and a startup asked me to work with them. As of now they are only two people and do not have a budget, so they would offer a share in the company.
I would be fine in general with that, but they did offer only 3%. I am not shure if I would be considered a founder in all the diagrams one can find online, but I am supposed to invest 15h per week and having no salary I consider that I am taking a high risk. 3% sounds extremly low for this risk. Is that a normal practice?
Also they want to add a calloption meaning they can buy my shares back for 3* a set hourly rate for all the hours I worked on it. Does that mean I have to sell it (sounds like it). If so is that a common practice too?
Payments Terms And Conditions Shares
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If you go for the call option, make sure it covers your rate plus some. Remember, there's a time value to money. If someone offers to pay you $100 today or $100 six months from now, they are significantly different. That $100 now could be invested to have $100+N by the end of six months. Your call option should reflect that. – Casey Software 11 years ago
2 Answers
The call option means it is an option for them to exercise at any time. You have to accept. If it is 3x a good rate and covers all your hours, then that is probably your best hope of a good payday here.
3% equity, even if realised immediately, is not good for a startup with no money and no funding (which is what "...do not have a budget..." means).
If you think it'll be fun, then go for it, but you should probably assume that it'll never go anywhere and it'll all be for free.
Being equity holder means you need to have confidence in their business plan. For the risk of not getting any $$ in the scenario where the whole thing goes belly up, 3x professional rate is normal (though I've seen 2x for less crucial roles). The problems you face are
- a) valuation ... work out what 3% means in terms of share value
- b) dilution ... you are basically dragged along when any investor comes along and shrinks the pie
- c) exit ... it sounds like totally at beck&call of the 2 founders (basically they buy you out at any time). This is dangerous as the rule of thumb is reward should match risk.
A good UX designer is worth weight so you need to have an appreciation of what value you are bringing to the startup and if you believe, what negotiating position you hold. If you don't have faith in their business sense, then try to insert/cover your exit options at liquidity events. Think of it as a decision tree with hopefully mutually beneficial outcomes ... but also keep in mind the saying, if you pay peanuts, you get monkeys.
