Ask HN: About to give 5% equity, any pitfalls to avoid?
I'm planning on allocating 5% equity to a co-founder / dev. Are there any pitfalls to avoid? Any preferred structures with good incentives? Possible horror stories with valuable lessons?
• Unless the company's already been generating substantial revenue, 5% is an implicit message that what you've brought to the table already (an idea maybe) outweighs what this person could contribute working their hardest by a factor of ~10. That's out the window if there's salary on top of that, but if it's straight equity, it's an "I'm 10x better than you" implicit message that will color the relationship for the duration.
• Say you take on another 20% from a cash investor. Do you both get diluted evenly or do you cover it out of your lion's share?
• Make an effort to value it for them. Telling them you have 10M shares outstanding and you're offering them for $0.10 apiece, even though those numbers are subject to change, sounds a lot better than "will award you 100,000 RSU's at a strike price of $0.005 per" without making clear what those currently are priced at to investors, or the total number of ownership units outstanding. Always resented companies that didn't figure this out.
• Find a way to make it common, non-voting stock. You don't want to get in a situation where they have to be present for votes (or worse yet their votes are necessary to get your way after you get diluted with additional investors).
• If you're an "egg" of a company, pre-revenue, based on your idea and both of your hard work, there's really not much case to be made for your share being 95% instead of 50%. Greed, for lack of a better term, may be good, but a large amount of equity says "I'm going all in on you" and inspires the best people to stick around and contribute in ways you can't, even carrying you when you stumble. If someone offered to marry you and wanted to split the marital rewards 95/5, with you getting the 5, would that sell it?
• If the person's only 5% material then I'd suggest they're 0% material and you should simply pay them a salary, avoiding the potential perceived insults and headaches associated with equity.
• Do this as a C corporation, not an LLC. Everyone understands C corporation rules. Everyone makes up their own LLC rules and this can cause huge headaches down the road.
Would you give 5% to a developer whoes skills you can buy off the market for cheap? Think twice.