Ask HN: Startup triples proposed salary after counter offer

[onetwofifth]

Startup offers me a 3 month contract to develop an iOS app, promise of future employment at market rate (and further equity then) First technical hire in a 3 person founding team. Seed funding only.

The offer me a paltry salary way below market rate, I counter offer with an offer above market rate for yearly employment (but below for an actual contract to build an app if I was charging hourly).

They call me and try to explain what the finances of a startup are like, etc, ask me to name my minimum, I refuse and tell them the ball is on their court.

Few hours later I get a new offer that is 275% of the original.

Going from original 4k/month 1099 towards 11k/month W2. 1% equity on both offers.

Note: there were 3 different offers that balance equity and pay (1k salary difference per 0.5% in the last offer). Equity vests fully at the end of the 3 month contract, they claim it's not common stock. Company believes in valuation of 30 to 150 million (I am unsure). A founder knows me from a previous company and also knew my salary.

What should I make of such a huge change? Is it just terrible negotiation on their part? What is the takeaway from this as a first impression?

While the new offer is something that can be considered, it has brought up a lot of questions. The initial offer was so ridiculously low that it shocked me. The market is Seattle btw.

[7Figures2Commas]

> First technical hire in a 3 person founding team. Seed funding only.

> Going from original 4k/month 1099 towards 11k/month W2. 1% equity on both offers.

> Equity vests fully at the end of the 3 month contract, they claim it's not common stock. Company believes in valuation of 30 to 150 million (I am unsure).

1. Adding your $11,000/month salary on to exiting burn, how much runway will the seed funding last assuming no additional funding? Your salary means nothing if the company is at risk of not being able to make payroll in 3 months. If you think that startups don't take on financial obligations they're not sure they'll be able to meet in order to get something they need now, think again. It happens all the time.

2. A company with seed funding talking about a valuation of $30 to $150 million is insane. You would be wise to ask what the company's last 409A valuation was. That's the only valuation that really matters to you at this point.

3. I would be wary of a company offering 1% equity vesting fully in 3 months, especially to a contractor or employee earning market rate. It's not typical and will be looked at very unfavorably by prospective investors.

4. It would be highly unusual for a company to offer you anything other than standard options. Not only would an outright grant of stock likely create tax implications for you, such a grant would likely be seen by investors as hair on the deal in future financings.

A lot of what you've stated is atypical and you should ask for an offer in writing so that you can confirm the terms and review them with trusted counsel.

[onetwofifth]

1. All the mentioned is that they all put "tens of thousands/car money" each, so I assume 50k each? Hard to say. They also need to hire a 4 other production workers (Server side, UX, QA, design, etc).

2. By valuation they claim that is what they will be worth based on user base (8/per user I keep hearing). That is the business model. I am highly skeptical, I put it at 10 million in a 1-2 years at best. They want to sell the app ASAP. They claim they won't sell for less than 25 million. They say "every 1% be worth $250k - $1.5m"

3. To be fair they did claim it was insane. "Equity vests when app ships" was in the terms for the 0.5% to 2% I got in the various offers.

4. I have no idea about such tax implications. All I heard was preferred stock. Any information would be appreciated.

[7Figures2Commas]

I will refrain from commenting on the equity other than to reiterate that what you've described is highly atypical for a "real" startup and if you're seriously considering the offer, you could do a lot worse than to discuss further with experienced counsel.

As for the salary, ask yourself: how long will this company be able to make payroll with nothing more than "car money"? The all-in burn on you alone will be in excess of $11,000/month. Even if you assume that the four other roles are filled with folks who will work for peanuts (not likely), it doesn't sound like the company currently has more than a half a year of runway, and that's probably being generous. For all you know, the founders, who you say have full-time jobs, might be putting money into the company on an ad hoc basis and could bail after a month if they lose interest.

Frankly, in my opinion, barring some major details you've omitted, this offer sounds like you're being told you won the lottery but have an incurable illness and two months to live. The fact that the founders are still employed elsewhere, aren't being forthcoming and have audacious, unrealistic expectations about valuations and exits before they even have a product are huge red flags.

[cat9]

I'd assume that between A and B, someone took them aside and said "are you insane, new grads in Seattle can get $90k filling CRUD tickets, you're never going to keep anyone even halfway decent for $48k."

Fair warning: this is probably indicative of their overall experience level at running a business & a team, which may tell you a few things about the ride you'll be in for with them (as opposed to any of the numerous other places in Seattle which would be happy to take you).

[onetwofifth]

They knew exactly what the market rate was. One of the founders was my ex boss. They also knew that I had recently been laid off because of budget cuts.

I am leaning towards they tried to screw me over, got caught and said "haha, joking". I am worried about them trying to start a company like this, when quality of first employees and execution are key. Ideas are cheap.

It feels like the long term relationship is poisoned already.

[nstart]

The fact that this is what you think means your relationship at a new company level is already beyond salvation.

[chipsy]

Bad faith is not uncommon. But now that they've done it once, feel free to turn the knife and ask for even more. I've been in a negotation where the company made a "final offer" that was egregiously low where I had the leverage. I waited two weeks to reply, countered with a 10x increase, waited another two weeks, and then increased it another 4x. Both times they capitulated.

(It was probably still too little.)

[mrits]

Do you mean percentage? Or did you counter a $100K offer with $1 million and then asked for more?

[rasz_pl]

Let me guess - whole business idea is this iphone app. There are three non technical "thinking" founders counting on you delivering them the product. After all idea is the most precious thing, on the other hand delivering working product based on this idea is simple menial mexican with a shovel work, why would they pay you even a standard market rate :)))

Skip equity, charge them flat 60-100K for the app, they do have seed money to burn. Let them fail on their own.

[onetwofifth]

They made me sign an NDA before even talking. They claim to not be aware of a competitor app based from France which has significant user base. They didn't make it known to me when I asked them of competitors, only to vaguely say "they remember hearing of it" after I mentioned it ( http://www.tvshowtime.com/en ).

2 business persons and 1 creative/marketing. None of them technical. All of them have highly paid day jobs as high ups in a big (really big) company. They are trying to hire people who quit or were laid off from such big company. All they talk about is having a big enough sell price so they can quit their jobs, only the creative truly thinks about the product.

I agree, they seemed to have fallen on their lie of then not having money. They want a contractor to build an app I should probably charge as a contractor.

[fsk]

When startup founders ask for an NDA before talking to you, that's another red flag.

So they have another full-time job, and they're doing this on the side without full-time effort? You're the startup's only full-time employee?

[onetwofifth]

Without full time effort correct. They have demanding day jobs.

First full time employee. They are hiring a server side dev, UX, Design and QA.

[fsk]

So they're financing it out of the money they earn in their regular job?

It sounds like they have a startup hobby rather than taking it seriously.

It sounds like a dead-end to me. They're going to blow through 3-12 months worth of expenses, realize they have nothing to show for it, decide to stop wasting their money, and shut it down.

[brudgers]

[Disclaimer: this is advice from the internet]

What is the takeaway from this as a first impression?

I have two premises in regard to business deals:

1. People whose first preference is to screw me will implicitly but probably not explicitly notify me of the fact before hand. My belief is that most everyone tries to find a way to rationalize their future actions in order that they can live with themselves. Imagining that I was given caveat emptor then excuses the future action.

2. What makes a good business deal is that both sides desire the prosperity of the other...or the person calls you up to make you rich.

In regard to the outlined facts:

The principals tried to take advantage of your potentially dire circumstances. The reason they did not succeed is that you had the option of turning down their offer. As I've said before, the value of non-controlling non-preferred stock in a privately held company is whatever goodwill the controlling interests assign to it. If and when there's serious money on the table, you've had your caveat emptor and you won't have any say in how things go down.

So let's treat it as straight up employment not a business deal.

1. A 1% stock offering means the hire is being made for the position rather than for you as an individual. That's normal, and ok if you're ok with it. Don't kid yourself that this is about owning a piece of the company. It's a straight compensation deal.

2. The stock option is to their advantage in hopes of convincing you that your interests align with theirs. They do, but only under employment semantics.

3. The worst thing an employer can do is fuck around with someone's paycheck and livelihood. It's not a joke, now; never has been; never will be.

[Please see disclaimer]

If you need the job and can stomach it, take it. Keep searching for something better. Quit the moment a check bounces. Treat it as a job. Forget about the equity. If you have something better in the works as a job, walk away. Remember that a good deal is one where the person isn't actively trying to prevent you from becoming rich.

There are many red flags. Find something else if you can.

Good luck.

[tptacek]

You're losing me at "equity vesting" "fully" at the end of a "3 month" "contract". A lot of those terms don't go well together in a sentence.

[mildbow]

Based on your answers, I recommend offering to do the iphone app as a contractor. Exactly how much you charge depends on how much of the 3 areas you have to work on (design, iphone app dev, backend dev). Just off the cuff, I would say don't do it for less than 50k.

Why?

- You can have an actual "trial work" period so you can see if the environment will be poisonous/you can't work for them fulltime. This is a big one since you mention the relationship might be poisoned already.

- You will be signing up just for delivering the app so there is less stress on you.

- You can get your 100k for 1-3months of work rather than 1 year :)

Contracting you should make more sense for them too: they have a trial period with you and a potential full-time first hire if all goes well. This is something they wouldn't have if they went with an iphone app dev shop.

[TheM00se]

Remember that you could also charge them a changing fee if they suddenly want to change the UI, and since your a contractor thats money they'd have to pony up extra. If your fulltime, they would feel like they could pressure you into doing it quickly

[kaolinite]

Why not ask them? Just send them an email saying that the offer sounds fair and you'd be happy to agree to it (assuming that's the case), but you're intrigued as to why they increased it by so much.

If I had to guess, it sounds like perhaps they had no idea how much the market rate was and then, after you countered, sought advice on this. Having learnt what the going rate is, they then offered what they thought was a fair price. Whilst it seems crazy to offer someone more than what they were asking, they might do so if they're planning to hire you full time.

[27182818284]

I like this idea. We need to talk more as humans in business.

[onetwofifth]

"If I had to guess, it sounds like perhaps they had no idea how much the market rate was and then"

One of the persons who made the offer knew my previous salary (close to the new offer). And I negotiated with him before.

Furthermore he knows exactly what the market rate is, as he dealt with it on a daily basis.

That theory (they didn't know..) is debunked. They even mentioned Angel List saying "in the valley they pay 80-140k", which is strange because that fact undercuts their own argument (though they said that equity was much lower.. )

[TheM00se]

Don't take the job, if this is their negotiation strategy imagine what they will do once you are employed. This clearly shows how they intend to operate.

[calcsam]

The odd thing is the original offer, not your new offer.

You are at about market rate for full-time employment. Consultants often charge >$100/hr, which works out to >$18-20K/month.