How to approach asking for equity

Question

After I graduated University 7 months ago I took up a job offer that I had been presented with working for a start-up company.

The offer had been negotiated and the plan was for me to come on board at a low salary initially, then after 12 months the salary would double when the business got going.

The salary I am on/started on is approximately minimum wage and I could easy get 2 or 3 times what I am earning now at another company. Actually it works out at roughly half of minimum wage if I were to work it out based on the number of hours I work.

The start-up company is run by a friend of mine who I have known for a few years so I trusted that this promise of an increased salary would be fulfilled and we could make it work.

When I came on board the start-up was a completely new company and no work on it had been started. I have been working flat out on it the past 7 months doing 95% of the work while the owner spent most of his time on another company of his. The owner and I are the only two people involved. The other company is complimentary to this new one and I have also been spending some of my time on that as well.

Essentially I have all the technical knowledge whereas the owner is more of a sales person. Without my input and skills the business would not be able get going and if I left it would fail completely. There is not enough money to hire someone else at the bare minimum salary I have been working for and if we weren’t mates beforehand I never would have accepted the wage going into this project.

The owner didn’t really have a good idea of how long a project like this would take so it has taken about 4 months longer than he anticipated. I also foresee it growing at a much slower rate than was suggested by the owner when we were negotiating the initial wage.

The long term plan is for me to split my time evenly between both the businesses when this start up launches. I will be doing all the technical aspects along with online sales and business development for both businesses while the owner attempts to achieve sale face to face. It is likely that I will be doing about 60% of the work on the existing company and about 75% of the work for the start-up company.

If I had known that I would be taking on this much of the work for the companies when I started I would have asked for some sort of equity compensation to make up for the low salary and significant contribution.

The start-up should be launching soon and I have come to the conclusion that I don’t want to be building up someone else’s business portfolio for years only for them to sell it when it becomes a success.

I want to ask for some sort of equity compensation or look at a way to get equity in the company in return for an investment but I am not sure how to approach it. It is unlikely that the owner will want to give up 50% of the company but ultimately I feel that’s what would be fair for my contribution. If two people are running a company and doing roughly the same amount of work then it doesn’t seem appropriate for one person to own everything while the other person gets nothing.

If ownership is not split equally then I feel I may become resentful and we will have a falling about at some point.

Any advice would be appreciated.

Answer 1

Startup ventures are often constructed in such a way, like how you describe, where short-term lack of cash is supplemented by offering equity or other bonuses in exchange for working for a reduced pay.

However, any agreements you have which are not in writing are basically nonexistent. Unless you made an agreement in writing, wherein after a specific period of time, a set portion of the ownership of the company would transfer to you, then there is no agreement. The owner has absolutely no obligation to give you any equity at all and probably won't. I say this because, if he is a prudent business owner, he is probably not in the habit of giving away large chunks of his company.

That being said, I worked at a startup where there was a fellow in the same position as you. The owner offered him a share of equity at some point, and even though it was not in writing, he gave it to him. Or at least, as he told me, he made the man a "partner."

I'm not sure what this means but I think it's likely the owner still makes a vast majority of the money for the company.

You should also consider the fact that an agreement, in which ownership of a company is split, especially if that number if 50%, are very complicated, and require a lawyer to draft them. Even if the owner did agree to, out of the blue, give you 50% of the company, there would still be a long, legal process in which all contingencies are examined. This process is also very expensive.

You are essentially proposing to buy 50% of his business in exchange for your continued sweat equity. This is a bit of a stretch, and for the reasons mentioned above, he may not want to split ownership of the company at all, due to the costs incurred for doing that.

In conclusion, my advice is to understand the process of business ownership much better before asking for equity. I recommend Michael T. Lechter's book, Other People's Money, in which he talks in detail about this.

Answer 2

I want to ask for some sort of equity compensation or look at a way to get equity in the company in return for an investment but I am not sure how to approach it.

It's unfortunate that this wasn't discussed beforehand, but you have to deal with what is in front of you now.

It's probably unreasonable for you to expect 50% equity in a company that hired you under these other arrangements. As far as I can tell, you are on track to get your increased salary in 5 months - fulfilling all their stated obligations. It would be very unusual for you to get the same amount of equity as the founder. However, it's not unreasonable for you to ask for something in exchange for your hard work.

Since it's only the two of you, why don't you simply sit down and have a discussion? Explain, just like you have here, that you feel the effort you are putting in deserves some sort of compensation beyond just salary, and that you think an equity position is warranted.

Be prepared for how you want to react when your friend responds. He could say "No equity at all", "How much equity are you looking for?", or "How about x%?". Be ready to hear and understand any of them and know what you will then say (for example, "Let me think about that.") You don't want to get angry and just quit without exploring all the possibilities first.

If I had known that I would be taking on this much of the work for the companies when I started I would have asked for some sort of equity compensation to make up for the low salary and significant contribution.

So now you have a better idea now of how much work is involved, and you can revisit the arrangements.

Talk about it with your friend, and be open to all the possibilities. Equity might be one outcome, but there are many others (such as hiring others so that you aren't taking on this much work, leaving altogether, etc).

Answer 3

It sounds like what you really want is to get compensated in proportion to your contribution. Equity isn't the only way to do that, plus equity comes with considerable risk. 50% of small businesses fail within the first 5 years. If that happens, your equity is worth $0. Unless the company is likely to get acquired, you might be better off with improved salary, profit sharing, or bonuses. Or a combination of incentives plus equity moving forward. Maybe you can negotiate more time off or bringing on another employee.

Regardless, tell your boss what you want, but be sure to frame it as part of a dialog. As you talk and think through it, be open to other arrangements that feel "fair." In such a small setting, you can't afford any resentment or bad blood. Unless you address this issue in a healthy way, you'll find yourself moving (or moved) along in the near future.

Answer 4

The horse has already bolted on this one. You agreed to work for a certain salary, with some kind of promise of a pay rise later on. That's exactly what you got. You aren't owed equity, if you wanted that to be part of your compensation you should have raised that at the start. You were already paid for your work (regardless of whether you feel it was enough) so have no grounds to ask for anything more 'in retrospect'. Asking for some percentage of the company now is basically asking for a stake in the company for free.

So my advice to evaluate where you are now. If you want more compensation in the future, then by all means negotiate. But it has to based on the future, not the past (in other words, work you will do, not work you have done). That might be a hard pill to swallow, but better to face facts and accept it than enter negotiations from an unreasonable and unprofessional standpoint that your boss somehow owes you more for the work you have already carried out.