Recently I got a proposal to be part of a startup idea, as the head of development team. I was offered three ways of being a participant: 1- To be a shareholder. 2- To get paid with a fixed salary. 3- To be a shareholder and get a fixed salary. From my point of view seems like the third option to be more convenient. But I think I need a clearer explanation from people who previously had to deal with this kind of situation. Also I really wanted to know how big of a share should I ask for in the first or third case. Any suggestion is much appreciated.
To answer this, one would need details about the startup including a hard look at the business plan and the size of the market. (And need to sign an NDA to see those.) If you don't know how to evaluate the potential business, you are "shooting blind".
Typically, a person who is in the role of "head of development" of the product will be a shareholder and paid in shares until the company generates income. Once income happens, then the person gets some.
But, what percentage of shares? You have to consider not just the initial share distribution, but also any shares to be issued later in return for capital investments AND what about being paid those shares over time. If all the shares are issued at once but people stop contributing, then those who are still participating will get resentful. So, it is better to have some shares at start but vest or distribute shares over time. You can also get "virtual shares" which are not actual shares in the company but have promises to buy back at a certain value.
So, there isn't one clear answer as to what percentage.
But, to give an idea of how things might go, I share the following with a lot of people starting a business. It is to help them understand how to price their efforts and why they need to almost triple their prices to stay in business.
For every dollar that comes in:
20% goes for profit (and taxes)
25% goes for sales and marketing
15% goes for administration and overhead
40% goes for offering the service or building the product
Remember that other developers will want part of that 40%. If this startup will manufacture something, then that 40% is further broken down in to parts and labor to build it.
Final word, if the startup is highly risky, take a salary only.
I was offered three ways of being a participant: 1- To be a shareholder. 2- To get paid with a fixed salary. 3- To be a shareholder and get a fixed salary. From my point of view seems like the third option to be more convenient. But I think I need a clearer explanation from people who previously had to deal with this kind of situation.
The only real way to analyze the choices involves:
- Your assessment of the company's chance of financial success
- Details behind how many shares are being offered
- Details behind how many total shares will become available (so you know your percent of equity in the company)
- Details behind the salary being offered in each option
- How lucky do you feel?
There's no simple, magic way to analyze this. It will take some knowledge of the company, founders, other investors, etc.
If you have been part of a startup before, you already know that the vast majority end up not being all that lucrative. If you haven't, then you should talk to your professional network regarding their experiences in your domain and your locale.
What is the best way to participate in a startup idea?
The best way is the one that meets your needs and the company's needs.