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Ask HN: What is “significant” equity?

I've been approached with an opportunity to work at a new startup. I've known the founders for several years, working with them at one point or another. They understand both the business and technology side and have had several successful exits. They're self funding, offering competitive, but reduced from my current, salary of 100k and 2% grant. My risk is essentially nil with how good the job market is, and my upside will be nice if we're successful. The position is first employee and lead architect. It seems like a favorable offer and it seems like the numbers line up fairly well for what I see for post series A startups. Theres always talk here about not working yourself to death for minimal equity and not getting blinded by it, but being new to the startup side of things I don't really have a clue about what "significant equity" means and the self funded nature of the business makes things more confusing. I don't expect to get rich from it, but I think we've got a good plan and history of executing well so we've got a good shot at turning time into a good payoff. So, HN, at what point in the ownership percentage do you go "all in" on? 2%, 5%, 10%, 25+?

pskittle 12y ago
Well, if its about the money then the deal seems fair. However you may wanto talk about your growth within the company.
mentat 12y ago
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.
- BayAreaSmayArea 12y ago
  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-compensation 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?
  - seekingcharlie 12y ago
    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.
    - BayAreaSmayArea 12y ago
      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.
      - mentat 12y ago
        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.
hakanderyal 12y ago
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.
- BayAreaSmayArea 12y ago
  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.
  - seekingcharlie 12y ago
    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?
    - BayAreaSmayArea 12y ago
      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.
      - seekingcharlie 12y ago
brudgers 12y ago
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.
- mtmail 12y ago
  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.
  - BayAreaSmayArea 12y ago
    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.
- BayAreaSmayArea 12y ago
  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%?

pskittle 12y ago

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

mentat 12y ago

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.

BayAreaSmayArea 12y ago
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-compensation 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?
- seekingcharlie 12y ago
  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.
  - BayAreaSmayArea 12y ago
    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.
    - mentat 12y ago
      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.

hakanderyal 12y ago

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.

BayAreaSmayArea 12y ago
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.
- seekingcharlie 12y ago
  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?
  - BayAreaSmayArea 12y ago
    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.
    - seekingcharlie 12y ago

brudgers 12y ago

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.

mtmail 12y ago
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.
- BayAreaSmayArea 12y ago
  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.
BayAreaSmayArea 12y ago
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%?