How much equity compensation can I expect from a preseed startup? [closed]

Question

I am a software engineer with more than 6 years of experience and currently finishing my degree at UC Berkeley. I joined the team as a full stack and data science engineer. There are four other guys who formed the technology company and had been working on it for a year or two. At the time that I joined, however, it was their belief that their initial idea wasn't making them any money and they will soon significantly change their business model. And so they did. They pivoted to a totally different model that more or less uses the same technology, but for very different reasons. And I was present when we conceived of this new idea.

As of now, the company has $200k in angel fund, but no investor money, no customer, no revenue, and no MVP. We all hope to have all of that in the next four months. It is entirely possible that we don't, but we have reason to believe we might succeed.

When I joined they agreed to eventually pay me equity, but asked me to prove myself first. In the past two months, they have had me work more about 50 hours a week, and paid me $1500 per month.

I don't have the exact numbers, but it seems the three founders own ~95%, and one other marketing intern owns 5% of the company. The intern has been with them for several months more than I have.

Whether or not I am considered a founder is a topic for another question. What I would like to ask is what is a fair percentage of equity that I should expect for this position? It would supposedly be vested over four years.

Background

I am well aware that it is below minimum wage. In the next one or two days we are having the conversation of how much equity I should get and sign the new contract. When I asked for 5% the CEO suggested it was outrageous and I should go on internet and ask what would be a fair cut.

CEO is a recent HAAS MBA grad. The team has two other engineers. One is another Berkeley EECS (computer science). One is a freshman at college, currently working remotely from Nebraska. And recently they brought a Berkeley post-doc with a PhD from a top university in France.

Structure

I believe there are 10 million shares, 5 millions of which are for investors and the startup accelerator which already took 10% equity in exchange for 200k, the other 5 million is what they decided to share amongst each other.

Answer 1

You've been had. You've been working in a highly qualified position for less than minimum wage.

Cut your losses and find a decent job that pays a decent wage. If you ever consider working for a startup, you may accept a slightly below market salary for immediate equity. But not below minimum wage with no guarantees whatsoever.

Answer 2

20% and no less

Simply put, your employer has been breaking the federal Fair Labor Standards Act, by paying you under the federal minimum wage.

In California, there are also laws extending your right to overtime pay (for any hours over 40 per week), which you have not been receiving. It would be wise to look into this in more detail, and see what your exact position is.

However, they can get around these laws via the exception for company executives - via equity compensation. The minimum amount of equity they can offer you, to get an exemption, is 20%

Note, this exemption does require them to give you reasonable management input, as you must be seen as a bona-fide executive/owner within the company.

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You have a lot more power in this negotiation than you realise, and possibly they don't realise either.

I recommend speaking to a lawyer, getting your exact circumstance clarified with them - and taking it forward. The company is currently breaking federal labor laws, and this should not be taken lightly.

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Summary: https://www.dlapiperaccelerate.com/knowledge/2017/california-when-do-you-need-to-pay-a-founder-in-dollars-not-just-equity.html

(Official) Department of Labor exception for Business Owners pdf; https://www.dol.gov/whd/overtime/fs17b_executive.pdf See 'Excemption for business owners' section.

Answer 3

When I joined they agreed to eventually pay me equity, but asked me to prove myself first.

Sorry, but you've been had.

With six years of actual professional experience, they're the ones who should have proven themselves to you, not the other way around.

Their argument is that none of the team members are paid.

The fact is that they are already being paid with equity.

And giving an 18-19-year-old Freshman from Nebraska who is going to work remotely and only part-time a full 20 to 30% ownership stake of the company just doesn't make any sense whatsoever.

At this point, you should aim for 100% equity and restart your own company from scratch (or go work for a real company that would pay you market rate). The fact that the current company is looking to pivot right now, but that it is still hamstrung by an untenable equity deal that no serious VC investor would touch with a ten-foot pole would mean that you would lose almost nothing (but the initial seed funding) by leaving it and restarting the company from scratch.

Please read this book Partnership Charter. It was written by an arbitrator who has plenty of experience breaking up companies, he specifically wrote that book to avoid break-ups in the first place.

If I were you, I would also avoid taking any of the current employees with me. It's not worth the potential legal trouble (although, I'm just a lay person, not an actual lawyer). Plus, if you do insist on recruiting co-founders from your alma mater, it's really not that difficult to do so. Please just read the book I recommended before you start going down that path.

Answer 4

Leave. Get a normal job

You've been willing to work for pennies and promises up to now. Of course a decent chunk of equity will seem ridiculous.

We can't make a valuation of your company or read the fine print for you. (Yes, equity gets very complex).

All we can see is that this company has taken advantage of you, and you've let it happen. We can also see you don't really understand the process of getting to that fair number (Fair enough, as I said, it's complex).

Getting a normal job makes calculating whether you're being fairly paid much much easier. That's what I do, and I would recommend that's what you do as well.

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If you've been unlawfully paid less than minimum wage, you may be owed money, and should look into whatever mechanisms there are to deal with that in your jurisdiction. I understand this is probably awkward to do right now, but there may be a time limit from the last unlawful payment, so don't procrastinate. This is your money, I'm sure there's a better way to spend it than donating it to some sleazy startup.

Answer 5

You don't want equity. You want a fair salary.

The reason is that it is very, very unlikely that your tech startup will become the next Facebook.

90% of tech startups fail. If you work for equity in such a startup, you end up with nothing.

Of those which don't fail, most become "just" small businesses which end up providing their owners with profits equivalent to an average salary over a few years, but don't turn them into millionaires.

Those mega tech companies which grew out of startups or those small companies which get bought by them for millions are a very rare anomaly. The public perceptions that tech startups are a way to get rich quick is a myth created by survivorship bias. You read the news headlines about the very few which succeed, but you don't hear anything about the thousands which fail.

And don't take it personal. I don't know your business plan, your product or the know-how of your company. But the little you wrote about your company doesn't really sound very promising.

However, if you work for a salary, none of that needs to bother you. You will get your monthly paycheck anyway (and if you don't get it one month, you know it's time to jump ship, because the company just ran out of money). This allows you to properly plan your finances and lets you sleep at night. And if your company somehow manages to win the startup lottery and turn into a success, you now have a very impressive reference in your resume and can use it to negotiate for a top salary at another tech company. So it's not like you wouldn't benefit at all from being a salaried employee in a successful startup.

Answer 6

When I joined they agreed to eventually pay me equity, but asked me to prove myself first.

You should not have started working for them without having agreed both the amount of equity and when it would be paid. Because that have them free license to...

In the past two months, they have had me work more about 50 hours a week, and paid me $1500 per month.

which, with all due respect, is horribly, horribly abusive. Please tell me there's a zero missing from that salary.

Answer 7

Considering how tense is the job market for IT skills (and especially data science), as soon as you provide the skill to build the product by your own, then you clearly deserve more than 5%. Actually, if you decided to leave, their project would be stuck for months, maybe years, before finding someone who would be willing to work for such a low pay check with such a set of skills.

Asking a 2 digits percentage is not outrageous. 15% seems fair to me. But remember it worths nothing until company runs profits.

This said, I’ve already worked on project of this kind: low paycheck, promises of equities etc. After 3 years, the project was still being developed and had still no customer. And that was the exact same pattern as you describe. I was working spare time on this project aside of college and was not really relying on the equities. It was a good way to create first strong experiences.

You are way more experienced that I was at this time. Don’t waste your time in there. As you said:

they agreed to eventually pay me equity

Nothing is certain about this, and you might be discussing for a very long time for nothing.

Answer 8

Ok so let's take a shot at answering the question.

But You need to do your own homework. You're only working 50 hours a week, so you have plenty of time to read Venture Deals by Brad Feld. It's a great book and will introduce you to VC thinking. Now, to your question -

1. any equity you get now will be diluted if you get VC funding in a few months, probably substantially - 10% might well become 7%. This will only further get diluted over the next funding rounds.

2. normally there is an employee pool, of ~20%. Note this pool will get diluted too over time, but the gist is all non-founder employees get equity from this pool. So, a 20-man team would each get ~1%. Some more, some less. But the thing is, that pool is also used for new talent too - so it's not just all used up after day one of funding.

3. You note that there has been angel funding, but you seem to think the founders own 95% and an intern owns 5% - what do you think the angel round was for? It is plausible the angel round was convertible debt - but that's just going to cause more dilution/reduce equity available.

Your request for 5% is quite unwieldy, and I find it unlikely that the intern is on 5%, unless the intern has committed capital to the project, or is a friend/family member to one of the founders.

You normally want to align yourself with the company, so more stock is better than less. Be wary though that you will have vesting - you use the word so I assume you know what it means (read Venture Deals please).

Here is a short link (still read Venture Deals!) that will help slightly.

https://avc.com/2010/10/employee-equity-dilution/

Now, If you cannot stay at the company because of low pay, you will leave, and you will lose your stock - making this whole exercise, from your POV, pointless.

The other answers are right in that you should be trying to get more pay, although I can see your difficulty, and I can agree with you staying on if you are learning new things and making new contacts, then there is value in this job. After all, people pay money to go to school to learn new things and make contacts, so you might look at this is a scholarship! But it really depends on if you feel you are advancing your prospects - that is to say, what you know and who you know - in this work.

You will be lucky once all the funding rounds are done and an IPO happens to own 1% of the company. In SF there is a market for equity pre-IPO that you might look into too. 1-2% seems like a fair ask, but this also assumes that you are being paid a livable SF salary too. Because you're taking such a risk as an early member, and because of obvious dilution, asking for more - 3-5% doens't seem unfair, but you would have to be able to make a fair case for it.

That case would include lost opportunity (salary), expected value of shares in 4 years, expected stock ownership of shares after dilution over 4 years and so on.

Answer 9

Bilkokuya brings in a good point about the legal aspects. While I don't think that it is possible to expect 20% in this case (though it is not impossible if they are in talks with investors right now and desperately needs you specifically).

When it comes to what you can expect I think the answer is about half of what you ask for, as long as you are not really outrageous. It all comes down to negotiation, and the outcome of that should feel like a win for all the parties involved. In order to do well in negotiations I suggest looking into pricing strategies. One of the popular concepts in price setting is anchoring. What the CEO does when he calls your 5% outrageous is negotiating. If you instead come into the negotiation with a well funded reason for why 20% is actually the right starting point to talk from then the negotiation will instead be about the discount the company will get from you.

This is based on the assumption that the laws have been correctly interpreted by Bilkokuya. But regardless of how you do it, setting an anchor as high as possible should be a good priority for you. If nothing else the founders will probably have to disclose information that you need in order to make a better evaluation (like the actual percentage distribution today).

I also believe that you definitely need to fokus a lot on the conditions of the shares. If they are conditioned on you staying on board for 5 more years without any salary then they are more or less guaranteed to be worth 0 regardless of how the company does. There is no indication that the abuse will stop so the likelihood of you staying that long is really low which means you are negotiating for 0. Your argument here is that the equity is nothing more than pure back pay and should come with no such limited strings attached.

A final note is the comments of the rarity of success for companies (it is not just tech companies). Getting accepted into an incubator and getting money might improve the odds, but I would argue that the odds are not improved that much. Achieving those goals can be done using the same techniques used to con you. I would look more at the fact that your team seems to have no actual experience (school typically does not provide experience) and you are not managing to actually deliver anything at all. 0 customers is the same as not started yet. Your first customer is when you get started. You don't have to make money of that customer, but you have to learn.