equityI’ve been asked to join a start up. It’s not a paid gig and I’d be doing all coding; outsourcing coding where possible; and managing that outsourcing in my spare time after work. The compensation proposed is that I will have the chance to buy equity at the same rate as investors and the potential for a exec position if it takes off.
I’ve never had any involvement in a start up before and I’m not sure what compensation to expect. This seems a bit of a raw deal? I’m not offered any equity, just the chance to buy it. Is this standard compensation? If not what is? Is it worth getting involved just to gain experience? Or am I being taken for a fool? If I am to re-negotiate the offer, what is a fair compensation?
There is no standard formula for compensation in startups as entrepreneurs may try non conventional methods to bootstrap and get the startup going. Regardless, people should be compensated for the work they do, either at present or in the future. Compensation can be in the form of a salary or equity. Sometimes since a startup is unable to pay market rate wages, they may add in more equity or similar benefits to make the position attractive.
In your case, you are not being compensated at all. And that doesn’t sound fair. You should also look at whether you can survive without being paid and if so for how long. Remember that projects may take a long time to finish and it is normal to overshoot schedules. It is normal to work in a startup in order to gain experience, and it is a great way, but you still would need to survive and you have to be realistic about whether the experience you are gaining is worth the value of your work you are providing them.
The fact that these founders think this deal is fair to you speaks a lot about their ethics and trustworthiness. If you don’t know them, one is likely to think they are trying to take advantage of you. Which means that this may likely happen again in the future.
Negotiating for a salary, paid in equity, deferring part of your wages to a future time are options depending on how much you trust them. Keep all agreements on paper. And As Denis suggested, running is also an option.
You will be responsible for all coding, and there is no cash compensation? I think you need to be given co-founder status and significant equity share. Here is a tool to help you calculate: http://foundrs.com
Anything other than that wouldn’t make sense IMO. If they don’t want that… well they need to come up with sufficient cash compensation.
Startups should at least offer equity and cofounder status for full-time / equal-time work, if they can’t pay your salary. It’s common practice for even the largest and most established companies, such as IBM and Amazon, to offer stock as part of an employee’s compensation package. If the startup can pay your salary, it should. Without such basics in the preliminary offer, these founders just don’t get it.
Good team members will want to resolve the many stresses and disagreements that appear at every stage, ideally before they emerge. These founders have created unnecessary resentment on day one, by giving you — a key player — an offer you recognize as “a raw deal.” Negotiating would validate their stinginess because they would fail to lose you outright. Going forward, they would remember that there were no serious consequences to attempting to make such a non-offer. Their shortsighted greed will likely cause them to neglect other team building opportunities, or even fray established team bonds.
A cohesive, communicative founding team is essential for success, and requires both trust and mutual commitment. The founders have damaged your trust, by failing to give you a definite incentive to maintain your commitment. Keep in mind that most startups break apart before they are funded and many evaporate before anything usable even gets built.
Even if equity and cofoundership had been on the table from day one, the fact that the founders can’t or won’t pay your salary should be a serious red flag. Forgoing an established job is a big deal, and taking the leap into funding and ultimately ROI is something most teams can’t accomplish. Thus, working at a real and proven company will open more doors long-term than clinging to 99%+ of non-funded startups. The exception is when you know the founders, trust them and truly believe your team can take the startup all the way. If you’re not working on the startup full-time and need or want the skills practice, I would move this last point down to “truly respect them.” You could still be on track career-wise, and would open doors for yourself as a technologist with interesting experience.
— good for you. You should join an established open source project where you can get feedback from real experts and have your code used in a real application, or build a project that is YOURS rather than these nobodies’. It is legitimate to work on a tech project for practice, even if you will not be paid or offered equity. Most worthwhile developers have done this at some point in their careers, and many of the very best continually seize opportunities to gain hands-on experience. In this respect, tech is not so different from music or almost any other discipline. We can give you more detailed answers about how and where to practice if you post a separate question.
Apart from all the good points that are already here, I think there’s one very important thing you should really think about:
It ain’t your company
I’ve learned this the hard way. For years, I’ve worked on a small wage on a startup company. The company was founded by some enterpreneurs that talked big about money - their main motivation - and about things like ‘executive position’, ‘equity’, etc. There was however a certain strange element of ‘coolness’ and ‘the sky is the limit’ about it, which came with a tremendous amount of energy.
I was working hard, very very hard, for years, and had a very good time most of the time. That is, until I almost burned out. I did some serious self reflection, and eventually I simply quit. Strangely, it was one of the most difficult decisions I have made in my life – which doesn’t make any sense today, because I should have decided that years earlier.
A company is nothing more than a group of people that want to achieve something. Achieving something is really what it’s all about. And while I was pulling the company in one direction, the founders were pulling it all over the place. You can read all about the importance of ‘focus’ in many, many business books; but that’s only one component. The other component of achievement is about culture. The lack of a shared culture tore our company apart.
I believe that for startups, culture and focus are equally important. Focus means ‘all people are working on achieving the same dream’. Culture is about ethics, trustworthiness, which basically means ‘what are you willing to do to achieve this dream’. I strongly believe that both should be aligned across all employees, which includes the founders and investors.
This also means it’s not about compensation. Are you all equally important? In my book that should imply you should all be willing to make equal contributions and get sort-of the same reward. In the culture I would like to work in, I wouldn’t even consider a negotiation process from zero; it should be offered pro-actively. Naive? Perhaps… but that simply is the way I would like to treat other people myself. In retrospect, all the signs were there: in our little company, I talked about ‘transparent salary scales’, while the investors talked about ‘bonusses’ and ‘salary negotiation’. Which is about culture.
Now, if you share the dream of the company, feel that your co-funders make serious commitments and feel that this is the only right way forward, this isn’t a problem. The real question you should be asking yourself is: How does this make you feel?
There are signs though. The fact that you’re treated as non-equal (you have to negotiate terms), implies to me that they see you as employee and themselves as your bosses. A promise of ‘executive status’ and ‘an option to buy equity’ only strengthens this feeling for me. Being able to outsource stuff and having investors tells me about a culture where employees are considered less important than spending money on other things. Simply put, this means you can only influence the culture limited, which means you guys have different dreams, which means it’s not your company. If it ain’t your company, why would you invest heavy in it? And really, invest is what you will do, because ‘time’ is the one thing you cannot ever buy back.
If you cross a line and decide to go forward, make sure to put the things that matter most for you on paper. Directors, investors - it can all change, so it’s only business. At that point you have to realize that the value of equity is something you can argue about in great lengths, so write it down. The same about salary, quitting your job, getting fired, etc. Check if it all adds up and feels right - and if it does, give it your best. If not, run.
Denis tried to put it into one word, but I’ll offer you several –
Listen to their ideas as they are offered to you
Pretend to be highly interested
Instead of the 40% equity they offer you, start a new company, invest the time all the same, and then build the product just as they described it in their ethereal terms, hire some marketing people with a 10% option pool; congratulations, you still hold 90% and are running the show yourself and can go pick up some seed funding.
Series A.
IPO.
Profit.
Humor aside, don’t forget how valuable your time is, but always see what setup they’ve got to offer. Sometimes the sacrifice is worth it, but don’t expect that to always be the case. It rarely is.
You should be getting paid something for your time. There’s a high chance this company won’t survive long enough for you to conceivably invest anything in it.
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