Ask HN: How much equity for first employee?

First-employee equity grants are normally limited to the 1-2% range (at most), as opposed to getting 10% and higher grants made to founders, for the following reasons:

1. First employees usually work for standard salary/benefits and therefore do not take anywhere near the level of risk taken by the founders.

2. First employees normally have no role in conceiving the core business model that, in a good startup, will be perhaps the most valuable asset available to the company.

3. First employees normally compete with many other potential employees who are ready to market their services to the company for salary/benefits, plus some modest equity compensation.

4. Once founders have reached the stage where they want to hire a first employee, they have usually gotten past the stage at which the risk level is at its highest (for example, here, someone obviously had to decide to pay you for a year's worth of consulting time, which likely was not cheap, when the prospects for getting any return on that investment were at their most speculative).

Having said this, there is no magic formula in this area. To the extent that the above elements do not apply to your case, you can argue that you should get a larger grant in exchange for taking greater risk, for being indispensable, or whatever.

In this type of scenario, you will likely get a restricted grant or an option grant. The former is immediately taxable, the latter is not. Both constitute equity grants and both will be subject to vesting. Thus, you will need to negotiate not only the size of any grant but also the associated protections for your position (how much to be immediately vested? what percent, if any, accelerates on any termination without cause? or on acquisition?, etc.).

For a few basics on restricted stock, see http://grellas.com/faq_business_startup_006.html.

Hope this helps.

I will suggest make it a three phase deal.

In phase I

0. Keep in mind your expectations and the fact that they are not to be let loose in this phase.

1. Put the (very) brief of what you have done for the company in the last one year, so that all in the room are in the same picture. Also that you like the company and the people and would definitely like to continue. This will help you in point 3 below.

2. let them know about the problems you are facing with the over hours from what was commited (40 - 70).

3. Express your intentions about joining with equity and are expecting something fair that compensates for the extra efforts you have (and will be) put, as specified in point 1,2.

4. Ask them to put a proposition on the table.

5. Try to scrounge here and there a bit, see if they have something more in mind that has not come out yet.

6. If the deal is at your liking - take it.! - done. Else, just tell them that this is less than what you expect and you will get back to them in a couple of days.

This will also give them time to review and upgrade the offer. Since you didn't like it and as you said that they know your value, hopefully they will consider upgrading the offer.

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Phase II

Talk to people or ask on HN at that point again, you will get better advice with better information at hand.

Prepare two cases in mind:

1. Worst: If they don't think that you are that important as you think and no negotiation is allowed - no analysis paralysis - just Y/N

2. They are looking to upgrade the offer:

    2.1 Avergage: Not to your likeliness but to some midway
        Decide you lower limit and keep one thought in 
        mind for anything below that - Y/N. 

    2.2 Best: To your likeliness - Y

Remember: this is where the lines are drawn, you cannot go back on the Y/N of 1, 2.1 once decided form here.

Give them a call to check what have been thinking, are they looking for an upgrade in offer or not and accordingly fix the next meeting.

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Phase 3

With completely figured out Y/N for all 1, 2.1 just behave and negotiate hard in the room.

If the meeting has a conclusion - good.

Else, if they ask for, give them some but limited (a week max) to turn around.

My question, is it out of the question for somebody in my position to ask for 10-15% equity?

This is most likely WAY too high.

Are they offering you equity or stock options? These are very different things.

What is the value of the company (even if approximate)?

What value does the website and this position in general (ie: not you, just any random webmin) add to the companies value?

What do you think you bring to the table over and above a web developer/techie in general?

What other high-level adds do you see them reasonably hiring in the next 18 months?

Thanks for the reply.

From my understanding it would be equity. I'm not sure what the valuation would be. I do know between the 4 partners, they've invested a little over 100K.

The website is the company. I took the project from an idea to reality, so over the last year I've learned their industry inside and out.

In addition to all of the technical stuff, I have handled all marketing for the website which has resulted in visitors and revenue. I also do lots of strategy planning for ways to grow the business.

I don't see them hiring any high-level positions in the next 18 months. I suspect in the next year one of the partners will move to the CEO role and I'll move to a CTO role.

The amount they've invested is some what irrelevant, except to maybe establish a minimum valuation.

I figured that the website was the company, but thanks for confirming. You also should establish how many other people in their world could have done what you did (and be realistic here). The less uniqueness you bring to the scenario, the less valuable you are overall. This is simply a datapoint.

On the plus side, it does sound like you are a valuable player to the company.

You probably do NOT want equity though. Equity has immediate value, which means you will have to pay capital gains taxes on that. If the company is valued at $500K and you get a 10% stake, that 10% is worth $50K. Are you prepared to pay taxes on that amount? Options are probably better. (IANAL, and this is a gross summarization).

You mention there are 4 partners. Let's even say that you all are equal (and in reality from what you described I think they would value their stake above yours). If you each got 10%, that sucks up 50% of the stock and will (again, summarization) make raising any future capital more difficult.

It also sounds from your other posts that you are somewhat very green to this kind of negotiating, and that can hurt you. I would spend a LOT of time googling and reading about topics like equity vs. options and golden parachutes and the like.

Based on the few words that you've posted, I would probably look at something like: 5% stake as stock options. 1 year cliff, 4 year vest 110% market rate salary Some sort of MBO bonus (either on top of the salary or a 90% salary and MBO plan to get you to 105-110%) Contract assuring you 6 months severance plus 1 month for every year of employment upon termination for any reason (basic golden parachute and not terribly uncommon).

10% seems high for stock. 5% is probably more realistic. In any case you'll likely end up with no more than 75% of what any of the founders have allocated to themselves.

Given the situation you should get a salary slightly above market. This is "fair" for everyone.

The contract would be a negotiating point and you'll probably have a hard time with that one. But I would personally probably still ask for it.

A lot of this hinges on how experienced the founders are all well. If they are also new to this they may be offended and think you are over-reaching. If they've done this before, probably not. I'm also assuming that you carry yourself day-to-day in a manner that is commensurate with my suggestions. If you act like a child and have a cube full of action figures, it's harder to negotiate...

When you say "first and only technical employee" ... should I take that to mean that the four founders are non-technical? I assume so, if you'll be the CTO and one of the partners will be the CEO.

Based on that assumption, and what you said about marketing, planning, and "the website is the company" ... why do you need to be an employee? Why not just compete?

>>My question, is it out of the question for somebody in my position to ask for 10-15% equity?

10-15% seems too high. As you mention, the 0.5% equity is more common However, I think that it is hard to come up with a percentage without knowing how big the pie is.

If you expect the company to be worth $200million in n years, 0.5% is a great number (as long as n is reasonable). If you think the company may be worth $100K in n years, 0.5% is peanuts.

Perhaps you should hedge your bets with a decent salary + some equity.

The important question is if they will be paying a salary and what kind of salary will it be? (will you be taking a lower rate then you make now, etc).

If you are being paid a good salary it would be harder to justify a larger piece of the pie. If you are working for peanuts, or even free, then the sky is the limit.

The initial salary I negotiated for I thought was fair. It was market rate in my area.

The problem is I ended up working way more than 40 hours/week, which diluted my hourly rate.

I see this as a continuing trend. I would have a big problem working 70 hours a week for my current salary, which is why I'm trying to figure out what % of equity would be reasonable.

One approach you can use:

If you're working 1.8x fair rate, work out what 0.8x your salary is & imagine you were an investor with this sum to put to work - how much equity would you require? That's a starting base for your negotiation. Good luck.

Have a percent in mind when you come in, but try and make them offer before you say the amount you have in mind. It's good negotiation to get the other guy to say the first number. Then, if they come in way below what you want, tell them that this number represents significantly less then you were hoping for.

Keep in mind that if they do lowball you, you can always walk and start your own company. You now have the experience building a site from scratch and you can do it again yourself.

Do they have an evaluation? When negotiating equity before an evaluation is set, there is always funny money going on. What do you really bring to the table? What will be your position in the long run? Will you be more of a CTO position or a programer? If you're the only one actually creating the website, creating the technology then without you, it's just a good idea. Whatever percent you choose to negotiate for, be prepared to have a well documented, planned argument.

I definitely see myself more in the CTO role than programmer, which is why I feel justified asking for so much.

be prepared to have a well documented, planned argument.

Thank you, this is good advice.