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I just got an offer from a friend for a startup in an industry we don't know much about. He likes the idea and has a good track record (in other industries). I am still unsure about the validity of the product.

He's funding it 100% and offered me $35,000 + 10% stock grant. Job would be high level design and overseeing development as well as some financial/market research. Obviously the $40k salary is low, Probably a 40% cut in what I could earn elsewhere, but I know itd be a great learning experience.

What are you thoughts? What questions do I need to ask about the stock grant? How will 10% look when/if we're diluted by other investors later on?

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Is the stock fully vested on day one and is it limited in any way? – JonnyBoats Jan 6 '12 at 2:56
Does he have funding to make it through to product ship and income coming in or will he run out and need investors? – Paul Cezanne Jan 6 '12 at 13:11

2 Answers

up vote 1 down vote

At $35K salary, you're taking on founder-level pain and risk. Is the company just you two? If so, 10% equity sounds low to me.

Is he making other significant investment other than your salary? A good way to calculate fair equity is to ignore his investment and decide what a fair split would have been. Let's say 33%/66% sounds fair, since he's done previous startups and is senior to you.

Now you need to add in the value of his investment. If the company is worth $400K, and he is putting in $65K of cash and he's not drawing his $35K subsistence salary, that's a $100K effective investment. That would give him 20% equity for his investment, which after dilution of your initial portions ends up being about 73% for him and 27% for you.

Of course these numbers are samples only, you need to work through your own numbers. (And it changes a lot if there are 3, 4, or 5 people).

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He's getting a salary and the other guy is bankrolling the whole thing. 10% with no financial risk other than a lower salary is a decent offer because without any intellectual property or customers the company is worth only what is being invested into it. – dnbrv Jan 8 '12 at 2:44
You're making a good point -- I was assuming that $35K is a fraction of market salary, mentally I was thinking around 1/3 of market salary. At that level, he's taking substantial risk and pain. But if it's even close to market salary, 10% equity sounds very reasonable. – Joe Augenbraun Jan 8 '12 at 3:14
ok thanks guys, i am still in talks with the founder. thanks for the advice though. – frank Jan 9 '12 at 20:19
up vote 4 down vote

It sounds like a fair offer. Whether you should take it depends on your personal life circumstances of course: is this a good time for you to take a risk, and would you benefit from the potential learning experience of being the first employee in a startup?

To help you decide further, what do you think of the project? Do you find it exciting? Or just another job? You'd better be passionate, because the most likely outcome is that a year from now, the company dies, you took a 40% pay cut and all you have to show for it is lessons learned.

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Thanks for the reply Well, I am in my mid twenties so I could take the risk, though I am not crazy about living so cheaply. Certainly the learning would be great for me, as I want to be an entrepreneur myself. There are 2 projects, and I am very intersted in one, and not the other. So it's a mixed bag. – frank Jan 6 '12 at 3:41
bump. bump. bump. – frank Jan 6 '12 at 19:00

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