Ask HN: Unorthodox Equity Arrangement?

3 pointssideway2y ago6 comments

Hi all,

I’ll soon be joining a small 1yo startup as the CTO and the CEO suggested the following equity arrangement:

- 3y vesting period, 3% per year - If I leave the company on the 4th year, the percentage will start reducing linearly until the 10th year, going down to a minimum of 5% (unless there is an exit event).

Keep in mind the following:

- We’re both first-timers in these roles (CEO / CTO). - He’s not coming from the business world. - We’ve known each other since forever and he’s not trying to screw me over; we are honest with each other on what we do or don’t know and this is definitely something we are not knowledgeable about. His reasoning is that the work between year 4 and 10 may be way more significant than the one we’ll do together in the next 3 years and that 9% is too generous to be given away in 3 years.

1. Is this pattern something you’ve heard before? If yes, how is this type of arrangement called? 2. Does it make sense? Any questions I should raise with him?

Thank you in advance.

6 comments

HelloNurse2y ago

  >  We’ve known each other since forever and he’s not trying to screw me over

ROTFL; if your mindset is that your cofounders might be "too generous" you are already being screwed.

These terms seem to presume that you should stay for ten years or more because 9% of the company in 3 years will be worth less than 5% in ten years, i.e. an extremely successful growth pattern.

This is not only more recklessly optimistic than usual: it's unfair to you because you are giving your shares to your cofounders in exchange for, apparently, nothing.

brudgers2y ago

I agree mostly.

Motivation is most likely that this is how the person thinks a business person is supposed to act rather than personally directed bad behavior or general sociopathology.

Many people don't have good role models because they have only worked crappy jobs.

But, the real red flags for me are that the person has focused on dividing the equity in some strange way rather than making sales and has concocted something that is antithetical to long term employee retention.

I mean if year four is a bad year, it's not just that the bonus will be smaller, but also that the employee will lose equity at exactly the moment when it grinding it out is needed.

HelloNurse2y ago

I think there is a large moral brown area of bad faith and deliberate exploitation of weak people between fair but greedy terms (e.g. me 20% you 5% because according to me my work is more valuable), which can result from excesses of businesslike aggressive attitude, and antisocial criminal intent (e.g. if I can make you sign this and that, when you are no longer necessary I'll then be able to sue you to get your shares, your back salary and imaginary damages).

In my opinion taking away shares falls in a rather bad part of this spectrum because, even if no further tricks are intended, it's something that can only be proposed to someone who's known to be gullible and submissive, by someone who isn't their friend.

Since the OP seems unable to treat this outrageous proposal as the red flag it is, it might be useful for them to frame their equity arrangement as a problem of "friend retention": friends shouldn't exploit friends, not even if they drown them in bullshit and they leverage personal feelings.

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Ask HN: Unorthodox Equity Arrangement?

3 pointssideway2y ago6 comments

Hi all,

I’ll soon be joining a small 1yo startup as the CTO and the CEO suggested the following equity arrangement:

Keep in mind the following:

1. Is this pattern something you’ve heard before? If yes, how is this type of arrangement called? 2. Does it make sense? Any questions I should raise with him?

Thank you in advance.

6 comments

HelloNurse2y ago

  >  We’ve known each other since forever and he’s not trying to screw me over

ROTFL; if your mindset is that your cofounders might be "too generous" you are already being screwed.

These terms seem to presume that you should stay for ten years or more because 9% of the company in 3 years will be worth less than 5% in ten years, i.e. an extremely successful growth pattern.

This is not only more recklessly optimistic than usual: it's unfair to you because you are giving your shares to your cofounders in exchange for, apparently, nothing.

brudgers2y ago

I agree mostly.

Motivation is most likely that this is how the person thinks a business person is supposed to act rather than personally directed bad behavior or general sociopathology.

Many people don't have good role models because they have only worked crappy jobs.

I mean if year four is a bad year, it's not just that the bonus will be smaller, but also that the employee will lose equity at exactly the moment when it grinding it out is needed.

HelloNurse2y ago

1 more reply

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