Ask HN: What is “significant” equity?

In my deluded world, significant equity is enough that you get rich if the founders get rich and get wealthy if the founders get wealthy even if less so in both cases.

It's not the $100,000 in salary over three years you didn't get in exchange for taking equity after a deal which made the founders rich if not wealthy. Significant equity aligns your outcomes and interests and gives you a seat at the table when liquidity events are going down.

Significance is more of a sliding ratio. 0.5% is significant if the founders each have 6%. 10% is significant if they have about 25%. There should be only one qualitative step between stakes, and that step should reflect the size of the company.

A final tell on significance is if the ownership structure is relevant to the discussion. Significant equity alters it in a...wait for it...significant way. It signifies that the offer is about more than a hiring decision. If the next programmer passing the interview process would get the same offer next week then the equity isn't significant. Gates and Allen wanted Ballmer, nobody else was going to get 6% with an option to 8 because there was nobody else.

Good luck.

And in this context it's especially important that you (the first employee) have the same stock type/class as the founders. You have disadvantages if they have stock and you only stock options. If they have preferred stock treatment or grant other investors preferred stock treatment then the company might exit at $100 million and you still receive nothing.

yeah, its a grant with vesting period, not options. As far as type I'll have to get into with actual contracts to sign but I believe we're all the same across the board, talking in terms of fully diluted percentage.

So if I'm reading you right, if the founders have split things with 40% each, and an option pool of 20%, significant would be > 4%?

35/35/10/20 would be significant. The equity grant is treated as increasing the value of the founder's equity. The option pool is already a sunk cost toward employees.

I would say significant stock is at least an amount that doesn't make someone think twice about the package. If the founders are holding 80%, then everyone else is pretty much an employee not an owner.

There's nothing wrong with being an employee. There's nothing wrong with working below market rate in exchange for some equity. Just be clear that it's a job and the only way you'll achieve market rate compensation or above is with a significant exit, limited dilution, and good-will toward you on behalf of the major shareholders.

So essentially employee equity is never "significant" in your opinion?

Completely understand that, but my question was about significant from an employee perspective as I mentioned in the OP.

Employee equity is usually not significant as equity. It might be significant as compensation. That's more likely if it already has value and the offer is in terms of shares. If it's in terms of percent, then we are talking equity not compensation: we're talking about ownership and control of the business and shaping the direction of the company.

Is the value of 2% of a startup meaningful compensation? Probably not. See my valuation elsewhere in this discussion.

The stock they offer you is to compensate you for the risk you take by working for an 'unproven' company, that may or may not be successful, with a below-market salary.

In post series A startups, there is already some 'proof' of success (generally in the terms of growth), so salary offerings gets high and stock options get low than a pre-series A startup.

Stock options/grants are tricky because of dilution and preferences. The 2% can mean many things. How much the company plans to raise in the future? Even if it's not planned, circumstances can change overnight, and company may need to raise.

It seems you have a connection with founders, so it probably won't hurt to talk to them about this issues.

In the end, it all comes to how much risk you are taking, and the compensation you are getting for it.

So thats part of my dilemma, I don't think theres much risk at all and I'm a bit confused by talk of risk in the startup world for software guys. The market is hot and I have little doubt I could walk out tomorrow and get a 110-120k job, and maybe a bit more, so the risk is only that I'm gambling the lower wages for the chances of bigger payout.

Seems pretty minor on the risk side for me and I'm not sure how I can effectively argue for more.

You have to understand that a payout (which is very, VERY rare to be worth anything to you) is likely to be years off.

Is it worth being below-market for 5 years for that supposed payout?

Do people normally lock in that low forever?

We're talking about triggers for going up to an agreed upon market++ salary with next fundraising round, or some significant sales for our product, etc.

Obviously not forever, but you just have to take into account that a funding round is also likely to be a while off.

It's in your favour that the founders have had startups/exits before (fundraising will be easier) but funding still takes months to close and you still need to ship a product before you even get to that point.

I imagine you'll be hiring other employees too which increases the strain.

So let's say you take the job for 80-90k for a salary of 30k below market. In exchange you get 2% equity.

Suppose there's a 5% chance of a $50 million dollar exit after five years and there's a 2:1 dilution risk of 50% and a bad-will at liquidation risk of 20%.

The 2% of a $50 million exit is $1 million. The 2:1 dilution risk at 50% reduces that to $750k. The bad-will at liquidation risk reduces the value to $660k. The 5% chance of such a payout makes the value of the equity $33k.

So on those optimistic assumptions, there's $3k of upside in taking the deal. Continual reassessment is necessary to make sure that continuing with the company is a good investment. Odds are that the odds of a big exit will go down over time and that dilution and bad-will will go up.

Finally, if you're arguing for more do you really want to work somewhere that requires constantly convincing people of your worth? Investing in the current opportunity limits your ability to invest energy in something better (in fairness it also limits your ability to invest in something worse).

If you're already willing to walk out the door for another job, why fool around with something that offers very marginal return? Go into business with people who share some of your interest in your getting rich.

If you're building the bones of the company and you're not getting double digits of equity you're getting a raw deal. That percentage will get diluted with every round too so it's not like 10% of 100M or something.

So, I guess I don't understand how building the bones of the company equates to equity. Is that based on the premise that ideas are cheap and execution is expensive/rarer and should be compensated with a piece of it?

Looking at the wealthfront equity map, https://www.wealthfront.com/tools/startup-salary-equity-comp..., it seems like nobody in funded startups has more than about a percentage. Is that tool off, are expectations too low?

Early stage companies (pre series A, perhaps even pre Seed in your case), cannot afford market salaries - especially in cities like SFBA. Startup compensation includes equity to make up for a below-market salary. Your "risk" is your opportunity cost - is that 2% over 4 years worth the $300-400k you could could have earned as part of a market salary somewhere else?

Ideas are very cheap - worthless actually, if you can't execute them into a product, let alone a product that users will actually pay for.

I don't know your current salary, but it should be a hell of a lot more than $100k in SF. So yes, 2% is low, especially given that it doesn't sound like there is an MVP or demo product existing - i.e. you would be building this as your role. Whether they like it or not, you're technically a cofounder, however as you're receiving some salary, you're not taking anywhere near as much risk and shouldn't receive as much equity as them - assuming they're not paying themselves.

Yeah, not SF, not for me. I'm in the southern US so 130 is near the top end for technical, non managerial, positions. The salary offered is a noticeable but not terrible cut.

I've had friends tried to recruit me in other parts of the country and gotten asked if I'm "king of my town" with what I'm making.

Agreed on the cofoundery-ness of it for the most part. They've been working on the idea and getting things fleshed out of the last 9 months and aren't taking a salary. I'd certainly like to make my way closer to the double digit mark, but honestly its tough to put forward much of an argument when the startup world is so capital centric.

Getting it fleshed out isn't actually happening unless they're building a real product in that time. Talking to people is not "getting it fleshed out". Assuming 4 year vesting then you're talking about giving up a full year's salary to work on something that has probably a less than 10% chance of succeeding. You're also going to have expectations of your time that are pretty extreme. If you want to do that, you need to participate in upside beyond what you're investing in the company ($90,000 of foregone wages) so that there's actual upside at at least 5x that. Consider you're investing $90,000 with a 10% chance of getting $450,000. Are you going to get that with 2% when that will be diluted 30% each round? Without double digit equity it's almost sure you won't. Even then you need change of control language and an understanding of share classes.

Looking at that link, you're talking, in the Bay Area, about 185k + 2% with less than that meaning (significantly) more equity.

Well, if its about the money then the deal seems fair. However you may wanto talk about your growth within the company.