What should the Stock distribution be for participants in an early stage startup (pre-funding)

There's no benchmark, but it does sound fishy. 1% for free labor in a completely nascent company doesn't compute.

Simple metric: If it fails your own gut-check, don't do it. Yes, that's a fair measure even if you don't have experience at a startup. It's better to pass on a good company than to hook up with a bad one.

At least you know the founder can sell! I'm amazed at how many stories like this I hear in the startup industry.

Otherwise, I agree with Jason.

1% each for 5 "co-founders"? This CEO is a genius con artist. Take it from me.

Granted, they all work part-time, but it's still crazy.

I should know what I'm talking about, my job is to split equity among pre-funding co-founders.

With such a low offer, I wouldn't even try to negotiate. You are facing a control-freak CEO with 95% of the shares and who obviously has never heard the word "fair".

I wrote about early employees equity and it included a great list of Options Grants in Silicon Valley for Series A from VentureHacks.

Title                        Range (%)
CEO                          5 – 10
COO                          2 – 5
VP                           1 – 2
Independent Board Member     1
Director                     0.4 – 1.25
Lead Engineer                0.5 – 1
5+ years experience Engineer 0.33 – 0.66
Manager or Junior Engineer   0.2 – 0.33

This all fits into an overall compensation package and early employees should be encouraged to take more of their comp as equity than cash to help with cash flow.

If the founder has access to capital, or a successful track record you could probably value the company at this stage at around 250K-500K. If he doesn't have either you should value it at 100K. Then figure out the number of hours you would expect to put in, then figure how much you are worth an hour ... the value of the equity should be close to what you would earn. If they are out of whack, you can use that to justify a larger equity grant.

Assuming no other compensations are offered (e.g. a monthly pay), I wouldn't accept the position for such a low stock. A possible thing to consider is what other investors think about the company. What is the biggest grant the startup received from VC? Who are the people who invested money? Can you talk to them and discuss about why they decided to invest?

@David: I'm not really sure that your figures make sense. If you hire (for example) a senior engineer and give her only stock, with 0.5% (avg. 0.33-0.66) for her to make sense to accept the position you would have to make millions a year, which seems unlikely at least for the first couple of years. Either you raise the stock or give hires a wage too (maybe small, but granted). Am I missing something?

You can't decide if the equity is reasonable without also discussing the vesting length.

To be absolutely fair, you may be able to negotiate that for 1% of the company you will put 1% of your time, and see how it goes from that.

If it turns out to be the next Google, 1% will make you filthy rich, and on the other hand, working on the startup for 30 minutes per week doesn't sound bad. The only tough thing will be to get the owner to accept those terms if he doesn't think they are BS. And if he does think they are BS, then perhaps he will then notice he is offering you BS as well.

Just my 2 cents.

The founder wants to keep 95% and share the remaining 5% amongst the team that ultimately produces the product?? Is this the founder's first startup? Perhaps he/she needs to learn about the old saying: "it's better to have a smaller piece of a big pie, than a big piece of a small pie". Not having a motivated, committed startup team is a sure recipe for producing a small pie.

If the startup team is working for sweat equity, it's important for everyone to feel that they are collectively working towards something that will be big in the future and that they will share in the rewards for taking the risks in the early stages. If the founder has money and can pay for some of the development, thereby reducing some of the risk for the developers, then the small share may make more sense, otherwise 1% seems a little insulting