Startup - 1 or 2% equity is good deal? Please advise


4

Two experienced guy with good business experience and good valley connections are looking for technical guy who can help them to start their startup.

So I am the only technical guy who will help them with starting wire framing, architecture framework, prototype work, build technical team etc. I am senior java/j2ee Architect, Java Developer and Ruby Developer with startup experience. I am not good UI developer but otherwise I am experienced to do all other necessary startup development work.

Initially it will be part-time work and once prototype is ready then it might become full-time job.

In return I will get stock options worth 2% of total authorized share ( And no title at all ). Is that good deal?

From their side - "Their equity will also significantly go down with funding rounds. At the end of the game - they will also have equity in single digit and my equity won't get diluted with funding cycles".

Two people with idea and connection needs prototype work done and for that just 2% seems very low to me. Whats fair deal? Please advise.

Equity

asked Jul 15 '10 at 04:26
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Web Thinker
430 points

7 Answers


6

In return I will get stock options worth 2% of total authorized share ( And no title at all ). Is that good deal? Form their side - "Their equity will also significantly go down with funding rounds. At the end of the game - they will also have equity in single digit and my equity won't get diluted with funding cycles".

Ehh, what's that about? If they bring on VC money, then new shares are issued. That dilutes your ownership as a percentage of the whole, as you maintain your number of shares while more shares are added. The above about your equity not getting diluted is nonsense. I'm guessing they're dreaming about 'paying' you now with a contract that promises you 2% of the shares at a set point in the future, without actually issuing the shares now. I would never agree to that, and neither would a VC.

Let me see if I have understood correctly: You're getting no salary, and a vague promise of 2% ownership in the future, in return for building the first release of the product? I'd say that offer is completely amateurish and way way off mark as regards market price for your contribution. I would walk away.

If you don't really have anything else to do, and you can negotiate your ownership percentage way up, or the scope of work way down, then it could make sense to continue.

For some ballpark answers about early stage equity see the past discussions here and here.

(To Joel Spolsky's answer, note that "Series A" means investment by professional venture capitalists. That usually means a) money in the bank, b) the concept has been vetted by professional investors, c) a prototype has been made and technology risk is low, d) some customers have signed up or there are letters of intent, proving market demand. For this reasons you're taking much less risk after Series A, and hence you get less equity. Your situation is very different.)

answered Jul 15 '10 at 05:11
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Jesper Mortensen
15,292 points
  • 2% is not just to build prototype. 2% equity is for prototype and all future work... – Web Thinker 9 years ago

5

In one sentence: tell them to sharpen their pencils and add a zero to that number with provision that those are founders' shares with same vesting as the other founders.

My immediate gut reaction is they are scumbags. You want someone to build the product that is the foundation of their startup and all you get is 2% OPTIONS!?!?!?!
People who are connected rarely if ever will mention they are connected. Things just happen, money appears, deals close.
Posers talk about all those connections they have etc. etc. etc.

Find someone who actually values you and will treat you fairly.

answered Jul 15 '10 at 05:47
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Apollo Sinkevicius
3,323 points
  • Thanks. This deal is estimating my value too low and that is bothering me :) I am planning to do this because i am at point to stop my http://www.tweetalley.com efforts. It is just tough to make that profitable in crowded twitter app market. But same time I am not desperate. – Web Thinker 9 years ago

4

+1 to Apollo and Jesper. The deal is ridiculous and probably shouldn't be fixed.

They're either ignorant or malicious. Either way you don't want to be involved.

answered Jul 15 '10 at 23:29
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Jason
16,231 points

1

I have come across such a situation myself , Helped an executive in understanding the technical side of the things , making him understand the market landscape , players , leaders and losers in the space from a technical stand point of view - Time spent was almost equal to 1 Year . Since the day one I requested him to ensure that I get 12% equity same as his ( founders stock ) with 1k/month from the time term sheets are drawn to developing product .. vesting tied to product deliverable s / releases. 1k/month was to ensure that he is committed on the project and will not going to dump the project half way.

Guess what when the contract was given to me , I did not get the same rights on the equity as his. Equity I would gain by meeting a deliverable milestone I will have to forego if company terminates my contract at a future date without cause. Termination with and without cause was very broad and did not have any protection for me .

So basically the contract came down to this
I work for 1k per month help build the technology etc..start gaining equity to be vested in 24 months from the date I deliver a release/ complete the phase .. After 12 months of my effort , when I have thought that I have earned 10% equity , before the final milestone company can terminate the contract without cause and I would loose all that equity ..

I politely declined the offer and moved on ..

To give you some idea
Oct 06 - Aug 07 - General discussions, knowledge sharing etc..and contract terms
Sept 07 - I moved on
Company got seed capital in March 2010. Site not live yet , and claims to have beta customers and revenue generating ...
I am glad I moved on .......

Be very careful in the decision that you make

answered Nov 21 '10 at 03:24
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Lav
87 points

0

Your decision. I woul tell them to put the job on elance and put it to some dude in india... not interested, sorry. Or I would tell them "go fuck yourself" if I am in a bad mood. Not friendly but pretty much in the area I see it.

answered Jul 15 '10 at 04:36
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Net Tecture
11 points
  • Not exactly professional, but it does get the message across I guess... – Tim J 9 years ago

0

Also think about what they will need to get the company valued at before 2% is worth bothering about.

They should be offering you a more significant chunk to get you to 'buy into the project'. If you want to 'invest' your time in a project you need a decent chunk of equity, same as any VC otherwise don't bother.

answered Aug 8 '10 at 21:28
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Mark Stephens
976 points

0

Doesn't seem like a win-win...move along is our opinion

answered Nov 21 '10 at 03:45
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Xs Direct
275 points

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