Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 2 down vote favorite
1

I recently met with a local start-up and was presented an offer. I spent the last few days reading on this board looking for insight into the start-up financing world. The start-up is technology based and and my role would be the sole programmer to start. The team currently consists of the founder and two people as advisory roles. At this point in time the future funding is reliant upon a proof of concept which I would be building.

Here are the details:

  • No salary, but can set something up to receive compensation for time invested upon receiving funding
  • 3 year vesting schedule, no shares the first year
  • 7,330 shares at the end of the first year
  • 22,000 shares total after 3 years
  • my rate would be ($75/hr) and shares can be purchased at ($8/share) - (~160/hours) a month * $75/hr ~= 1,500 shares for months worth of labor

The start-up financing world is new to me so Im still trying to learn everything I can. I realize the stock has no value without knowing the total shares outstanding. I was told the company was setup with 10 million shares and that the majority of them will be used for future investors. I have not learned about option pool yet but it sounds as if this offer is for 0.0022% of the company and that every month of labor I would receive 0.00015% of the company.

Can this be right? Or is there something I am missing?

share|improve this question
3  
If you are getting 0.0022% of the company, this would be the worst offer ever. Please double-check your math. For someone who is not getting paid, expect anywhere from 0.5% to 20% of the whole company. – Alain Raynaud Mar 13 '12 at 21:00
@AlainRaynaud That is what I am trying to figure out. They said 10 million shares a lot are "non-active" and will be used for future fun raising. So 22000 shares divided by the 10 million gets me to 0.0022%. I dont know enough about this yet to calculate otherwise. – Patrick Mar 13 '12 at 21:07
1  
Hmm... actually, I think 22000/10000000 is 0.0022, as a fraction. That's out of 1. It's not a percent. In percentage form, that would be 0.22%, or about 1/5 of 1 percent. That still seems like it is quite low for someone who is not getting paid up front, but it brings it up to about half of what Alain was saying is expected. – rbwhitaker Mar 13 '12 at 21:51
Wow, cant believe my math on that one. Thanks for the correction of 0.22% I totally overlooked the decimal. Even a years worth of work would only get me to 0.44% in shares so definitely eye opening. Thanks! – Patrick Mar 13 '12 at 21:55
2  
I'd tell them to take a hike. – TimJ♦ Mar 14 '12 at 4:22
show 2 more comments

7 Answers

up vote 2 down vote

Maybe maybe not.

  1. The company may be paying you with new shares issued so by the time you receive your shares there may be a million more issued so your percentage of the company would be less.
  2. Even if you receive financing your shares are worth $0.00 unless someone is willing to pay for it. Company receiving financing doesn't mean someone will pay for your shares if you decide to sell them, so knowing the number of shares outstanding only works to determine the value of the publicly traded company so you are long long long ways away from that under normal circumstances.
  3. What would you live on?
  4. Why only consider 160 hours per month? Working 12 hours / day 7 days a week is likely to be a possibility and I would feel to be compensated for every single of 84 hours I put in a week.
  5. What happens after the POC? Let's say you do this in a month.

So consider this carefully because while this may be fun and potentially profitable it could also spell disaster if the business fails.

share|improve this answer
1. Wouldnt that dilute that 0.0022% even more? 2. My point about the financing was that they would reemburse as salary or buy back shares or something similar to pay me for the work completed. 3. 4. I would be living on income from other projects so that is why I estimated it at around 40 hour weeks or 160 hours. My time would be spent on other areas. 5. After POC it would be trying to get funding and then working on the full version or leading a team after that. – Patrick Mar 13 '12 at 19:29
Also on 1. 2. I thought the point of knowing the shares outstanding was to truly evaluate the offer. With no salary, I don't know of any other way to determine the value of the offer without knowing the percent? Is there another way I should be calculating this if there are "non-active" 10 million shares some of which are non-active. – Patrick Mar 13 '12 at 19:52
@Patrick On 1. I thought that's what I said. 2. Did they say that? Or better yet put it on paper? 3.4. Did they agree to non-exclusive rights to your time and possibly work? 5. Is it on paper? – Karlson Mar 13 '12 at 20:07
Everything is at the negotiation stage now. We talked about everything I mentioned above and the rest is on paper. I have an example agreement which I need to present with my changes and / or requests. My main question is, does that seem like a good offer, at my calculation of 0.0022%? Unless I am miscalculating something but that percentage only to get diluted is merely pennies. – Patrick Mar 13 '12 at 20:13
@Patrick The number of shares outstanding means nothing if there are 10000 shares worth $0.01 and 100000 worth $0.001 it's still worth $100. The question is the number of shares you have and how much they are worth. Don't think about it in terms of the percentage of company ownership. – Karlson Mar 13 '12 at 20:28
show 5 more comments
up vote 2 down vote

That's a mess. Here's a big problem: They are issuing you stock, which they claim to be worth $8/share. Over the course of a year, you're going to get stock "worth" $58,000. And then you'll have to pay tax on $58,000. Where's the money to pay the taxes going to come from?

If it were me, I'd drop the entire idea of getting paid my "market rate." I'd buy some stock of the company at its current value, which is realistically on the order of pennies, not dollars, per share. The stock may vest over time, but the vesting schedule is wrong -- as others have pointed out, I could be fired after 11 months. I'd expect monthly vesting, and I'd want to see how the company planned to divide up the rest of its stock -- how many shares go to the "founder" and "advisors"? If I'm going to produce the main intellectual property of the company and taking a big risk with it, then I'd expect to get at least 20% of the initial capitalization of the company (before selling shares to investors).

Also, I'd be very careful about any arrangement where I work now and get paid later. Those sorts of arrangements can be very tricky tax-wise -- messing up could mean a big tax hit for me, and liability for the company.

share|improve this answer
Thanks for the helpful advice. After talking with the company so far we have ditched the market rate. They have now turned around and offered a 7% stake of the 10M shares. So technically that shouldn't dilute as easily since they are saving shares for investors. However this is still a far cry from the 20% that many have suggested so far. They revised the vesting to 20% of the 7% shares upon proof of concept and the other 80% monthly after until 2 years. What are your thoughts on these revisions? – Patrick Mar 21 '12 at 1:46
On thing I forgot to mention is that they wrote upon receiving cash funding of $250k I would get a monthly compensation (enough to live off of) and upon receiving 1M in cash funding a good market rate compensation. – Patrick Mar 21 '12 at 2:07
1  
7% after the investors get their hands in is actually really good. Of course, it depends on how many shares they're actually saving for investors -- if they have 10 million authorized, then they should have several million of that reserved for investors. The vesting schedule is also pretty standard. Again, you want to look at what everybody else is getting -- in a new company, everybody's shares should be subject to vesting unless they either bring pre-existing value to the table, either in the form of substantial IP or cash. – Chris Fulmer Mar 22 '12 at 0:42
up vote 1 down vote

What they are trying to do is pay you your market rate in stock. They appear to have valued the venture at $80m ($8 x 10m) and worked backwards from there with the assumption every share equals $8 in cash. You only get rewarded (i.e get cash) if someone wants to buy your 22,000 shares instead of the other 10m shares.

As Alain points out, for the risks you are taking you should be getting a much bigger chunk. And the vesting schedule is not in your interests. What will stop them firing you in 6 months and nothing has vested?

share|improve this answer
Thanks for the helpful post. When would anyone buy my 22,000 shares versus them just issuing new stock. Instead of a market rate in stock is there anything I should take back to the table for proposal? Also maybe a vesting schedule that is performance based? – Patrick Mar 13 '12 at 21:42
Someone will only buy your stock if it is cheaper than what they are selling it for and the buyer thinks someone else will pay more for it. And the stockholders agreement lets you. I wouldn't spend a lot of time writing a counter-proposal. Tell them that you ran the numbers and it isn't worth getting involved at this stage. See if they come back with any questions and a better offer. If they truly believe the programmer is only worth what your calculations show then you won't get far with any counter-proposals asking for a bigger chunk. – james Mar 19 '12 at 2:11
up vote 1 down vote

If they're already trying to screw now, imagine later. I'd say walk away!!!

For fun, ask them what they're getting themselves. I'm still wondering if the worse is the proportion of shares or the vesting schedule?

share|improve this answer
up vote 1 down vote

You can "set something up to receive compensation for time invested upon receiving funding"?

Definitely don't do that. You should be getting a salary from Day 1. It can be deferred and then paid upon receiving funding, but don't take anything less than that.

You should be entitled to maybe 1% (or more- maybe 2-3%) of the company's shares, on a fully-diluted basis (which means 1% or whatever of all shares- not just common stock or whatever class you're getting0, upon consummation of the initial funding (Series A round- not convertible note round, or something earlier).

share|improve this answer
Thanks for your suggestion. Some of the other users suggested around 20% of the shares for the risk and the IP. Is there a reason you suggest the 1-3% fully diluted? – Patrick Mar 21 '12 at 2:06
Did you read the part about getting paid normally on top of the shares? ;) – NetTecture Mar 29 '12 at 6:07
For the percentage of shares: get as high a percentage as you can. If you can get 20%, go for it. A much lower percentage would be typical, though. NetTecture, yes, I read the part about getting paid normally on top of the shares, but that payment promise is worthless; allowing the poster to "set something up to receive compensation for time invested upon receiving funding" is a recipe for getting screwed. There needs to be a definite salary now- with dollar amounts and timing of payment agreed now, not later- the salary can be deferred until funding, but there needs to be a salary set now. – user6492 Apr 2 '12 at 1:43
up vote 0 down vote

I wish everything in Life had that much Clarity, before we make our decisions, unfortunately does not work that way, anyways why don't you put in both the options in your agreement. 7,330 shares at the end of the first year or Your hourly rate(some nominal rate probably 60-70% of the your standard rate) not too exorbitant. and then make it your choice to pick either one of them at the end of vesting period, that way even if they decide to fire you they would have to pay your salary for that period(say 11 months).

share|improve this answer
up vote 0 down vote

A lot of the answers here don't seem to be very helpful because they say things like 'You are getting screwed! Walk away!' without any detail. This is one part math problem (the part you've given us) and one part your relationship with these people. Your question should really be, "what's a normal equity distribution for a first technical hire?" That's an easier question to answer without all the emotional responses.

First, read Fred Wilson's blog on employee equity. And then ask them how much they've allocated for those brackets and where you fit in.

A few percent stake for a first technical hire is pretty good (5%). You are only getting 'screwed' if you don't fully understand how you could possibly be diluted in a way that was bad for you.

Dilution isn't always bad.

Let's say they value the company right now at $5MM. And they grant you 10% of the company. You're total option stake is worth $500,000. You build the prototype and everyone loves it and the VCs come along and they say they will value you at $50MM, and they want to buy 10% of the company. The company issues 10% more shares to sell to the VCs. You get diluted, so now you only own 9% of the company. But you own 9% of a company worth $50MM, which is worth $4.5 million. Yippeee!

What happened at Facebook that they tried to show in the Social Network was the company essentially issued A LOT more shares, and granted them all to everyone except the one guy, so that guy got screwed.

"On January 7, 2005, Mark caused Facebook to issue 9 million shares of common stock in the new company. He took 3.3. million shares for himself and gave 2 million to Sean Parker and 2 million to Dustin Moskovitz. This share issuance instantly diluted Eduardo's stake in the company from ~24% to below 10%."

To be honest, there really isn't much you can do to stop something like this, but it's probably very rare.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.