46 ms·

Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say: • Employee given 1% • Two ad

by wheels 15y ago

Another way of working things out is figuring out what the probable return on the stake being given is, e.g. something like, say: • Employee given 1% • Two additional funding rounds at 30% dillution each bring that to 0.49% • In a $30 million exit the employee will get $147,000 • Probability of an exit at $30m of 10% (somewhat generous, but let's assume that the company has already raised an angel round and that's being used as a filter) • So the adjusted value, including probability of failure, of those options is just $14,700 You can adjust the math to fit the startup at hand, but it's generally a reasonable formula for evaluating the value of options vs. salary. In general if you want to join a startup as a first employee you should either push for a larger slice, a near-industry-standard salary or do it for the experience (say, if you're interested in starting a startup of your own down the line).

notbitter 15y ago
You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.
jonnathanson 15y ago
Something to further emphasize here: time to exit. Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.
Murkin 15y ago
The seed round _is_ the 'probable return' calculation. Seed numbers should tell you what other (professional) investors consider to be a 'good deal'. If you are willing to get in and worse conditions, you are either brilliant or..
- wheels 15y ago
  That's partly true, but there are some subtleties not conveyed by such: If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life. And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset). Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.
fatalerrorx3 15y ago
I hope I didn't just get screwed then..I've been given 1.5% equity as a first employee, with an option to get additional 1.5% over the next 9 months (0.5% every quarter). With a salary of 65,000. I'm the web programmer developing the product from the ground up. We haven't yet raised any VC money, it's self funded by the 2 co-founders, one of which is a doctor who is primarily the finance arm. Did I just seal my fate? I'm 22 and have not dealt with being part of a technology startup so I wasn't really sure what percent equity was fair. I believe my shares won't get diluted with investment rounds based on the paperwork that I signed though, they're preferred as opposed to common, if that makes any difference?
- adaml_623 15y ago
  Did you discuss the papers with a lawyer?
- Silhouette 15y ago
  I am very wary of assuming too much from the limited details you've given. However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now? If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.
- rapind 15y ago
  Well you're building their product for 1.5% or potentially 3% and the product hasn't even been validated by outside investment... I think you know the answer. You're only 22 though, so I'd make the most out of it (learning experience). One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.

by wheels 15y ago

notbitter 15y ago

You forgot that the Series B round was raised at a bubble-driven $60m valuation. Investor preferences kick in at the $30m exit so the employee gets $52,500.

jonnathanson 15y ago

Something to further emphasize here: time to exit. Many would-be startup employees seem to underestimate the length of the road from founding to funding to payout. Even if an exit happens (which, as we've established, is rare), it's likely going to happen a lot later than you'd think. And the exit itself is more likely to be a drawn-out process than an instantaneous event.

Murkin 15y ago

The seed round _is_ the 'probable return' calculation. Seed numbers should tell you what other (professional) investors consider to be a 'good deal'. If you are willing to get in and worse conditions, you are either brilliant or..

wheels 15y ago
That's partly true, but there are some subtleties not conveyed by such: If a VC is investing in a seed round, it's effectively just an option on a later investment. It's the ante, not a bet. If you're investing from a $1 billion fund, it's not really worth making sure you're getting a good price on a $100k investment that's 0.01% of your capital. I have more than 0.01% of my liquid assets in my back pocket right now. The employee, on the other hand, might be investing 10% of their life. And for angels, compared to an employee, there's very little opportunity cost. An employee needs to clear a lot more to break even since they're leaving tens of thousands per year on the table in terms of salary. Most angels, who participate in syndicates and write checks in the range of $15k, aren't really limited in the number of investments they can do by the amount of cash they have. So the opportunity cost is the spread between their startup returns versus more traditional investment vehicles (say at about 6% per year). An employee taking a 30-50% salary cut is risking a lot more (not to mention that they probably aren't rich at the outset). Now, the worse conditions bit is also not quite true. The comment below on the market pricing employee scarcity versus investor scarcity is apt -- and actually it can go both ways. If the market is particularly frothy, investor equity may be overpriced relative to employee stock, or in the more common case where a startup scrapes together a seed round, it may be underpriced.

fatalerrorx3 15y ago

I hope I didn't just get screwed then..I've been given 1.5% equity as a first employee, with an option to get additional 1.5% over the next 9 months (0.5% every quarter). With a salary of 65,000. I'm the web programmer developing the product from the ground up. We haven't yet raised any VC money, it's self funded by the 2 co-founders, one of which is a doctor who is primarily the finance arm. Did I just seal my fate? I'm 22 and have not dealt with being part of a technology startup so I wasn't really sure what percent equity was fair. I believe my shares won't get diluted with investment rounds based on the paperwork that I signed though, they're preferred as opposed to common, if that makes any difference?

adaml_623 15y ago
Did you discuss the papers with a lawyer?
Silhouette 15y ago
I am very wary of assuming too much from the limited details you've given. However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now? If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.
rapind 15y ago
Well you're building their product for 1.5% or potentially 3% and the product hasn't even been validated by outside investment... I think you know the answer. You're only 22 though, so I'd make the most out of it (learning experience). One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.