Ask HN: I've been offered 5% stake in a startup. What should I think about?
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- Do you vest?
- If you vest, what metrics determine if your vesting stops? Can they do it arbitrarily, etc
- what if you finish your work in less than 1000 hours?
- you should have some benefit if you finish the work and then continue with the company.
- Does the 5% already have a value? In which case, if you get your stock up front you might have a tax implication.
- whats your anti-dilution rights? You should have the opportunity to participate pro-rata in any dilutive event (eg. a fundraising)
- the other founders should have a non-compete (so they cant sell the assets to a brand new company)
- if vesting, they should vest immediately on any change of control
- what if your responsibilities change so you are not doing development but some other work (biz dev, sales, etc.
- i would do basic due diligence on founder and current investors. background checks, etc.
- what does "5%" mean? Do they have an option pool set aside already? Can they issue arbitrarily more options?
If you have any questions on these I'll check back and answer.
- If you vest, what metrics determine if your vesting stops? Can they do it arbitrarily, etc
- what if you finish your work in less than 1000 hours?
- you should have some benefit if you finish the work and then continue with the company.
- Does the 5% already have a value? In which case, if you get your stock up front you might have a tax implication.
- whats your anti-dilution rights? You should have the opportunity to participate pro-rata in any dilutive event (eg. a fundraising)
- the other founders should have a non-compete (so they cant sell the assets to a brand new company)
- if vesting, they should vest immediately on any change of control
- what if your responsibilities change so you are not doing development but some other work (biz dev, sales, etc.
- i would do basic due diligence on founder and current investors. background checks, etc.
- what does "5%" mean? Do they have an option pool set aside already? Can they issue arbitrarily more options?
If you have any questions on these I'll check back and answer.
Not sure I understand vesting in general, but I will do some research to have the questions you have here answered. Thanks!
Vesting means that you get your shares over time. there's several things that can be happening in your deal:
1) you get your shares right away but they are restricted until you put in your 1000 hrs (this might be best because it starts the long-term cap gains clock ticking)
2) you get your shares in 1000 hrs (i dont like this. what if he raises money at a 20mm valuation. you might have a serious tax implication). This is a form of vesting.
3) the 1000 hours happen and then you get your shares over time (vesting) after that
4) all of the above, but you get options instead of shares. Not sure if I like this either but depends.
But all the other things I mention (anti-dilution rights, non-competes, change of control, change of responsibilities, etc) are all very important. you can't do a deal without everything spelled out.
1) you get your shares right away but they are restricted until you put in your 1000 hrs (this might be best because it starts the long-term cap gains clock ticking)
2) you get your shares in 1000 hrs (i dont like this. what if he raises money at a 20mm valuation. you might have a serious tax implication). This is a form of vesting.
3) the 1000 hours happen and then you get your shares over time (vesting) after that
4) all of the above, but you get options instead of shares. Not sure if I like this either but depends.
But all the other things I mention (anti-dilution rights, non-competes, change of control, change of responsibilities, etc) are all very important. you can't do a deal without everything spelled out.
If the company raises money 900 work hours from now at $1 per share and they have 20 million shares then 1% of the company is worth $200,000 then. If he is granted the shares then he has to pay taxes on that (he can get away with a discount to that but he still has to pay taxes of some sort).
Right now the shares are probably worth zero. So if he's granted stock now there are no tax implications.
Right now the shares are probably worth zero. So if he's granted stock now there are no tax implications.
Can you provide a bit more info on the tax implications of #1 versus #2?
1000 hours is half a year of work. Do you have an indication that this guy is not a bozo? Because I have one piece of evidence which strongly suggests bozo: he's trying to get a technical cofounder for 5%.
Of course, in theory it's only 1000 hours, which is quite different from what a technical cofounder for a startup might have to put in before seeing any money[1]
Until 1000 hours have elapsed, there's more work to do and they're seeing signs of promise but still don't have the budget to pay you (or someone else). When your chances of seeing any return on the work you've already done depend on their startup being successful it's going to be very tempting to do more unpaid work to try to make that measly 5% stake worth something.
If you were the first paid hire at a startup you'd probably also get a low single digit equity stake. And six months salary for six months work.
[1]The other way it's quite different from being a technical cofounder is that presumably you don't have any influence over any strategic decisions they make.
Until 1000 hours have elapsed, there's more work to do and they're seeing signs of promise but still don't have the budget to pay you (or someone else). When your chances of seeing any return on the work you've already done depend on their startup being successful it's going to be very tempting to do more unpaid work to try to make that measly 5% stake worth something.
If you were the first paid hire at a startup you'd probably also get a low single digit equity stake. And six months salary for six months work.
[1]The other way it's quite different from being a technical cofounder is that presumably you don't have any influence over any strategic decisions they make.
Could not agree more. If you have to take burden and responsibilities for being a cofunder, 5% is very low. If you are the first employee it's good, with a decent salary.
I'll give you 6% for my "startup" for 950 hours of work.
<B>Jokes aside, the MBA way of thinking is as follows:</B> 1) What has he already provided for the other 95% (customers, revenue etc)? 2) What is the chance that this startup will be successful and yield a big enough return on your investment?
Here is the math:
Amount of cash the 5% will yield on exit needs to exceed the Salary for $1000 hours of work multiplied by (1/(probability of success).
If the two above make sense, then you need to consider the opportunity cost of spending the 1000 hours on his project over another one.
<b> Other way of looking at it:</B> Do you really like working with the guy? Is he brilliant, a good team and your not sure where it will end up? If so, maybe it is worth negotiating either some up front cash or a bigger percentage if the math doesn't work and just go for it. Worst case scenario you loose some opportunity to work at another startup and you get some business experience and programming experience you wouldn't have otherwise.
<B>Jokes aside, the MBA way of thinking is as follows:</B> 1) What has he already provided for the other 95% (customers, revenue etc)? 2) What is the chance that this startup will be successful and yield a big enough return on your investment?
Here is the math:
Amount of cash the 5% will yield on exit needs to exceed the Salary for $1000 hours of work multiplied by (1/(probability of success).
If the two above make sense, then you need to consider the opportunity cost of spending the 1000 hours on his project over another one.
<b> Other way of looking at it:</B> Do you really like working with the guy? Is he brilliant, a good team and your not sure where it will end up? If so, maybe it is worth negotiating either some up front cash or a bigger percentage if the math doesn't work and just go for it. Worst case scenario you loose some opportunity to work at another startup and you get some business experience and programming experience you wouldn't have otherwise.
I always recommend getting some kind of hourly rate, as well as a percentage. That way if the stock ends up worthless, you still got paid something.
He's offering you an opportunity to be his cofounder. Given the high-risk nature of the opportunity (no funding, no salary, no customers, etc.)
Does 5% feel right now? My gut says no. Ask for 30%?
(On the other hand, 5% + a salary for first engineer is pretty generous)
Does 5% feel right now? My gut says no. Ask for 30%?
(On the other hand, 5% + a salary for first engineer is pretty generous)
I think it's strange that the percentage is tied to a set time period for your contribution. Who knows exactly how long it will take at this stage?
If I were you, the biggest question I would have would be posed in the mirror: do I believe in this company? 5% -- or better yet, 100% of nothing is......nothing.
If I were you, the biggest question I would have would be posed in the mirror: do I believe in this company? 5% -- or better yet, 100% of nothing is......nothing.
From what I have seen, it is a great team of people. And yes I do believe in what the company is trying to accomplish.
1000 hours sounds like a lot of hours for a contract to work with a startup. Does this mean that he's considering bringing you on as a cofounder, or would this be more of an advisory role?
Even if I plan to potentially come on full time and take a significant equity stake, I've learned (the hard) way to always charge for my work. Equity is essentially meaningless before a certain point in the startup's lifecycle. While this potentially allows you to get in early on in the startup, a number like 5% means that the guy doesn't really value the equity all that highly yet. Considering that a lot of founders don't give their first employee 5% (and that vests over 4 years), he either thinks that you are awesome, or doesn't really know what he's doing. I have seen new startups bring an advisor on at 5%, but that implied A LOT of work, vested over several years, and it always seemed like they were being too generous.
If the company is structured as an LLC, it probably isn't going to be a standard startup. If you want real investors, you have to form a C Corp (since there are too many restrictions on transfer of shares in an LLC).
In summary, I would take cash, and setup a contract for 100 hours at most. Feel free to take a significant hit on your normal consulting rate, but charge him something. Also structure the contract so that there are well-defined milestones, and you get compensated as you hit the milestones.
Even if I plan to potentially come on full time and take a significant equity stake, I've learned (the hard) way to always charge for my work. Equity is essentially meaningless before a certain point in the startup's lifecycle. While this potentially allows you to get in early on in the startup, a number like 5% means that the guy doesn't really value the equity all that highly yet. Considering that a lot of founders don't give their first employee 5% (and that vests over 4 years), he either thinks that you are awesome, or doesn't really know what he's doing. I have seen new startups bring an advisor on at 5%, but that implied A LOT of work, vested over several years, and it always seemed like they were being too generous.
If the company is structured as an LLC, it probably isn't going to be a standard startup. If you want real investors, you have to form a C Corp (since there are too many restrictions on transfer of shares in an LLC).
In summary, I would take cash, and setup a contract for 100 hours at most. Feel free to take a significant hit on your normal consulting rate, but charge him something. Also structure the contract so that there are well-defined milestones, and you get compensated as you hit the milestones.
BOE scenarios. For simplicity, I assume you earn $100/hour. So the deal offered is #100000 for 5% of the company. That suggests a $2,000,000 valuation of the venture at the present time. Is that reasonable? Would you invest $100000 of your own money in the venture? If you were to put your own money into the venture, what kind of return would you expect in a year? five years? ten years?
What is the vesting schedule? What is the actual cost to you of the stock, that is, what is the current value? What is the cash-out strategy? Are you OK with all your compensation being in stock for which there is no market? Has the company been funded? What about dilution of your share by future investors? What happens to you after the six months is up? Are you critical to the success of the venture? Who owns whatever intellectual property you generate in the course of your work with the venture? How do you participate in the upside if the company is a huge success? What happens it the venture fails? what if it just ends up as the living dead, surviving but not prospering?
What is the vesting schedule? What is the actual cost to you of the stock, that is, what is the current value? What is the cash-out strategy? Are you OK with all your compensation being in stock for which there is no market? Has the company been funded? What about dilution of your share by future investors? What happens to you after the six months is up? Are you critical to the success of the venture? Who owns whatever intellectual property you generate in the course of your work with the venture? How do you participate in the upside if the company is a huge success? What happens it the venture fails? what if it just ends up as the living dead, surviving but not prospering?
Is it possible the company may not have more than 6 months of runway? 1000 hours couldn't possibly be a well-scoped amount of work. You're not being given the security or compensation a full-time hire deserves OR the finite scope a contractor deserves. Even if you believe in the company and think the 5% is/will be worth something, consider what specifically you're being asked to do and be very clear with expectations. I'd also break up the agreement into smaller projects, with both cash and equity if you want equity, so that you have the opportunity to part ways on good terms instead of an all-or-nothing equity lump.
Who are the other members in his organization? Is he the only founder? (Does he own the other 95%?) How much funding does it already have/does it need in the future? (Dilutive potential)
What are your alternatives? If you have a 250k salary job elsewhere and you have a family, the safety might be worth it. What are your circumstances? The value of a stake in a startup is highly context-sensitive.
jaltucher brought up some great questions you should answer first, so you should take a look at his questions first.
Good luck.
What are your alternatives? If you have a 250k salary job elsewhere and you have a family, the safety might be worth it. What are your circumstances? The value of a stake in a startup is highly context-sensitive.
jaltucher brought up some great questions you should answer first, so you should take a look at his questions first.
Good luck.
Don't worry about the hours, it's the 5% you should be thinking about, specifically dilution. Watch the movie "The Social Network" and what (allegedly) happens to Eduardo. He had 30% and then ultimately had 0.03% ... unfortunately you have to watch the whole movie to see how that works.
Here's Fred Wilson: http://www.avc.com/a_vc/2010/10/employee-equity-dilution.htm...
Here's Fred Wilson: http://www.avc.com/a_vc/2010/10/employee-equity-dilution.htm...
Before you even consider the %, there is a much more important question:
Do you believe in the startup? And if you do, do you believe that there will be a market for the 5% stake you get.
A "no" to either question suggests that you should work for the money and not the equity.
Assuming the answer is "yes" to both, what are the terms under which you can unload that equity later on?
Do you believe in the startup? And if you do, do you believe that there will be a market for the 5% stake you get.
A "no" to either question suggests that you should work for the money and not the equity.
Assuming the answer is "yes" to both, what are the terms under which you can unload that equity later on?
I think you forgot the most important thing: How much this startup makes? Did it raise any money?
And since he is looking for free work, so the startup did raise no money and did make no money, too.
P.S. HN users, I have got a startup and I just need 500 hours of work for 20% stake.
And since he is looking for free work, so the startup did raise no money and did make no money, too.
P.S. HN users, I have got a startup and I just need 500 hours of work for 20% stake.
This is strictly business. I would get / create a full contract that immediately clarifies how and when you get your percentage. Also what type of stock is this? I second jaltucher's response.
This community is great at giving advice on various topics. I felt I should post this to see if you can help me with my decision.
A couple of months ago, I was approached by a founder of a new startup to help build his company's online presence and build software to integrate with his partners. For this he offered me a 5% stake in his new company, an LLC, for 1000 hours of development time. As I get closer to making a decision, I would like know what I should be worried about in these kinds of deals? What questions should I be asking? Are there any legal ramifications I need to think about?
I don't have any experience with startups, besides what I read about on HN, so any questions, comments, recommendations are appreciated.
I won't be going into too much detail about what the company does, and I'm using a throw-away account to post this, but I will try to answer any questions you may have.
Thanks!