Ask HN: What to ask for when entering as co-founder

[Lindathefounder]

Hi all,

I've been working with a SaaS company for the past few weeks to test our compatibility as co-founders. The company has raised 1M so far but burned all of it over the last 3.5 years..They have now pivoted (hence the understanding that they need a new co founder). There are currently 2 co-founders and 3 employees. I was offered 5% from the ESOP and a minimum wage salary (as the company will be dead soon without an additional investment), with 4 years of vesting and a 1 year cliff. There might also be a future ICO where I will be getting 1.3% of the tokens. Each of the founders holds 25% of the company. I was thinking that a 5:1 ratio is not a good deal for me, especially as I am risking a lot entering into unclear waters and my contribution is significant.

Any thoughts you might have about how to negotiate and what is important to ask would be great. I'll just mention that I was hoping to get 10%-11%.

Thanks!

[chatmasta]

5-10% is common in my experience for an early employee with a “co-founder” title at company at this stage. Critically, they already raised money, so you are not taking as much risk as the founders. You are an employee, and a founder in title only.

That said, my approach would be to offer them two options. Either they give you 5% with a market rate (100k+) salary, or they give you 15% with the shit salary. They can’t afford to pay you market rate, so they’ll choose the shit salary, but likely bring you down to 11%.

It all comes down to what you’re worth to them. If they’re screwed without you, and you are prepared to walk away, then you’ll get the terms you want.

Keep in mind that 5%, or 15% or even 90% will likely be worth nothing ever. Money now is good. The pivot is a bad sign. If they can’t afford to pay you beyond a shit salary, that’s a bad sign too. It sounds like the founders have no direction and just want to coast along until their VC money dries up.

[Lindathefounder]

You're right, though it got me thinking about what is the actual offer... If they are offering 5% this might mean much less. After the 1m round, there is an expected dilution of 25%. Additionaly, the ESOP will have to be refilled (since I will be getting most of it) which will dilute with another 10%... My current estimate is that if N is what they are offering me than the real offering is expressed by N(1-N)0.75. So if they are offering 5% this actually means 3.5%. Im wondering if they take this into consideration when they say "fully diluted".

[brudgers]

How much is 5% of a company that is likely to be dead soon worth to you? After the pivot, all the work lies ahead. With a $1 million investment, you probably want to see the cap table if the 5% of a company likely to be dead is worth enough to proceed.

A few years ago, I made this: http://fumoney.kludgecode.com/default.aspx The caveat I would add now is a discount factor based on an assessment of a liquidity event. There are lots of high value startups that are not going with an IPO or any other event that allows employees to cash out. Manually adjusting the calculation can be done by multiplying the FU money field by 1.0/probabilityOfSuccessfulExist. Example multiply by 10 if the probability of the exit amount is 10%.

Good luck.

[rahimnathwani]

tl;dr - It sounds to me like you're being taken for a ride.

From what you've said, it sounds like:

1) The company has no tangible or intangible assets (no money, no viable product, no significant physical assets, no distinctive IP).

2) The company has existing liabilities (existing full time employment contracts that would have a cost to exit, maybe some rental agreements too).

3) Passive shareholders hold ~35% of the equity.

4) Two employees hold 50% of the equity, without any vesting conditions.

These conditions sound like you're starting a company from scratch, except with some extra weight on your back. There are some problems with what's been proposed to you:

- ESOP rather than shares: usual things to watch out for with ESOP: what is the strike price, what is the vesting period etc. I've seen offers that included stock options which would mean negative cash flow for the employee (i.e. cost to exercise the options over 4 years is more than the salary over 4 years).

- Even if they gave you shares instead of options, they're offering you a smaller cut (5% instead of 25%) AND their shares aren't subject to vesting but yours are!

Perhaps there are details I've missed or that I've guessed incorrectly.

But if someone offered me something like this, then I'd make a reasonable counter-offer (worked out from scratch from the objective facts, not based at all on their offer). If they were to act shocked or otherwise indicate my counter-offer is far off what they would be willing to agree to, I'd shake hands and walk away.

[matt_the_bass]

If they need a new cofounder after 3.5 years, then to me is sounds like they failed and need to start over. If so, then aren’t you really on the same footing as the original cofounders and deserve the be on par with them? If not, are you really a cofounder or just a valuable hire.

I understand the there has already been dilution so you’re not starting from a clean slate. But there is nothing preventing them from reassigning some of their stock to you.

[Lindathefounder]

"But there is nothing preventing them from reassigning some of their stock to you"

This will actually result in a tax event valued at the company's value no? This is the reason they offered ESOP in their claim.

[matt_the_bass]

That’s a good point. Though if they need a new founder rather than a key employee, there maybe an argument that the shares current value is close to 0.