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I recently met the founder of a web startup who is looking to build his management team. I would fill an executive position on that team.

Last year, the company received initial angel funding followed by additional angel funding in the last quarter of this year. The company is now looking for investors in order to raise Series A venture funding (to broaden it's customer base), and plans a Series B round towards the first quarter of 2011. The founder owns approximately 55% of the company, a significant portion is held by the angels, and the rest (10% or less) is held by a couple other employees.

At this stage in the company's existence, is there a standard approach I should look for around compensation, e.g. considering the following factors?

  • Stock grants
  • Receiving options vs. stock
  • When is it appropriate to make my own investment in the company
  • Salary, including lower-than-market salary in exchange for more ownership and assumption of greater risk vs. market-salary for less ownership, etc.

I'm not certain that I'm asking the question appropriately, but I wanted to use this as a starting point.

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There are no standard approaches. Each situation is unique.

I suggest bringing in the following specific numbers that are concrete: a) your current salary b) the valuation of the startup at the time of the last angel investment, and c) the valuation at which Series A is being sought. Assuming that you want to join the startup because it promises professional growth and personal satisfaction a simple algorithm can be applied:

  • If the startup can afford to pay your current salary, then you join with performance linked ESOPs common to all employees of the company and no additional stock grants.
  • If it cannot, determine the per annum gap. Convert the gap into number of shares using the last angel valuation for a three year period. You can then negotiate a vesting schedule for this many number of shares.

The logic is that you are sharing the risk (of reduced salary) and if Series A closes as hoped, and at a higher valuation than the last angel, you are already rewarded a bit (virtually of course).

I don't understand why you would want to be a salaried employee (and pay taxes on your salary) and also invest your own money.

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How might items b (the valuation at the time of last angel investment) and c (the valuation at which Series A is being sought) figure into the equation? Your last comment is interesting. Regarding my bullet point, "When is it appropriate to make my own investment in the company", could you elaborate on under which circumstances it would make sense for me to buy into the company with my own money, vs. receive equity at start time, as related to overall compensation and involvement with the company? Thanks... – Robert Nov 27 '09 at 16:26
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+1, especially the confusion over why you're putting money in and taking it back out via salary. You either have the savings to put in time and money for stock, or you need a salary... – Jason Nov 28 '09 at 0:12

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