I joined a small startup company roughly 1 year ago as the 3rd member of the company. At the time of joining, the company was roughly 6 months old; the company is contract work based and the 2 co-founders have a 50-50 share.
It was just the 3 of us for the large part of a year.... all 3 of us putting in long hours, late nights and weekend work to get through the project work that we had. The team has now grown to another 3 employees (all of which were found/recruited by me).
With regards to the equity share, I was initially given an offer of 5%... I was not happy with this offer given the following:
- I had been earning well below market related salary.
- I had worked incredibly hard (with plenty of overtime). I went out of my way to help out with anything and to offer advice on the running of the company.
- I effectively grew the team to what it is now as I recruited the 3 employees that the company hired.
- I also put complete trust in these guys upfront in that nothing was on paper at the start regarding equity share... I have also been very patient in allowing the whole process to unfold.
They then came back to me with the following offer:
- 5% for free.
- 5% as a repayable loan from the company based on 5% of a valuation done on the company.
I have 2 issues with this:
1) The percentage still seems quite low. I know that as companies grow and teams get larger, the chances of me securing more equity get tougher. I'm not sure if the 10% is worth my while at this stage... i would have expected higher as a 3rd member.
2) The valuation done on the company seems completely inflated... and is based on forecasts and projections over the next 5 years or so. The company has only been around for 1.5 years with no long term proven track record. My understanding of a young company is that it is difficult to take long forecasts into account and value it highly... I always thought a good general approach was to look at profits over the period and use some kind of multiplier between 1-3. The problem with the valuation that has been done is that the co-founders now expect me to take out a loan based on this and effectively lock me in by making the loan payable over several years.
I don't have a problem with the loan approach, however, the percentage seems low and the valuation incorrect. So my questions are:
- What are some guidelines in determining if a percentage share is fair?
- Are my concerns regarding the valuation valid at all?