I have been working for the past few years as a consultant doing mostly design/development. A good chunk of that time was spent upgrading and/or building out a product for a company that I will call a startup (for lack of a better word). The company has been around for almost 10 years, was bought out of bankruptcy once in that time, but has a handful of big name clients using the product and has been cash flow positive for about the last 6 months. The company currently only has board members (all investors), but the cash flow is about to a point where they are ready to bring on employees. Given that I will be making a decent salary that is not completely at risk, have built a signigicant portion of the existing product, and will be one of a very few employess brouht on, where should I start the negotiation process for equity?
I tend to agree with some of the others here. The company you describe is not a start up even though the company was been through some challenging periods (Bankruptcy) and operating at a loss (for who knows how long). The investors have taken all of the risk. You were hired as a consultant being paid as a third party. You did not assume any risk so therefore should expect little if any equity.
You're contributions to the product may have been important, which you were paid for, but in the end you did not sign on with this company as a beneficiary of equity.
If the investors feel your departure could cause disruption to the operation of the business then they may elect to grant some type of equity or profit share. If your contributions to the company are easily replaceable then your position then becomes a bit more precarious.
Personally, if I were in this position I'd have a discussion with one or more of the board members to see what their expectations are for granting equity or profit share, and then use this information to negotiate the best employee package you can get if you decide on accepting full time employment with the company.
This company is not a startup. The time it has been incorporated, the fact that it has a number of clients and that it has a positive cash flow makes it a growth company, not a startup. As such, you should expect low-to-no equity.
The key thing you (and they) should decide is if you are a key employee or just an early recruit. Essentially, the company should have (or will) set aside 5-15% of equity in a pool. If you are a key employee, you should be able to individually vest towards 0.5-2% equity from that pool, depending on role and value, over three years with a defined plan. If not, you should at least have some way to have access to the pool with a stock option plan. The remainder of the pool should be for profit sharing amongst all employees.
Based on the responses, I may have understated my position a bit. In the three years as a consultant for this company I spent some of the time porting the existing product from outdated technologies into the latest and greatest and spent the rest of the time building out a considerable amount of new functionality. At this point myself and one other consultant are responsible for 90% of the implementation of the product and are almost irreplacable. Not all of the work we did was paid for, some done on good faith to keep a good relationship and with the understanding on both sides that these nights and weekends off the books would be compensated with equity when the time comes. If it is standard for an equity pool of 5-15% is set aside for bringing on critical employess, I am expecting in the neighborhood of 3-5%. While I do agree with the statements of not having shared a lot of the risk to this point, I have made sacarfices from a typical consultant relationship which have been recognized by the ceo.
Thanks for all the feedback!
How much was 'good faith' work? Were the investors at the time aware that you were considering this 'good faith' work? I've done independent consulting and would say that that type of relationship has never come up. Once, getting an idea of equity in exchange for work was brought up but it was very clear. I would never do something on 'good faith'. That being said, if you are as responsible as you think you are, 3% vested over 4 years might be reasonable esp if you have the product knowledge you claim. It depends a lot on the status of the company - how much has already been invested, how investors feel about cash flow positive-ness at this point and esp the future prospects. Maybe they're thinking prospects are great but they want a full rewrite from scratch.