Ask HN: I need equity advice. | Hacker News Reader

Ask HN: I need equity advice.

26 pointsericmsimons15 comments

Hi HN! My company recently got funded by a prominent YC-like incubator (will not name for now, but they're closely tied to YC). I'm having trouble figuring out "deserved" equity for each of my team members.

To preface, I started working on this project two years ago. It was not a business, just a side project with no funding. It gained 3000 users and I decided to take it on full time. I made this decision nine months ago.

Enter Jake. I had a feature for my product that I wanted built and he was perfect for the part. He has worked with me for the past 4 months and we just received our incubator funding. I offered him 10% of the company (vested) when we first started. Some people have told me that I should have offered him 1-3%...what are you thoughts on this? Not that it matters, I'm locked into this agreement now but...

On the other hand, we have my friend John. John hasn't touched a line of code in our project so far (he just finished up his year in college), but he is an obvious choice to us because we need another talented programmer on our team. I offered him 5% to join us if we got funded. After the successful interview, he said he wanted 7.5% because he's leaving school to come and work for me (and his parents aren't particularly happy with that).

I feel like 7.5% is way too much for someone who is joining after we have been accepted into an incubator. The risk is now so much lower than before. Did I give Jake too much? Is John asking for too much? HELP!

UPDATE: Thanks for all the replies. I got the answer I was looking for and feel validated in my decisions. I'm going to leave this thread here for future founders to look at; the comments are gold. Thanks again HN :)

Working without a salary, pre angel funding = co-founder

You should be giving them 20%+ equity. If you treat them like employees, they will act like employees. At this early stage in the startup you need dedicated fanatics who will obsess about the project 24/7 and work 70 hours a week. With 5-10% equity, it's not rational for them to do so.

You are omitting critical information. Are you paying these people a salary, or just equity? If you're paying them a salary, then 1-3% is reasonable. If you're not paying them a salary, then they are pretty much cofounders. Getting into a non-YC incubator does not really reduce your risk by much, nor does getting 3k users as a side project.

No salary. So 7.5% is reasonable post-acceptance to incubator?

At no salary, 7.5 is small.

What you should do is come up with fair salaries and rate each person's work accordingly. What I mean is this. Let's say that you're 30 and fairly senior with a moderate amount of team lead experience-- $150,000 / year-- and have been working for 18 months. Your junior co-founder, who's just out of college-- $80,000 / year-- has been working for 12 months. So your investment (opportunity cost) is $225,000 and his is $80,000. The market valuation of the company may or may not be $305,000... it could be effectively zero, or it could be an order of magnitude higher, but this gives you a sense of what the proportions should be. The younger person should have 80/225 of what you have. If he stays longer, that number should evolve in his favor, which is one of the things vesting is for.

Of course, it's not clear what these time-of-stay amounts will be from the outset, which is why you need vesting and other provisions.

In your situation, rate yourself around $120,000/year (intermediate seniority with a promising product) and a promising, out-of-college programmer around $90,000/year. You're not going to actually pay these amounts to anyone, but these numbers should be the basis for equity amounts. Also scale for above-board effort, giving a 1.5 multiplier on people who really give their all (set aside some equity for this).

What is your current revenue?

I'm surprised no one linked to this, it being HN and all: http://www.paulgraham.com/equity.html

One other thing to consider, besides the rational aspects to equity assignment, is fairness. People will talk about their equity allocation sooner or later and if there is a major differential between people who perceive themselves as similar (e.g., similar skills, similar job, came on board around the same time), it could hurt productivity and morale. People know the world isn't fair but they still get angry/demotivated when they are on the wrong end of the perceived unfairness.

Thanks for the heads up - this is a really great point :)

this is brilliant point that many founders underestimate. fairness and motivation. it happens left and right when inexperienced tech founders just "calculate" equity. it might be calulated 100% corectly and co-founder might agree with it, but something will "not feel right" for him and greatly affect his performance. please pay attention.

And also, are you profitable? Because 7.5% or 50% of 0 is zero.

And what work still need to be done? Is it a next 5 years of 20h/day full-time commitment or it's just a "small contract"?

7.5% sounds reasonable, may be even too little if he is truly valuable candidate.

Don't forget that everything you give should vest over time (for obvious reasons), giving 10% vested like you did is not a good idea.

Also, timely 83(b) election is your friend.

7.5% sounds reasonable, may be even too little if he is truly valuable candidate.

Equity numbers are weird. Some times, 10% equity means the other founder has 90% and any dilution is going to hit that... meaning that a 20% grant to someone else moves the split to 72/8/20 not 70/10/20. So it's important to know what events can trigger general dilution. If the option pool is not set aside, that will trigger dilution too.

Sometimes, 10% means "I'm giving you 10 but I'm only giving myself 25 and the other 65 is for new talent, option pools, and to offset investor dilution". Other times, it means, "you're subject to all dilution, the only constant being that I have 9 times as much as you do". Two entirely different things.

The risk is still quite high. Incubator funding != VC funding.

7.5% is not "way too much" at this point. Are you paying $85-100k for a fresh out-of-college developer? If no, then he's putting capital at risk (opportunity cost) and 7.5% is a quite reasonable slice.

Really, though, it comes down to this: does hiring him (and getting N years of his work, where N is the vesting period) make the company 7.5 percent more valuable? If yes, then you're not really giving anything up by cutting him a 7.5% slice.

Perfect advice. Thanks so much!

Also, please do vesting for this next guy. It not only protects you, it protects them. The guy you gave 10% could be gone tomorrow and he has 10%. Do a 4 yr vesting, 1 yr-cliff, monthly thereafter.

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