I'm being hired as the first employee of a pre-seed startup. How to approach negotiating terms of my employment, remuneration etc?

Question

I've have a couple successful conversations with two founders of a b2b hw/sw tech solution startup and they let me know that they'd like to "progress things further". I'm guessing at this point that would mean discussing what kind of terms of employment I would agree to.

I don't know how to start even thinking about what's reasonable in terms of equity/salary cut. I am aware that in principle equity is worthless unless the company exits, but I really have no gauge of what kind of early-stage employee equities and salaries vs market rate are reasonable. I feel somewhat awkward discussing the money because as for now the company is pre-investment, running off a small grant and the two founders' savings and side hustles. That makes my salary essentially come directly from the founders' pocket and feels kinda... personal?

And then it obviously becomes more complicated than that because of non-money terms. Should I negotiate working hours? Work-life balance is important to me, not only for mental health but also for productivity. After meeting the founders and chatting about work-life balance briefly they seemed like they broadly reject the 80h-week Silicon Valley startup grind mentality which is good. I'm aware that working in a startup is likely to have crunch-times when extra effort is necessary but would discussing nominal work week length be unreasonable? Originally before applying to a startup I was interested in negotiating a 4-day week with a bigger company - is it unreasonable to even bring it up with the startup? Is it likely to paint me as lazy and unwilling to commit?

I do realise there is a lot of broad questions here and I wouldn't be surprised if there already existed resources with the information I seek, in which case I'd much appreciate if you could point me in the right direction!

About me: embedded software dev with 1.5y professional experience at a top technical consultancy. Graduate of some really solid technical universities - probably the main reason I've been considered for this position given the amount of responsibility necessary to develop the product at such an early stage.

Answer 1

I feel somewhat awkward discussing the money

Get over this. Very quickly, or you'll get raked over. They shouldn't be at all embarrassed by this conversation, but if they are that's a big red flag (because they'll get mauled by their investors or run out of cash).

running off a small grant and the two founders' savings and side hustles

How small? You're right this directly affects your salary, and you need to point out (explicitly; see first point), that by taking a lower salary you are taking on part of the risk. Your eventual compensation needs to reflect this (larger %age).

"two founders" ?

What's the current plan for equity split? How do they bring in other investors? If its 50-50 - big red flag, because they haven't thought about that, or what happens when they disagree (equal voting rights), or one wants to cash out.

This affects you, because there should be provision for distribution to employees stake and other subsequent round investors.

my salary essentially come directly from the founders' pocket and feels kinda... personal?

Yep. They'll feel every penny going out. Use this to make sure that every minute you spend working is productive (useless bureaucracy or diversity training will suck the money out of a startup).

Where it gets really personal is the acrimony when they run out of funding and it becomes your fault for not being more xyz (personal experience, circa 2003).

Where it gets really personal is when there's big $$ on the table and they can greatly increase their own share by getting you to quit without yours. People intent on money change when they get a sniff of it and can become total bastards (personal experience, circa 2001, also 1992).

Make sure any shareholding / options are not an all or nothing (eg if you leave, you still are entitled to a smaller percentage, instead of zero).

Don't get greedy and ask for e.g. 25% - It won't happen, as there are other investors beyond just the founders. Better to have 3% of a $100m company than 10% of nothing.

Make sure that subsequent seed rounds do not affect your shares/options - this is really important. It's called "dilution" - get an appropriate lawyer to review your contract. What you're looking for is an "anti-dilutionary ratchet" - If there's a share restructuring, eg to different classes of share for each round of investor, this can have an effect on you. You may think you have 3% of $100m, but then find it's been diluted so much that you'd have been better spending the time working at a checkout (personal experience, circa 1996).

interested in negotiating a 4-day week with a bigger company - is it unreasonable to even bring it up with the startup?

Too hard to call this; depends on them. You can only ask, couched in terms of saving them money and ensuring you're always clear headed.

Answer 2

How to approach negotiating terms of my employment, renumeration etc?

Like any other salary/job-offer negotiation: figure out what your market value is, what money you need to make this work and all other parts that are important to you (hours, flex time, benefits, work from home, social concerns, etc.)

The only thing different about startup is a potential equity part of the compensation. If that's part of the package or offer you need to value it somehow. If they offer equity they should have a business plan and some scenario(s) that describe how this would be turned in to cash and how much it would be worth. That also would include their funding strategy including taking on more financing and the associated dilution of your shares. Example: they are offering you 0.1% of the company and planning to sell the company in 5 years at a projected 2 billion with a dilution factor of 4: Your shares would be worth 250,000 or 50,000/year.

Next you de-rate this by the amount of risk that you feel is in their plan. Does their business plan make sense to you? Do comparable companies valued the same way? Are their real customers for their type of products or services. If the plan is good (shows actual market research and solid data based numbers), something like 10:1 could be appropriate for an early start up. So in our example that would be 5,000 a year and so you could accept to work 5,000 under market in exchange of 0.1% of the company. Basically you gamble 25,000 over 5 years to potentially gain 250,000 if all goes well. Whether that's attractive for you or not depends on your personal risk tolerance.

Answer 3

Your negotiation base should be 100% salary, 0% equity.

Most startups fail. Those which do survive the first couple years rarely become any valuable. So you really want to be an employee working on a fixed salary.

In the unlikely case that you are working for one of the few startups which actually do become successful, you can always renegotiate your salary later or leave and use your founding participation in a famous startup as a reference to land a highly paid job later.

Answer 4

First, you need to figure out what your fair market value (fmv) is. Then you need to determine what part of that you are comfortable taking in equity. Then, you need to learn what the current value of the company is, so you can determine what percentage of the company is equivalent to the cash you are leaving.

Let's say your fair market value is 100k/year. Let's say you are comfortable taking half of that in cash, and the other half in equity. Let's say the equity vests equally over 3 years (so after 3 years, you own all the equity you've been granted - if you quit after that time you still own the equity). Let's say that the current value of the company is 1 million dollars.

You'd ask for 50k / year in cash, and the equivalent of 150k in equity (over 3 years), or 15% of the company.

Another way to think about this is that taking this job should be exactly equivalent to taking a different job which paid fmv, and investing 50% of your income into this start up.

Obviously, the hardest thing to determine on your own is the current value of the company, so for that, you need to ask them. I cannot emphasize enough that it is the current valuation; not any projections based on another firm, not what it might be worth in a few years if only....

If they've raised any money, part of that process included determining a valuation of the firm and that most recent valuation is exactly the number to use. If they've yet to determine realistic valuation, then this is going to be much, much more difficult, and you probably should start to consider if you are a co-founder rather than an employee.

Work-life balance is important to me, not only for mental health but also for productivity.

In all honesty, it is going to be extremely hard to have a nice work-life balance the first few years as the first tech hire at a startup. At first, you are going to have thousands of different technical tasks, the vast majority you have no experience with (set up MySql in AWS, install Git, etc., etc.), which means you are going to be really inefficient doing those tasks.

Second, there is always going to be a lot more work than resources available: Hey, you're an equity holder, do you want to double your development staff expenses, halving your runway, or do you want to get more done with fewer people? To get more done with fewer people requires that you set an example of what you expect a work day to look like.