[wuliwong]

When I joined a startup a couple years ago as a very early employee. The equity they offered was some tiny percentage, like 0.1%. I did the math and said, "you know, we would need to exit for a billion dollars for me to receive a million?" The founder seemed surprised at that. Nevertheless, I joined the startup.

What I don't understand is if the company does sell, and I only get my 0.1%, I should be upset or call the founder "greedy" if he doesn't give me more money than what was in my contract?

If I'm going to take less than what I believe to be the "market rate" for my services in lieu of some equity and my motivation is to make money, then I'm going to do the math and weigh the probabilities of my equity and the lower-than-market salary being more lucrative than taking a job with no equity and a market rate salary.

I just don't see how founders who honor contracts that employees sign as being greedy. Arguments that the founders take more risk or work harder or whatever seems to me to be beside the point. If the employee doesn't think the percentage of equity is good, then they shouldn't sign the contract. That's how I see it. And maybe if more of us took that stance we wouldn't have to hope that founders would just give us money out of the goodness of their hearts and instead have satisfactory agreements already in writing.

[timr]

"you know, we would need to exit for a billion dollars for me to receive a million?"

It's worse than that. By the time you factor in preferred shares and other investment dilution, your 0.1% will be more like 0.00001%[+]. Few people think about that, and unless someone is actively looking out for your interests (e.g. someone giving retention grants -- or you demanding them), it's difficult to make a lot of money as an early startup employee. You can easily find yourself in a situation where you vest your grant, leave the company, and later find out that a new hire is making an order of magnitude more money than you in an exit. That's startup life.

The game here is predicting the expected value of an extremely improbable future event, and sacrificing present day money in favor of that event. There's no "fair" way to do it, so if a founder is asking that kind of commitment of you, they should be looking out for your interests over the long term as well.

[+] edit: I overstated my case here. You can probably expect 1-2 orders of magnitude dilution, but it doesn't really change the argument.

[emmett]

That's a gross exaggeration. If you own 0.1% of the company, you're likely to be diluted to around 0.02% at the very worst, and most likely 0.04% or so assuming 3 rounds of funding.

That's assuming a positive outcome that clears preferences of course - if the company goes in a fire sale you're not going to make anything at all. But assuming a billion dollar exit means you're assuming not a fire sale.

[timr]

I was being flippant in my use of decimals there, but that's a detail.

Even if you get 0.1% and are ultimately diluted to 0.01%, a billion dollar sale is $100k. When people sign up for below-market pay, they're not envisioning a distant eventual windfall of a year of market-rate salary.

[JohnTHaller]

So, if we take the above poster at their word that it would have to be a billion dollar exit to be worth their while (and net them a million dollars for X years at below market salary) and assume your dilution numbers are accurate, they'd only get 200 to 400k. There would have to be a 2.5 to 5 billion dollar exit for their diluted tenth of a percent to net them a million.

[nedwin]

You're assuming all startups pay below market.

[JohnTHaller]

I'm taking the post we're responding to at face value: "If I'm going to take less than what I believe to be the "market rate" for my services in lieu of some equity and my motivation is to make money, then I'm going to do the math and weigh the probabilities of my equity and the lower-than-market salary being more lucrative than taking a job with no equity and a market rate salary."

[porter]

Is 0.1% realistic (or average) for an employee? What are typical equity ranges for employees?

[rdl]

It depends on when you get hired. Early engineering key hires, pre series A, are often 0.5-3%, but is probably around 50% of market salary ($80k on $160k, say). Employee 100 in the same role in a highly successful company could be as low as 0.01%, but is nearly at market salary ($140k?). There might be 2-4 years in between the two hires.

[rdl]

Preference is the thing that fucks you, not dilution directly. Dilution, assuming no down-rounds, is likely to be no more than 50% in total, because it's iterated -- all the early people get diluted in the first financing, but the first investors also get diluted in the next rounds, so rounds after A, unless something is very wrong, are usually more like 10-20% dilution each time, tops.

It's preference which turns a $200mm exit on a company which has raised $150mm into essentially a non-event for common stockholders (i.e. employees).

[methehack]

I agree with timr here. You guys are missing the point. It's not math. It's trust.

There's no way to predict the outcomes. Options are little more than signals of intention. At point of exit, everything is in the air and you are not part of the negotiation. What's it worth? Do you have to move? Do you report the Chief VP of Total and Complete Meanness?

You get paid because someone is looking out for you.

The way to evaluate the deal you're getting from a founder is to ask yourself whether they would pay you out of their own pockets. There will be a moment when, in effect, they make that choice. The good ones won't be able to enjoy the money unless their team shares in the wealth. The bad ones will cobble together a rationalization about risk or how smart or deserving they are. You don't assess the offer, you assess the people. I know because I'm not very good at assessing the people ;)

[throwaway7808]

Hey, do you want to join a cool startup that I'm working on? I'll look out for you, no worries. Just work and have fun, and I'll take care of the rest.

By the way, there's also an investment opportunity, you see I've recently came into ownership of a certain bridge....

[methehack]

No thanks.

I'm not saying you shouldn't have an agreement or you shouldn't make it as solid as you can. Obviously, you should do this. I'm saying that's not enough. The perfect agreement means very little if the agreement is with someone untrustworthy.

Trustworthiness is often harder to judge than you might think because untrustworthiness and charisma seem to intersect pretty heavily to me. That leads to the unfortunate situation that assholes are likable. Boo hoo.

[hmsimha]

> I've recently came into ownership of a certain bridge

Sorry, I'm saving my money for this sweet deal that's coming up on the Eiffel tower.

http://www.smithsonianmag.com/history/the-smoothest-con-man-...

[chermanowicz]

I agree here to some extent, but there are a lot of ways companies can exit with employees receiving less than their equitable share of the company's acquisition price/value.

Ex. Salary & retention package for founders & certain execs while common stock purchase price is drastically reduced. (just one example)