5 ms·

Demands from first employee joining our startup

6 points by bobdilly 14y ago

So I am one of the founders of a growing software startup and there are 3 of us in total, we have recently received some seed funding but currently none of the existing founders are taking a salary. We need another technical guy - software engineer type - to help accelerate development of the projects we are working on, and we have found someone who seems very keen and competent. We have proposed that this guy join us on a 6 month contract, as kind of a trial period, that would then change into a full time position if everyone is happy. The problem is that we cannot yet afford to offer anywhere near a market rate salary and so this guy would need to take a risk (he would have to move to London from Germany) for a job at near minimum wage. But we expect that in 6 months time we will have received second round funding which would enable us to pay a decent salary. The potential employee still seems very keen to do this although he is now wanting assurances about the future employment contract that would be entered into after the initial 6 month period. Basically he wants to be assured that IF he is accepted into the company after 6 months to continue working, he will be given an agreed equity stake. Love to hear some advice, should we agree to this? Is this an unreasonable request from an employee?

jusben1369 14y ago
Not all all!. It strikes me that your employee - if anything - is too reasonable. It seems you're asking him or her to: - Take a salary at substantially under market - Take a chance on a startup that has very little traction (just yet) - Move countries/locations If I understand it correctly or they are asking for is a very clearly defined "If it all works out then in 6 months I want x% of the company" Seems super fair. My only counsel - and I think this works for both sides - is a minimum and a maximum range. For example no less than 4% and no more than 10% depending on how you perform. This works for both parties. If they're good but not great you can have the conversation after 6 months "We want to keep you on and around but not at 10%. Here's the non emotional, rational reasons why 4% is the amount we are comfortable to offer" If 10% is hard coded into the agreement you might have to cut someone who can otherwise be a valuable member because they're not worth "that much" That helps you and OP. Secondly, if gives them super motivation to contribute as much as possible during that 6 months to maximum their %. One final note. What happens if you can't raise any more money for 12 months. Funding is a beast. Have you built that possibility into the dialogue anywhere? Good luck!
stevenwei 14y ago
You want this guy to move across countries and work for minimum wage on the hope that you'll be able to raise another round of funding in 6 months? Sounds like you're looking for a fourth founder, not a first employee.
bobdilly 14y ago
Also what would be a reasonable equity stake to offer?
- devs1010 14y ago
  equal to whatever anyone else has, adjusting for who's been there longer, so initial founder still has the most, etc
IsaacL 14y ago
Why not just give him equity with vesting and a 6-month (or 12-month) cliff?
regularfry 14y ago
Under those conditions, I'm surprised he isn't asking for a decent chunk of equity up-front. You said it yourself: "this guy would need to take a risk." Compensating a risk with a fixed payout is more than a little shitty. Also: think hard about the incentive structure you're building for yourselves here. If he gets equity when a) the startup gets through a second funding round in 6 months, and b) you also decide to continue his employment, the rational thing for you guys to do is ditch him in 5 months and 29 days if the company is going well. If I were him, I'd be really careful about getting into that situation. You've got to remember that the fact that nobody else is taking a salary is a choice you guys have made, it's down to your personal financial situations, and it's not something you should hold over someone else as a justification for not paying them. Especially if you need him that badly.
- dchichkov 14y ago
  Even if he would ask for a decent chunk of equity upfront, that wouldn't change much. It would be no-cap equity from common stock. Would you put your money into this?
  - bobdilly 14y ago
    What do you mean by this? Why would he not want say 5% equity if offered? cheers
    - mikemoyer 14y ago
      You don't have to give up anything upfront (see my earlier post on Grunt Funds)
nandemo 14y ago
> Is this an unreasonable request from an employee? To put it kindly: if that guy posed the question here from his point of view, very likely the majority opinion would be "walk". There's a lot of programming jobs out there that pay more than the minimum wage. Even if you agree with the equity proviso, after 6 months any of these things could happen: * one of the founder leaves and your company stops growing * your company doesn't get the second round of funding right away * you decide the guy isn't performing well enough (I don't know how this would affect his prospects in UK/Germany, but in some places a 6-month stay would affect one's image significantly) * the guy goes well but you decide to hire another person instead of hiring him full time (thereby paying market salary and giving up some equity) * the guy goes well but you decide not to hire him full-time, for any old reason.
dchichkov 14y ago
You want to pay him below market salary, right? Practically that means that you are asking him to invest 'market salary - your salary' every month.
pygorex 14y ago
There's a few things you can do: * Drop the move to London requirement and allow him to telecommute. This could especially be appealing as he's working below rate. * Hire him on at a full salary with the understanding that he will defer a significant portion of his salary. He can defer it towards equity (maybe with a multiplier and definitely with a cliff) or defer until you close another round of funding (at which point he is paid a bonus equal to his deferred salary). * Depending on how well you know and trust this person: give him a small equity stake up front with a regular vesting schedule every 6 months.
mikemoyer 14y ago
I love hearing problems like this! I just posted a book on this topic on Amazon.com, it's called Slicing Pie (mike moyer). The basic concept, called a Grunt Fund, is to account for the different contributions people make using hypothetical values. The % each person deserves is proportional to what they contribute relative to others. The point of the book is to address problems exactly like this.
- regularfry 14y ago
  Interesting. You shift the problem of all hours-worked not being made equal to one of all rules deciding how to value hours-worked not being made equal. I don't have a gut feel for how that might play out, but it does seem like it might be fraught.
  - mikemoyer 14y ago
    Hi Regularfry, I'm not sure what you mean?
    - regularfry 14y ago
      In a hypothetical typical situation, you have the problem that up-front, before anybody has actually done any work, the assumption is that everyone will put in equal effort, so everyone gets equal share locked in from the beginning. Someone doesn't pull their weight, the shares suddenly look out of whack and people get annoyed. So, you could try the simple fix: a grunt fund calculated on the simple assumption that all hours worked are made equal. Say one person does 60 hours, the another 40, and you get a 60/40 split. BUT: the person doing the 40 hours was working on a patent application, and the person who did 60 was just bashing out template HTML. Not only that, there's a third person who's fronted some cash for a lawyer, and they don't get anything because they're working 16-hour shifts at their day job and haven't put any actual hours in. The shares look out of whack, and people get annoyed. Next - and this is where my impression of the grunt fund idea comes in - you define an exchange rate between the various types of input up-front, so a 1 hour working on a patent application gains equal share as 5 hours writing HTML, or $100 paid out of pocket. Everyone is happy, everyone gets a share they feel is proportionate to the value of their input, and everyone's working towards the same "pay-off" day. The question is, what happens when it turns out, say, that they don't need a patent after all? The patent-writer's work has no value at pay-off day, except in a certain nebulous "we had to go through that learning to get here" way. Not only that, but the HTML-wrangler now has an incentive to get the company to pivot into that situation so that there will be no more patent work, and lots more HTML work. That's a weird incentive. That's what I mean by the trade-off: in the first case, you have total uncertainty over who's actually going to do what. In the second case, you have uncertainty over how many hours people are going to work. In the third case, you have uncertainty over the value of those hours at pay-off day or, to put it another way, you have uncertainty over the accuracy of the exchange rates you define at the start.
devs1010 14y ago
wow you are out of line to expect anything for minimum wage and,not give him a very large share in the company unless he has no experience and its more of an internship

6 points by bobdilly 14y ago

jusben1369 14y ago

Not all all!. It strikes me that your employee - if anything - is too reasonable. It seems you're asking him or her to: - Take a salary at substantially under market - Take a chance on a startup that has very little traction (just yet) - Move countries/locations If I understand it correctly or they are asking for is a very clearly defined "If it all works out then in 6 months I want x% of the company" Seems super fair. My only counsel - and I think this works for both sides - is a minimum and a maximum range. For example no less than 4% and no more than 10% depending on how you perform. This works for both parties. If they're good but not great you can have the conversation after 6 months "We want to keep you on and around but not at 10%. Here's the non emotional, rational reasons why 4% is the amount we are comfortable to offer" If 10% is hard coded into the agreement you might have to cut someone who can otherwise be a valuable member because they're not worth "that much" That helps you and OP. Secondly, if gives them super motivation to contribute as much as possible during that 6 months to maximum their %. One final note. What happens if you can't raise any more money for 12 months. Funding is a beast. Have you built that possibility into the dialogue anywhere? Good luck!

stevenwei 14y ago

You want this guy to move across countries and work for minimum wage on the hope that you'll be able to raise another round of funding in 6 months? Sounds like you're looking for a fourth founder, not a first employee.

bobdilly 14y ago

Also what would be a reasonable equity stake to offer?

devs1010 14y ago
equal to whatever anyone else has, adjusting for who's been there longer, so initial founder still has the most, etc

IsaacL 14y ago

Why not just give him equity with vesting and a 6-month (or 12-month) cliff?

regularfry 14y ago

Under those conditions, I'm surprised he isn't asking for a decent chunk of equity up-front. You said it yourself: "this guy would need to take a risk." Compensating a risk with a fixed payout is more than a little shitty. Also: think hard about the incentive structure you're building for yourselves here. If he gets equity when a) the startup gets through a second funding round in 6 months, and b) you also decide to continue his employment, the rational thing for you guys to do is ditch him in 5 months and 29 days if the company is going well. If I were him, I'd be really careful about getting into that situation. You've got to remember that the fact that nobody else is taking a salary is a choice you guys have made, it's down to your personal financial situations, and it's not something you should hold over someone else as a justification for not paying them. Especially if you need him that badly.

dchichkov 14y ago
Even if he would ask for a decent chunk of equity upfront, that wouldn't change much. It would be no-cap equity from common stock. Would you put your money into this?
- bobdilly 14y ago
  What do you mean by this? Why would he not want say 5% equity if offered? cheers
  - mikemoyer 14y ago
    You don't have to give up anything upfront (see my earlier post on Grunt Funds)

nandemo 14y ago

> Is this an unreasonable request from an employee? To put it kindly: if that guy posed the question here from his point of view, very likely the majority opinion would be "walk". There's a lot of programming jobs out there that pay more than the minimum wage. Even if you agree with the equity proviso, after 6 months any of these things could happen: * one of the founder leaves and your company stops growing * your company doesn't get the second round of funding right away * you decide the guy isn't performing well enough (I don't know how this would affect his prospects in UK/Germany, but in some places a 6-month stay would affect one's image significantly) * the guy goes well but you decide to hire another person instead of hiring him full time (thereby paying market salary and giving up some equity) * the guy goes well but you decide not to hire him full-time, for any old reason.

dchichkov 14y ago

You want to pay him below market salary, right? Practically that means that you are asking him to invest 'market salary - your salary' every month.

pygorex 14y ago

There's a few things you can do: * Drop the move to London requirement and allow him to telecommute. This could especially be appealing as he's working below rate. * Hire him on at a full salary with the understanding that he will defer a significant portion of his salary. He can defer it towards equity (maybe with a multiplier and definitely with a cliff) or defer until you close another round of funding (at which point he is paid a bonus equal to his deferred salary). * Depending on how well you know and trust this person: give him a small equity stake up front with a regular vesting schedule every 6 months.

mikemoyer 14y ago

I love hearing problems like this! I just posted a book on this topic on Amazon.com, it's called Slicing Pie (mike moyer). The basic concept, called a Grunt Fund, is to account for the different contributions people make using hypothetical values. The % each person deserves is proportional to what they contribute relative to others. The point of the book is to address problems exactly like this.

regularfry 14y ago
Interesting. You shift the problem of all hours-worked not being made equal to one of all rules deciding how to value hours-worked not being made equal. I don't have a gut feel for how that might play out, but it does seem like it might be fraught.
- mikemoyer 14y ago
  Hi Regularfry, I'm not sure what you mean?
  - regularfry 14y ago
    In a hypothetical typical situation, you have the problem that up-front, before anybody has actually done any work, the assumption is that everyone will put in equal effort, so everyone gets equal share locked in from the beginning. Someone doesn't pull their weight, the shares suddenly look out of whack and people get annoyed. So, you could try the simple fix: a grunt fund calculated on the simple assumption that all hours worked are made equal. Say one person does 60 hours, the another 40, and you get a 60/40 split. BUT: the person doing the 40 hours was working on a patent application, and the person who did 60 was just bashing out template HTML. Not only that, there's a third person who's fronted some cash for a lawyer, and they don't get anything because they're working 16-hour shifts at their day job and haven't put any actual hours in. The shares look out of whack, and people get annoyed. Next - and this is where my impression of the grunt fund idea comes in - you define an exchange rate between the various types of input up-front, so a 1 hour working on a patent application gains equal share as 5 hours writing HTML, or $100 paid out of pocket. Everyone is happy, everyone gets a share they feel is proportionate to the value of their input, and everyone's working towards the same "pay-off" day. The question is, what happens when it turns out, say, that they don't need a patent after all? The patent-writer's work has no value at pay-off day, except in a certain nebulous "we had to go through that learning to get here" way. Not only that, but the HTML-wrangler now has an incentive to get the company to pivot into that situation so that there will be no more patent work, and lots more HTML work. That's a weird incentive. That's what I mean by the trade-off: in the first case, you have total uncertainty over who's actually going to do what. In the second case, you have uncertainty over how many hours people are going to work. In the third case, you have uncertainty over the value of those hours at pay-off day or, to put it another way, you have uncertainty over the accuracy of the exchange rates you define at the start.

devs1010 14y ago

wow you are out of line to expect anything for minimum wage and,not give him a very large share in the company unless he has no experience and its more of an internship