Proper Equity Share for Very Early Level Startup


3

I was offered a position of software engineer at a company of 3 people, but it's technically just one (more on that later). I was offered just about market value for an entry software engineer in my area and about 1% of ISO over a 4 year vesting period.

Here's the catch: The majority of the salary is deferred until they secure the entire seed round of investing they were looking for (currently they have 1/3rd). Two of the co-founders are no longer there (full-time job and school) but are said to continue "helping out when possible". I'd basically be one of two people working on the product full-time.

Is it fair to ask for a little more equity? I had something in the range of 3-5% in mind before they gave me an offer. Is there a better form of equity to ask for other than ISO? If I leave the company in 2 years, do I keep the stock I own but forfeit the 2 additional years that haven't vested?

Equity

asked Sep 24 '11 at 15:31
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Butch
16 points
  • Also take a look at the [equity canon](http://www.brightjourney.com/q/divide-companys-equity) question for additional Q&A on this topic. It also contains the link below. – Jarie Bolander 8 years ago
  • If two of the original founders have gone, even if they're "helping out where possible", then it sounds like they're not really taking it seriously. Personally I'd look for another opportunity. – Giles Thomas 8 years ago

2 Answers


3

First, make sure you read this: Forming a new software startup, how do I allocate ownership fairly? Lots of good stuff in there (and in the comments too).

There's a big question about time and effort. How much has gone into it already? If not that much, then you should get a bigger share.

Is the product live? If it's still in development, pre-launch, then you should get more (perhaps even be considered a founder). It all depends on those pesky little details which only you (and they) know.

If they want to defer a big chunk of your salary, then you have to ask what guarantee you'll have of getting it. For example, if they fail to get all their funding, will you get paid? I'm guessing not. So, in that case you have a massive gamble on their efforts. They also gamble on yours (they need you to build something to get the money). At this point, you're looking more and more like a founder. You certainly should get more options if you have no guarantee of getting paid your deferred salary.

As far as the vesting, yes, that's how it works. If you vest over four years (sounds reasonable to me) and you leave after two, then you get what is vested and you lose what is not. Remember, you're getting options, not stock. You're getting the right to purchase at some price, not actual shares in the company. So, you'll keep those options not that stock. The options will expire at some point if you don't exercise them (maybe 10 years or so - check the terms).

answered Sep 24 '11 at 18:35
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John
1,194 points
  • Thanks. The product is still in development and figures to be for the next few months. The three of them have put a lot of work into it thus far, but like I said, it's not finished and two of them are basically gone now. If I am considered a founder, do I get a special kind of stock option, or is it the same ISO of common stock that I would get normally? – Butch 8 years ago
  • Of course there *are* different kinds of options (could be for preferred stock, could be non-dilutable, etc.) but the point is really the quantity. If they've put a lot of time and effort into they'll likely not see you as a founder but it's not really fair for them to bail because they can't get it done, ask you to take all the risk and only give you a tiny chunk of the action. The issue here is risk. Founders take risks, you're taking a HUGE risk. They need to compensate you for that risk. 10% at a minimum (IMHO). – John 8 years ago

1

Let me add these points:

The two co-founders who aren't working for the company full-time: are their Founder's Shares subject to vesting? If not, then there is a high risk they won't contribute equally to the company's future growth. If so, then if they don't wind up working for the company, their shares should accrue back to the company and accrete to all other stock-holders equally.

It would be a major red-flag for me if the Founder's Equity weren't subject to vesting. I'd insist that it be. This is a critical question that needs answering.

With regard to your deferred compensation, I would ask either -

  • that it be paid back in full at Closing. I would also try to negotiate additional equity or options in exchange for deferring your comp: you should be paid for your risk or not getting paid; or,
  • should it not be paid in cash, be paid in the class of stock being issued at Closing. You should try and negotiate some discount to the equity price paid by the investors, say, 20% or so, similar to how discounts offered to purchasers of Convertible Notes work.

If you believe in the product and the market and, most importantly, your ability to deliver the product, then it might be a great opportunity, especially if you can resolve these issues.

answered Sep 26 '11 at 21:42
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Dmiller Conj
156 points

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