Ask YC: Help in negotiating my stake in a start-up

I can't imagine that in any real company, employee shares would be "protected from dilution at all stages". It is, for what it's worth, largely not up to the founders; if they want a VC round, they're going to alter the structure of the company to suit the VC.

4% of a company that has been operating for 18 months is a huge stake.

| my stake will be protected from dilution at all stages.

So you are being given preferred stock? That's the only stock that I can think of that would prevent dilution during later stages. I find it difficult to believe that a smart startup company that would give out preferred stock to employees. I also can't imagine VCs/angels who would invest in a company that had just given preferred stock to a "Legal and compliance director" (no offense but that title isn't necessarily thought of in terms of bringing revenue in as highly as a developer or salesperson).

A 2% stake could easily get chopped down to 1% or .5% on liquidation due to various means. Assuming a five year growth-to-liquidation, does 1% of a $100m sale ($1m) justify taking no salary for 2-3 years and then a below-marketing salary for the remaining time? Balance that with the risk that the startup may fail, not raise as much money as they thought, etc...

A least two key factors you need to think about are (1) what you expect the company to get acquired for, and (2) when you expect to be acquired. A $10m sale in year 1 means you get $50k-$100k (being optimistic) for one year of work. A $10m sale in year 3 means you get $50-$100k for three years.

Several factors to consider: Are the other founders taking salary? How will they protect you from dilution? Why won't they pay you at all even if they raise money now?

But generally, 8% is pretty high for someone joining 18 months after founding.

4% is pretty high coming into a startup over a year after its founding.

You're coming in at a point where there will be significantly less risk.

On the outset if you think the startup would do well, then I would suggest to join even at a 4% rate - the reason being that its better to join a more promising startup at a below market compensation rather than the other way round.

One way of coming with a good figure is as follows:

Assuming your market salary is x /mnth and the founders is y /mnt. Also, assuming that you get funding in about an year. Then finally based on the assumption that the startup equity is a function of hte risk that you take, then each founders total investment comes to:

12y + 18y

and your investment comes to:

12x

So essentially your stake in the company should be around

12x / 3*(12y + 18y) + 12x

Also, there is no basis for your stake to not get diluted and incase the startup goes for multiple rounds 4% might looks like a very high figure which the founders might end up not being very comfortable with.I would suggest, and for other reasons also, that you might consider negotiating a bigger stake and accept dilution.

My feeling would be that 2-4% plus a market rate salary would be about right post the first VC funding round. Ahead of that, then the offer feels too low - particularly as you are effectively investing your salary on a monthly basis.

One mechanism you could apply - take your personal valuation of the current worth of the business IP and divide it by your notional annual salary for the next couple of years. What percentage does that come out at?

4% non-dilutable (if it really is so) and 8% dilutable may not be so different if there may be more rounds. And 8% is a LOT if they have cumulatively invested 4.5 man-years and you have invested none so far.

If they give large percentages to every new person, the math doesn't add up and they'd have little left at the end.

It comes down to an investment decision. Do you want to invest 2 years worth of salary into a company without a product in exchange for 4%? You're basically giving the company a yearly salary x 50 valuation. Pretend you're an angel investor and think about whether or not this is a good investment.

As the 5th member that's pretty low. Last year I was offered 1.5% and would have been the 12th employee at a company that had been around just under a year, the only reason I didn't take it was the salary was too low to live any kind of half-enjoyable life. Now of course the company has about 35 employees and they seem to be doing well, although they're in a saturated market and I can't imagine them fairing very well in an economic depression. At this point I'll only kick myself if they get acquired and my 1.5% is suddenly worth upper 6 to low 7 figures.

If you're to be the 5th and crucial member, I'd fight for more or don't bother. The fact is most startups don't get acquired and you aren't going to get rewarded for your 80 hour weeks and below market salary - but you will have learned a lot and you'll probably have less hair.

It's hard to see how they can guarantee that you won't be diluted.

There's a lot of variability in these kinds of negotiations. If you really think the company is going places, negotiate for as much as you can and say "yes" before it puts a strain on your relationship.

FWIW, if the other cofounders are close to having customers and a functional service, I think their offer is in the ballpark and you could easily justify taking it.

read http://blog.guykawasaki.com/2006/03/nine_questions_.html