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I'm looking for suggestions as I'm considering an offer from a startup.

A friend of mine is founding a software startup together with two partners and he's looking for engineers. The idea is convincing. There's a prototype built by one of the founders, and round A financing just completed. Acording to them, the company will be owned 60% by employees and founders, 40% by investors. My friend is talking to me and a few other people which I know, to form the core dev team and build a solid product. We are all senior software engineers at a large US software corporation. Eventually they're planning to hire more junior developers to gain traction and deliver faster.

The compensation they're offering is fine cash-wise, but I'm trying to figure out if the stock option offer is on par with what I would expect from other startups. Recently I read lots about startups; many blogs and articles point out that a reasonable stock offer for a senior engineer joining at the early stages post-round A is between .3% and .7% of the total equity. These guys are only willing to offer .25% and say that anything higher is VP-level compensation.

Are they being stingy or am I being unreasonable asking for .5%?

thanks

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Considering in round A they gave 40%... there's not a lot left for anyone else. If the pay is good and is something you're interested in (has to be better than being a number at a big company) then don't let the % scare you away. Use it as a learning experience to see if you even want to do it yourself in the future! – Sean Feb 6 '11 at 0:18

2 Answers

up vote 5 down vote

Ask to see the cap table. It should have a line item for stock options for early employees. That line item should provide enough room for all the employees they need to hire in the first year. A typical amount would be 15% or 20%. Ask them what their hiring plan is and how they plan to allocate the stock options. If they need to hire a lot of people to make this thing work, the grants will be smaller. If they are only going to hire five or ten people in the next year, they should be larger.

I'd be a little bit worried if, in their series A, they have already given away 40% of the equity. That's a ton of dilution for a series A and may indicate poor planning: when they need to raise more money, they'll start to get to the point where even the founders are so heavily diluted that they are not being properly compensated as startup founders. Usually a better strategy would be to sell 20% of the shares to investors now, and then work on the company for a while, until you can raise the valuation high enough to raise more money without too much more dilution.

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Thanks for your answer, I will follow up on your sugestions. As far as I know they only plan to hire 6 to 8 people to get the thing off the ground. Later minor work may be outsourced, and I doubt they plan to give away any equity then. – user7073 Feb 6 '11 at 5:16
up vote 0 down vote

What do you mean the offer is "fine cash-wise"? Generally the reason you get equity in a startup, especially as early as you are talking about, is compensation for a lower than market-rate salary.

As for the amount of equity - I don't think you can set any easy rules. There are a lot of factors to consider - how much money was their Series A? How big is their option pool? How soon do they plan on raising more money (thereby diluting you)?

Here's a similar question and answers which say .5% - ~2%. Ultimately you just have to decide what is fair to you.

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By fine "cash-wise" I meant "salary-wise". The salary they are offering is on par with what I make now. I know there are no simple, straightforward rules for equity allocation, but any ideas based on past experience with startups (which people on this forum seem to have plenty of) could help me negotiate and eventually make a decision. – user7073 Feb 6 '11 at 4:29
I know what the term means in general - I didn't know if fine meant you could live with it or if it or market rate or what.Since they are paying you normal market rate salaries I think you'll have a harder time negotiating a good equity stake. As I said in the answer, generally these positions are below market rate salary and thats why you might get more equity. – Ryan Elkins - IActionable Feb 6 '11 at 5:29
That's a good point. They've chosen to match everyone's current salaries, for some reason. I guess they can afford it considering how much funding they say they got and that there aren't many employees at series A. – user7073 Feb 6 '11 at 5:50

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