I am in negotiations with a startup to join them as the 5th employee. The current offer includes 0.3% of the shares, which I thought it was low. When I sent them my counter offer asking for more, they explained to me that they only have 10% of the shares for the employees so they can't offer more. Is this normal? I thought a startup would have more shares to distribute among their employees. The founders also mentioned that even if they wanted to give their own shares to the employees, they would have to offer them to the investors first.
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I will lead the development of their core software technology.– balborianCommented Jan 25, 2022 at 18:07
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1@JoeStrazzere title matters? It's a 5 person company.– DaveGCommented Jan 25, 2022 at 18:12
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10%? nice. i never worked in a company that offered any equity. i think your location and industry matters, so maybe include that in the question.– foernoCommented Jan 29, 2022 at 15:09
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4 Answers
Early stage startups need to preserve their equity in order to attract new employees and investors. Giving away too much too early is a sure way to stunt future growth.
It shouldn't matter to you if it's "normal" or not. Decide if your compensation is sufficient. If not, ask for more. If denied, move on to other opportunities.
answered Jan 25, 2022 at 18:01
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Thanks for your answer. Is it common to have only 10% of the shares allocated to employees? If not, does such low % indicate something about the prospects of the company? Commented Jan 25, 2022 at 18:04
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4@balborian You need to keep as much equity as possible to attract angel and venture investors. Many will insist on a controlling interest (50% + 1 share) if they're going to bankroll the startup. There is also a potential for conflict of interest if employees own too much. Commented Jan 25, 2022 at 22:57
Yes, setting aside 10-15% of stock for employees is the recommended amount in all startup playbooks - here’s a Forbes article to that effect.
Having said that, as employee 5, I would expect .5-1% usually, though it does matter whether you are a strategic hire or just a temporary measure. This stock offer indicates the latter. Which may be fine, startup stock is of equal value to magic beans and isn’t a meaningful part of your total compensation.
Working for a tiny startup is very risky. The startup is likely to fail. There won't be any job security. As the person leading the development of its core technology, you will be overworked and you'll get as much stress as the CEO.
And even if the startup succeeds, which is very unlikely, expect that your shares will get so diluted that, that they'll be worth absolutely nothing.
Start the negotiation with that mindset in mind. Insist on getting market value for your skills. And if they say no, that's fine. Walking away is most likely your optimal outcome.
And in the future, if you really want to start some kind of partnership, read this book first, The Partnership Charter by David Gage.
answered Jan 25, 2022 at 18:50
In early stage startups who is a founder and who is an employee can get mixed up. Often people will join thinking they are a founder when really they are an employee and this sounds like what's happened here.
They see you as an employee and so have allotted a small amount of shares as an incentive to employees. The rest of the shares will be allotted to founders / seed investors and they will probably be thinking also about future investment and funding rounds.
Sounds like you'll be their main tech person. If you are the only tech person then run a mile as the current founders are building a tech company whilst not respecting that tech should be paid an good share of the company and seen as a founder. This is also common when the founder have put some of their own money into the company. As you are coming along and only adding your labour only then your are seen as an employee.
At this low equity make sure they are paying the correct wage if you really want to join.
