Ask HN: How much equity should I ask for?

[Catalyst4NaN]

I'm not particularly motivated by money but this feels like something I should ensure that I'm doing myself justice.

I dropped out of University after first year and took pretty much the first job I liked the sound of that would pay me to code. It's been a great year and I wouldn't trade it for the world. I was the first technical hire at the company working with an external agency. Fast forward 10-12 months, I'm now an experienced Junior Dev. I'm currently working for £18k p/a. I've been interviewing at a couple of other companies and have had been quoted £26-32k and with a hard offer of £28k.

We're about to go for a funding round with a valuation of ~£7m. My bosses have informally agreed to better the £28k offer. I really like the idea of a minor equity stake. I was thinking somewhere between 0.125% and 1%. This feels like a big range. I don't want to come off like I don't understand the value of the potential equity stake.

After the funding i'll (hypothetically anyways) be working under an experienced CTO (new hire) with a quite substantial amount of responsibility.

I really appreciate any advice HN :)

[tptacek]

Personally, I think negotiating for equity in terms of percentages is a mistake. The better way to do it is in terms of financial outcome.

You make X dollars in salary every year. You model the equity as a lump-sum bonus paid after 4 years (divide the liquid value of the options by 4, mentally applying as a deferred bonus for each vesting year).

To make that happen, you ask management for some outcome scenarios --- a "low", "medium", and "high" outcome, for instance --- that values the grant you're getting.

ie: "If we're acquired for $50MM, your options would be worth $Y". You make $X/yr, so, if the company is acquired, you'd effectively have made $X+($Y/4)/yr. Are you happy with that number? Then agree.

To dig into the low/med/high scenario, two helpful anchor numbers: first, the company's valuation at its last round (if the medium option 20x's valuation, that's, you know, worth knowing), and second (and I think more important) the multiple of trailing revenue that represents. In other words: in the "medium" outcome, how much revenue do your employers propose the company to have done in the preceding year, and what multiple does that imply for the valuation?

These are easy numbers to get your head around, implicitly capture the percentage of the company you're getting without making that the terrain you're negotiating over, and (most importantly) forces your employer to be clear about where the numbers are coming from and how the business will actually work.

The other way to do this is just to value equity at $0.

[7Figures2Commas]

The intention of the process you outlined is good, but the process itself is flawed and highlights the pitfalls of trying to value equity at early-stage startups.

First, very few startups can accurately tell you "If we're acquired for $50MM, your options would be worth $Y." Heck, for fun, ask a founder of a typical angel or venture-backed startup how many shares it has outstanding fully-diluted.

If tons of startups struggle to describe what their capital structure looks like today, why should prospective employees rely on them to make estimates based on what their capital structure will look like months or years from now? Dilution, liquidation preferences, the option pool, acceleration terms. There's so much that can't be predicted or controlled, so asking a company to come up with exit scenarios for specific employees is like asking a blind man to read tea leaves.

> The other way to do this is just to value equity at $0.

At most early-stage startups, this is the correct approach to dealing with equity. There are very good reasons most vested employee options are never exercised.

This doesn't mean that the OP shouldn't ask for some equity, but focusing negotiations around basis points of equity and trying to assign a future dollar amount to equity is generally a bad idea for the average employee because it opens the door for treating equity as a 1:1 (or close to 1:1) substitute for salary, which at early-stage startups it is not.

If an early-stage startup wants to offset your cash salary with equity, try this: ask for $50 to $100 worth of equity for every $1 of salary offset. How the company responds will likely tell you a lot more about its future than if you ask what it guesses 1 option will be worth 4 years from now.

[tptacek]

try this: ask for $50 to $100 worth of equity for every $1 of salary offset

You take that number from their last valuation?

[7Figures2Commas]

Of course. In the US you can't get around 409A.

As a prospective employee, if you fundamentally believe that the company's latest 409A valuation is already too rich and equity is important to you, don't join the company.

[jballanc]

> The other way to do this is just to value equity at $0.

I've worked for startups that gave me stock options, and I've worked for consultancies that have done profit sharing. In every case, I came away with $0. Options can be diluted away and profit sharing is subject to accounting tricks.

The only time I received stock and made money from it was when I worked for a large, established, and very profitable company.

Another thing to consider is that any reward with a vesting schedule will cloud your judgement on when is the right time to jump ship. The advice I was given was that in your 20s you ramp up your income fastest by taking new positions at new companies, and in your 30s the best way to increase your income is to advance within a single company.

I think a good target would be to take a new job every year or two in your 20s, targeting a 15-25% increase in salary each time. However, given that most options have 4-year vesting schedules, that essentially means forgoing stock based compensation until later.

[tptacek]

I walked away from what turned out to be a pretty significant pile of money by not purchasing my employee options at the last startup I was an employee of. I don't regret it and would still advise against people putting actual dollars down on private company options, but options ending up worth something are not a myth.

[Catalyst4NaN]

I think I understand what you mean. Certainly i'll look into evaluating my value + wants based off your model.

For me in some small way I want to be working for a company that is even in an almost insignificant way mine... Not dissimilar to the attitude that I guess crowdfunders have.

[tptacek]

No matter how you choose to negotiate, do the step of asking your employers for a couple scenarios --- not just one --- that will put actual numbers to the value of your options. Not based on the VC valuation, but on what the company might get acquired for, and what sales figures would look like at those acquisitions.

You will find hiring managers that literally have no idea how or why your options could be worth anything, and it's worth knowing when you're dealing with them.

[Catalyst4NaN]

First thing on my todo list for Monday! :)

[7Figures2Commas]

> You will find hiring managers that literally have no idea how or why your options could be worth anything, and it's worth knowing when you're dealing with them.

Here's a different perspective for you to consider: most founders or hiring managers at early-stage startups don't have the ability to convince a reasonably skeptical person why the company's equity will ever be worth anything. It's basically a matter of faith. Most startups aren't going to have an outcome that delivers wealth to employee shareholders. You either believe that the company has the opportunity to defy the odds or not.

You say you are learning a lot, will have a good deal of responsibility and like your co-workers. In other words, it sounds like you're pretty happy and pleased with the prospect of continuing your employment with the company. A lot of people, even those who have maximized their compensation, are unhappy in their jobs, so you have something money can't buy.

This doesn't mean you shouldn't protect your financial interests and ensure that you're fairly compensated. But ask yourself what you stand to gain or lose from taking negotiations down a path that will ask your employer to convince you that whatever equity it offers you could be worth something.

The most important part of any negotiation is to determine what it is you want and need. Far too many people fail at negotiations because they don't do this. As a result, negotiations become focused on things that don't matter. You might win such a negotiation, but still come out a loser.

You like the idea of minor equity stake, ostensibly because you want to feel invested in a business that you're excited to be working for. If that's the case, you could do a lot worse than to pick a number, and tell your bosses you're really excited about the company's prospects and want to feel invested in its success. Chances are you'll have a far better outcome than putting your bosses on the spot and demanding that they predict the future.

[mvc]

> But ask yourself what you stand to gain or lose from taking negotiations down a path that will ask your employer to convince you that whatever equity it offers you could be worth something.

If you're going to be the head engineer in a startup, shouldn't you be having this conversation anyway as part of your job?

[imaginenore]

But where did the $50MM figure come from?

[tptacek]

It's an arbitrary number, but so will the real estimate; what I think the important exercise is: take the arbitrary "real" estimate and have them back it out to what multiple of their projected sales that's meant to be.

As the other commenter points out: it's very difficult to gauge how valuable a share in a private startup is going to be worth. I think it's a lot less hard to reason about how much revenue the company is going to make.

That doesn't directly solve the valuation question --- the multiple on revenue is going to vary wildly from 3x to 100x --- but at least you get an idea of what they think their business plan is; and, if they're hoping for a 50x valuation, or they think they're going to be doing $1bn top-line in 2 years, then at least you know they're being crazy optimistic.

[brudgers]

Practically speaking non-controlling non-preferred equity of a private company is worth only whatever value those higher up the food chain assign it out of goodwill. Controlling interests can structure liquidation largely however they want...e.g. they can sell to themselves at a nominal price or they can sell their stock into a round and buy a Ferrari. Hollywood accounting happens outside of Hollywood.

There's nothing to be gained by forcing your way into equity unless you are funding. You're not and recognition that there are sound business reasons for a negative response to a request for equity is not a sign of lacking sophistication.

If it's on the table take it. If it's not figuring out the business reasons why is immensely valuable.

Good luck.

[puppetmaster3]

Perfect response. What brudgers said is if you don't have control or preferred w/ anti dilution their commitment is minimal.

Common 5% in Q1 can be any number less than that in Q2.

[shubb]

How much of the value of the company is tied up in it's technology?

Your leverage at the moment is, if you decided to get another job, you would walk away taking all knowledge of the current system with you. Imagine you quit, and something went wrong the next day - how long would it take them to fix it?

I think your boss did you a huge favor, taking a risk on you this first year. Now you are no longer an unproved dropout, he owes you a real wage. Keep both of those in mind.

[Catalyst4NaN]

I don't think I can quickly evaluate that. I would say it's less technical than a traditional tech company but still closer to that than say an eCommerce store.

> I think your boss did you a huge favor, taking a risk on you this first year. Now you are no longer an unproved dropout, he owes you a real wage. Keep both of those in mind.

This is exactly the lines I'm thinking of. I've been lucky enough to gain the sort of experience that puts me on the same playing field (at least in the view of employers) as my a grad.

[greenyoda]

Lots of people advise job hunters to be skeptical of counter-offers. For example:

http://corcodilos.com/blog/7874/should-i-take-a-big-counter-...

The job offers you got suggest that your current employer has been happily underpaying you by 50% of your market value.

Also, you're comparing a "hard offer of £28k" with "informally agreed to better the £28k offer". Don't turn down the hard offer until you've gotten a real commitment. And you'd need to get that commitment before the £28k offer expires.

[Catalyst4NaN]

It's true that it seems like I'm being underpaid - I wouldn't say they're happily doing so. We're a young start-up struggling for cash and to make ends meet. Hopefully the funding round will alleviate that to a degree.

Also thanks for the link. I hadn't thought of it like that.

From my perspective, £18k (and indeed £28k) is a lot of money. I'm 19 and I'm getting paid to code, I know it's naive but I think it's awesome. I love the people I work for/with and I love my job. I come across adults who haven't had that their entire career.

Edit: Just to follow up on the counter offer. The process of raising this round of funding has been such a whirlwind. I don't think there is anything untoward going on. I think a case of Hanlon's Razor: http://en.wikipedia.org/wiki/Hanlon%27s_razor

[deanclatworthy]

It's brilliant you are getting this experience at such a young age. It'll be absolutely invaluable when job hunting in the future. Many CS graduates come out of university in the UK ill-prepared to enter the job market and end up taking underpaid junior roles.

But 18k doesn't sound far off the salary I'd expect an inexperienced junior dev to make. Things that might get you a higher salary for this kind of role are a degree or prior experience. If you have prior working experience (even freelance) then you probably are getting a little too low.

[walshemj]

18k sounds low for a grad starting that's only 5k less than the minimum wage.

Around 26k would be nearer the mark for a starting grad with no experience.

[deanclatworthy]

He isn't a graduate though. He is a junior developer who dropped out of university after a year.

[walshemj]

Its the rate for the Job what does a graduate certificate matter the UK isn't as fixated as some country's on credentials.

[Catalyst4NaN]

Yeah to clarify, I mean that after a year of work I'm now on the same level as a grad?

[troels]

A lot of the comments here tells you not to get taken advantage of (financially) and how to maximise your worth etc. I don't think that's wrong per se, but I also think that may be better advise for someone a bit further in their career than you are. Where you are, I would say you should maximise for learning. That means getting to work with experienced people who are willing to teach you. By all means, make sure you get a fair salary, but make it a secondary priority when deciding what to do.

Regarding equity - Certainly ask for some amount of equity. That could never reflect bad on you as it signals a commitment to the company on your end. Keep in mind though that equity is a fairly long-term view. At 19, a 4-year vesting is eons away. There's a good chance you'll never turn those options into anything material.

[d0m]

You ask £40k and 1.5%. What's the worst that can happen?

[gesman]

You: I want £40k and 1.5%

Corp (in 1 week): "Thank you, but we cannot entertain your offer. We wish you all the best in your future endeavors".

You: Ok, let's negotiate.

Corp: "We've just filled in the position with suitable candidate. We'll keep your resume in our database for 6 months in case we might get openings down the road."

[shazow]

If an employer rescinds an offer after you make a politely-phrased counter-proposal, then that's a very combative attitude and I'd stay away from working there to begin with.

The only kind of employer who would react that way is one who routinely misleads and exploits their employees through sketchy tactics and ultimatums.

[idlewords]

And then you take that better-paying job you were already offered.

[kzhahou]

So people should not negotiate? Should not value themselves highly, because of severe risk that they'll lose every opportunity? I should hope not!

[fredkelly]

Agreed. Asking for equity can only send positive signals about your long term view of the business - you've nothing to lose in my mind.

[glofishx]

well the worst that can happen is that he does not get hired: no salary increase, no equity.

And this is not even the worst that can happen. I have withdrawn (let them expire) offers from people that after receiving my first offer tried to strongarm ridiculous bonuses. The reason I have withdrawn the offer is that it made me clear that the person does not understand their worth to us - hence would likely be a trouble later on. I did not negotiate and just let the deadline stand.

I am tired of all these advices that make it sound as if asking excessive bonuses and money does not give off bad impressions. It actually does.

[chimeracoder]

> The reason I have withdrawn the offer is that it made me clear that the person does not understand their worth to us - hence would likely be a trouble later on.

Or just doesn't have much experience with (salary) negotiation, which, for most roles that aren't sales or HR, isn't necessarily a problem. The people who do this for a living (employers, recruiters, etc.) are always going to know the rules and the social norms better than the ones that don't (most employees).

I don't really know what you mean by "ridiculous" in that situation, so it's hard to draw any conclusions, but I will say that most good engineers are pretty bad at negotiation skills, and IMHO withdrawing an offer is quite an extreme move.

[glofishx]

Let me add to all this that we first did an informal negotiation with the prospective employee with a quite lengthy back and forth that led us to put those terms in writing.

But only when he had the official letter did it occur to him to ask for a larger office (it is not possible as he should have seen during the visit, travel funds (???), extra time off and more salary. It was extremely annoying.

[fsloth]

"And this is not even the worst that can happen. I have withdrawn (let them expire) offers from people that after receiving my first offer tried to strongarm ridiculous bonuses. The reason I have withdrawn the offer is that it made me clear that the person does not understand their worth to us"

I thought negotiations are iterative. Start from an anchor value, then the other party suggests a higher number with reasoning why this would be a fairer value, and continue until an agreement or batna is reached.

If the response was "screw you, I want 1 million" I would understand you aggrievances but typically resenting employees attempts at negotiation gives out the impression that you want only complacent underdogs as employees.

[learnstats2]

I've been on the other side of this and it was absolutely fine.

I asked for fair market value, i.e. I understood I was asking for less than my value to the company. When this elicited a bitchy response along the lines of what you have said, I understood enough about the company to find a better job.

Companies that won't negotiate with you over salary, won't negotiate with you over anything. A toxic place to work.

[gjmulhol]

There is an argument to be made that it is better for a company to make a fair offer and not negotiate. There have been long patterns in many industries that people who negotiate harder get better results, leading to large wage gaps (particularly between genders). A fair, open, honest, and frank discussion about the position of the company is best, but I think a hard negotiation creates a norm that can be toxic.

[learnstats2]

> people who negotiate harder get better results, leading to large wage gaps (particularly between genders).

This can only be true if companies are not making fair offers in the first place, i.e. the wage gaps result from a culture of underpaying employees.

I agree that this should be better addressed, but forbidding employees from negotiating is only harmful.

[kzhahou]

If someone doesn't want to negotiate at all, it's because they're trying to get the best of you.

That said, to negotiate effectively, both sides have to be willing to walk away. It's the fundamental premise.

[rfrey]

This sounds like you are actually tired of uppity employees who don't know their place.

[lordnacho]

1% is £70K, albeit illiquid that still sounds like a lot of money. If they better your £28K salary it looks like £100K (of course salary is real and ongoing whereas equity is a single NPV). Is there a vesting schedule?

I'd say you need to think about how much you like working there, and your chances of finding something better. The market does seem pretty buoyant, could be well worth it to talk to more people.

[MrTortoise]

28k outside of london is good. If they are getting funding then they are probably also scaling up, you want to get on the leading edge of that if you can. Career wise that might be worth more than equity.

Equity is a double edged sword, sure you get extra value but you are also tied to the company. When things are going great you don't want to leave and when things do sour then you cant because you just lost money and may feel a moral pressure.

28k is also a good figure as it will springboard you into all kinds of other job roles (because recruiters only look at previous salary). my salary jumps were similar in the beginning.

[walshemj]

oh one thing no one has mentioned as this is the UK - is this a HMRC approved scheme or not - might have tax implications.

[arethuza]

^^^^^^^^^^^^^^^^^^^^^

Really sensible comment - you need to understand whether it is an approved options scheme or not (assuming you are in the UK).

[auganov]

How many employees do they have? The less the more likely you are to negotiate a good stake. I don't think it really makes sense to apply financial calculations at this stage. You might be underestimating the amount of equity you can get.

What I'd do is keep the table open - make them hire/pay you for a month or two, then negotiate. You can probably get way more if you develop a good relationship.

EDIT:sorry, sounds like you already work there

If they're <=5 people don't be afraid to say 5 or even 10%.

[djloche]

Ask for £35k from the existing company. Leave the discussion of equity out.