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I need some advice because I'm not sure if I'm being unreasonable here.

TLDR: Joined friends startup (about 5-6 months in) on 6 month contract for salary and no equity. Built entire project from scratch. I am the only one working on it full-time and want to ask for co-ownership at 20%. Am I being unreasonable?


A long time friend and his best friend started a company 10 months ago.

They were both taking an entrepreneurship masters class and part of the program required they start a business. They got funding to hire someone to help them out with the idea. The funding was 20k (CAD) for 6 months (About 20/hr normal shifts). I decided to accept the position with no equity for 6 months and we'd see how things would go from there. The pay was significantly below what I'd accept anywhere else (60k) but no risk no reward right.

By the time I joined, they were working on 1 side project for the school and I was suppose to work with the friend on the main project. Over the past 5 months, I built 95% of the entire thing. Worked on it 6-7 days a week and meet with them on Sundays to work on it at one of their houses. They both work full time somewhere else and I work full time on this.

So over this time, I focused on my project, his friend focused on the scheduling project one and my mate work the customer relationships and getting clients. Now my contract is coming to an end Dec 8th.

They've offered me another contract of 6 months at 25k with 5% equity. They couldn't get money from the same fund as last time so this time it's coming from the money they made from selling to the school. It's basically all they have so I can't negotiate for more cash and I can live with the cash offered so I don't care about that.

They both currently have full-time jobs a year each so if this doesn't work out, they're covered. I feel pretty stupid putting my career on hold for a startup where I have only 5% ownership, am getting paid less than market rate to be the primary developer/designer/etc, and receive no benefits other than working from home.

I had dinner with the friend (the mutual one) last weekend. He felt we needed to talk because he could sense something was on my mind. He asked me where I saw myself in a few years and I said I want to me making decisions with them at the top. I'm not interested in just being another employee, if that's what I wanted I could do that anywhere else for a salary reflecting my skills and the work I put in. His response was "We're not really looking for another co-founder", I asked him what he was concerned with and for him, he just wants to be making all the decisions without having to justify himself.

Anyways, that's the situation. Just need to know what I should do. I'm going to work on my resume after this. My contract is done beginning of December so I should be prepared anyways. I've never really interacted with startups before and don't really know what my options are. I guess I'm just looking for feedback. I know that I want is a percentage of the company that reflects what I've put into it. My ideal number is 20%. They both currently have %50 each and given the work and risks I've taken to be involved, I don't think I'm being unreasonable. I think an even split between the 3 of us isn't entirely fair since it was their idea, they did the leg work to get the company started and the initial funding, they've currently paid for the lawyer fees (or will at some point) and any other fees so I do get that. But in my opinion I got in early enough and did enough of the leg work that 20% is a fair ask. I'd just love to here some opinions or options.

Thanks.


More info

  1. Both of them received a 9k scholarship from the course where this all started so they put that 18k towards starting the business.

  2. The project the other guy is working on, they sold that to the university for 30K.

  3. They don't know how much they owe their lawyers yet. They're guessing that's going to be around 5-10k

  4. We're not at seeding stage, the product hasn't launched yet, I don't think they've talked to any investors yet so there's no guarantee of any future revenue at this time.


Update: They weren't willing to negotiate and I thought the offer was too low. So even if I had accepted, it would have just fostered resentment. So looks like I just need to find something else to do now.

closed as off-topic by IDrinkandIKnowThings, Dawny33, gnat, JB King, Michael Grubey Nov 16 '15 at 23:07

  • This question does not appear to be about the workplace within the scope defined in the help center.
If this question can be reworded to fit the rules in the help center, please edit the question.

  • 2
    "No risk, no reward" It's unclear what. The 'reward' is. You've essentially donated your time up to now (the entire product) and nothing compels your 'friends' to cut you in in exchange. You need to understand how badly you've been played before you can proceed. – Nathan Cooper Nov 15 '15 at 20:24
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    I'm voting to close this question as off-topic because this is not about navigating the workplace but about determining a proper equity. Remuneration amounts are specifically declared off topic here. – IDrinkandIKnowThings Nov 16 '15 at 15:51
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    The point I was trying to make, if I understand everything, is they have a backup plan, they have regular jobs. In December, you won't. You shouldn't let this side project of theirs interfere with your livelihood or your chance to find a full time job. – Dan Shaffer Nov 16 '15 at 18:06
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    I completely disagree about closing the question. It's garnered a lot of interest and the fact that a "correct" answer will be lost in the nuances of it are not a disadvantage! I vote to re-open. (if I could vote.) – dwoz Nov 20 '15 at 23:32
  • 1
    "They've offered me another contract of 6 months at 25k with 5% equity." and "pay was significantly below what I'd accept anywhere else (60k)" suggests they are valuing the company at $100k right now. If you do not agree with that evaluation then state you feel is worth X, your salary elsewhere would be $30k so the $5k shortfall needs to be made up with X% stock. Your risk is the stock is worth $0 in 6 months. – TafT Mar 6 '18 at 18:09
22

The answer is pretty simple: You are, for all intents and purposes, the "primary angel investor" in this venture.

Communicate to them that by taking a significantly-below-market rate, you're essentially investing in the company. For the last six months, you've "invested" the equivalent of CAN$40k, which is the difference between your rate and the typical market rate you can command, meanwhile carrying all of the risk and none of the reward. At the end of December, it can be credibly argued that on paper at least, you've "invested" a large share, if not perhaps the largest share. So, what is that worth?

If over the course of the last six months, you've "invested" $40k in the form of uncompensated value, and through to the end of the company's first fiscal year you expect to "invest" another $35k...then you've "invested" $75k in the venture. At the end of the fiscal year, what do they expect their venture's reasonable valuation to be? When they DO walk into that seed "A" round with investors, what's their valuation?

For the sake of putting numbers on it, if the valuation of the company is expected to be $1million, then your contribution is about a 7.5% stake. To properly and appropriately apply a risk premium to your investment, you're reasonable to expect this to bump to about 10%.

  • I like the line of thinking that I'm an Angel investor :) If there's no way they see it that way but if I'm foregoing money to build something for you then it does make sense to think about it that way. – Batman Nov 16 '15 at 0:23
  • good positioning, Batman. they're offering you 5% and at the strawman valuation I imagined, they're not terribly far off. Bear in mind that every penny that they grant you comes out of their own pockets. That's different than when this scenario happens after the "A" round and the money is coming out of someone else's pocket. – dwoz Nov 16 '15 at 0:34
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    "No, he's not an 'Angel' investor." That argument is fine too. If they're unwilling to take into account the amount of successful work he did, then he should consider his replacement cost and his own opportunity cost. Contrary to popular belief, software engineers are not easily interchangeable. If they hire someone to replace him at this stage, it's going to be a huge gamble for them. He should keep this in mind while negotiating, and at the same time, he should look for work elsewhere to see what his real value is on the open market. Right now, he's not being objective about his true worth. – Stephan Branczyk Nov 18 '15 at 8:38
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    @NotMe, I also disagree. The very definition of an underfunded startup is "put in sweat equity in lieu of real pay, with the hope/expectation of a back-end payday in the form of REAL equity." That's the norm. Working as a software engineer on new technology, for landscaper's wages, and "that's the deal," is not the norm. I again reiterate, because you seem to keep missing it, that nobody's suggesting that he's accrued ACTUAL equity at this point, only goodwill. Hopefully, he can parlay that goodwill into actual equity, which is really the BEST form of goodwill! – dwoz Nov 18 '15 at 20:45
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    @StephanBranczyk, just to be clear, I think we're in alignment here, you and I. – dwoz Nov 20 '15 at 23:30
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There are two aspects here

  1. Co founding
  2. Total remuneration

It sounds like being up as a co founder/director is out of the question, so you need to decide if that's a deal breaker for you.

Then as an entirely separate question, you need to look at the salary package as an employee. I would expect either a near-market rate salary plus small equity, or a larger equity stake with a smaller salary.

Essentially any equity you take is a risky investment in the company, so it needs to be high enough to justify that risk.

How much do you expect the company to be worth in a couple of years time, if all goes to plan? What share of equity would you therefore need in order that if you sold your equity at that stage, you'd make at least as much as if you'd simply worked at market rate for the same amount of time? Now how much more do you want to account for the risk of failure?

If taking less than market rate, you're essentially investing the difference in the company, so treat it like that.

  • somehow missed this answer when I posted...gives much the same answer as I did. Kudos, Jon. – dwoz Nov 15 '15 at 18:35
  • Thank you for this answer. The way I see it, chances that the company makes anywhere near enough for a 5% stack is not enough for me to feel comfortable foregoing market rate of a full stack developer, especially one involved so early in the stage of the company (I joins 5-6 months in). So their offer as it stands does not work for me on the employee aspect of things. On the co-founder side of things, if they aren't willing to include me as one, there's nothing I can say to convince them to do so. Either they want me or they don't. All I can do is counter their offer or walk. – Batman Nov 16 '15 at 0:21
  • Exactly: decide on both parts individually and walk if either of them are a no. – Jon Story Nov 16 '15 at 0:22
  • Anyone else in this situation, don't just calculate base don salary; include all benefits when calculating (pensions, paid time off, sickness, medical plans, etc, etc) – Mawg Nov 27 '18 at 13:51
  • @Mawg That comes under "Total remuneration" and "salary package" in the answer - when we talk about a salary package, we generally mean salary + bonuses + benefits, not just base salary – Jon Story Nov 27 '18 at 14:36
9

"Fairness" doesn't exactly equate into this scenario. Even if you've built much of this project, and you personally enjoy working with the founders, you feel that you are worth more than what they are currently offering, and as such, you should make that clear to them.

They may consider the offer you're making to be unreasonable since it's been steady pay, but this isn't just about them now - it's also about you. You should be ready to and defend your compensation asks, as well as move on if the company decides not to accept it.

  • 3
    Thank you, that's pretty much the consensus. Tell them what I want, stick to my guns. Either they accept or they don't and if they don't I walk. – Batman Nov 16 '15 at 0:21
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5% is ridiculous, I'd ask for equal shares and negotiate down to 20% at most and take the loss in earnings, anything less and you're being used. You're the one taking the risk, you're the one doing the work. If you're going to do it for peanuts you might as well develop for yourself and take the whole pie.

I have been in this sort of situation, basically you're working at a loss to make someone else rich, you're not doing yourself any favours by doing so. Do a simple equation, how much do they need you versus how much you need them. In my experience from similar situations they need you more, so make sure you're on the winning side of it. If they don't think so, then don't take less, decide how saleable the product is and do another equation.

Is it worth doing it yourself versus the risks in doing so. It's possible that you could redevelop the idea from scratch and be selling it before they can even get off the ground. I'm always wary of people who look around for funding to do everything without the expertise to actually do it themselves when they have the funding. Sometimes people like that make a career of looking for funding and then just getting enough done for the next round of looking for funding leaving a line of developers behind them who didn't make anything worthwhile out of it.

  • 1
    I'm downvoting because there is FAR more involved in getting a company off the ground than just having a developer write some code. The founders had an idea, they got some minor funding (no small feat), they made a sale, etc. These are HUGE items that outstrip code writing and, quite frankly, take far more time than the OP is letting on. Also, who knows how much they've already had to give up just to get the funding that paid the OP to begin with. Early investments cost quite a bit. – NotMe Nov 16 '15 at 23:32
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    @NotMe Thanks for the explanation (Y) Appreciate it, but having started more than one business and been on the developer angle as well more than once I'll stick by my answer. At the end of the day I can only give input from my personal experience, which may not always be normal I guess. – Kilisi Nov 17 '15 at 2:05
  • I guess we have different definitions of risk. The OPs risk is that they end up out of a job at some point. The founders risk is that they (depending on company structure) end up financially liable for failures. A further risk is that their currently unpaid for efforts continue to be unpaid; and the final risk is that their financial investment is lost ($30k at this point). From the numbers given, the only one who has made any money on this deal is the OP as the costs shown easily outweigh the amount taken in. – NotMe Nov 18 '15 at 17:03
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    @NotMe Yes, we define it differently, to me the OP has been making a loss (could have been employed elsewhere for more) and stands to make the biggest loss of being out of a job as well as out of pocket. The 30K wasn't their money and couldn't have been spent on something else, so it's not being risked. – Kilisi Nov 18 '15 at 18:58
4

You need to establish your ownership now and either the risk/reward potential is acceptable or you should move on to other jobs or ventures. At this point in the venture there should not be another "contract" or "let's see how the next six months goes."

Negotiating at this point should focus on their reluctance to give you more equity vs. their reluctance to quit their jobs and/or find a replacement for you. So far, there is no actual value in the company to negotiate. The "idea" guys must relinquish equity as people, like you, provide unique contributions to the success of the company besides the idea itself.

With that in mind, do not sacrifice equity out of eagerness to create a deal. The company should consider the cost if you do not renew the contract. This is important because the other owners are employed, which violates the risk-reward formula. You can't compare their "partial dedication" to your full dedication. Any worthwhile idea has lots of competition, so the idea is not as valuable as the people's skill, commitment and devotion to the success of the idea. Those things create value more than anything else at this point in a company's evolution.

You should expect their full time commitment as soon as possible for the success of the company, with the expectation that the longer their delay in joining your full-time commitment, the more equity you should expect now. Otherwise you might find yourself with a long series of below-market contracts for small pieces of a company that does not have enough support to succeed.

Similarly, it is important to not overvalue your contribution. The company may be able to transition to another similarly skilled developer willing to accept the terms offered you. The business might benefit from another developer's perspective. This is more difficult the more you can offer unique perspective or have done work outside of software development to help the business succeed. A more difficult transition to another developer is not unfair leverage of your development work, it is an indication of your unique value to the company. If you walk away and things continue without you, you were probably offered too much equity. And this may not be a loss to you - again, without more support, the company will almost certainly falter and your resume will not suffer.

Consider if you "shop around" for start-up "CTO" or "CIO" positions, they are primarily in the 1-25% equity range (rarely higher or lower). It seems that you have reasonable expectations, including your current and desired amounts. This is a fair range, and the conditions above are the means of measuring it.

A lower equity position encourages stability but is an indication that your role is more a commodity to the business than a strategic advantage. While a larger share is an indication of unique contribution for a critical component of the business (including your willingness to devote full time to the success of the company when others are unwilling).

Last, this negotiation will probably be the largest offer you will get (whether it is the 5% or the 20% you seek). If the company is successful, then additional ownership options will be smaller (as a percentage). If the company fails you will not get additional offers of equity unless you acquire a failing company.

  • Hey thanks a lot of taking the time to write this. I just wanted to clarify, when you say "This is probably the largest offer you will get", are you saying they are likely not going to give me the percentage I want, even though you think it's reasonable? – Batman Nov 16 '15 at 17:45
  • No - I edited the response (I hope it is more clear). Whatever you negotiate during this contract is likely to be the largest you will get based on your description of the company's status. – Jim Nov 16 '15 at 18:08
  • Oh I see, basically it's now or never, so don't agree to bs terms. – Batman Nov 16 '15 at 18:10
  • Something like that, yes. Percentages of this size are rarely discussed unless it involves substantial investment or bankruptcy. – Jim Nov 16 '15 at 18:36
  • Yea I agree. It really should have been something I discussed before I agreed to do anything. That put me at a disadvantage. I'm meeting him in a few hours. The math, and pretty much all the feedback agrees with me. If they don't, at least I'll know I made an informed decision. – Batman Nov 16 '15 at 18:47

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