Internet startup input

[Golden Mean]

So, I've been working at megacorp for over a decade now. I've never really been happy and may now have a chance to exit.

I was recently contacted by a highly successful ex-coworker that is starting up a tech. company. So far it's him and another partner. I'll be doing backend architecture and coding as far as we can tell. I've already started doing some work and have moved them over into the "cloud".

So far I've worked part time with no pay. Recently, I pushed the subject of coming on full time. They would like to wait on that. Although they could pay me now, their concern was if the company didn't gain traction, they wouldn't be able to continue to do so maybe 8 months from now. I cannot afford to support myself and pay for insurance for long and they know that, so I think they are looking out for my best interests.

So the current situation is, I get a chuck of shares in the company (.5%), I continue to work part time with no pay and we agreed to discuss full time when they've gained traction or June. Whichever comes first.

Anybody been involved in such a situation. Anything I should be wary of or do to protect myself?

As far as I understand, the shares (which vest, each month, over a 4 year period) aren't going to be worth anything for a long time. Is the 4 year period typical. Can anyone share their experience with owning startup shares?

Thanks,
GM

 

[FIREd]

A vesting period of 4-5 years seems pretty typical in my experience.

Being paid with shares is always a gamble when you work for a startup. My wife and I used to work for "solid" biotech startups and were paid sub-market monthly wages in exchange for some company shares. Unfortunately we never made a dollar from those shares. Are you comfortable with the possibility of working part-time for free?

 

[Peter]

0.5% sounds very low for someone working without pay. The vesting period is reasonable, although probably at the long end of reasonable.

Peter

 

[Brat]

Are they seeking venture involvement? While bringing in a venture capitalist group means giving up some % they also provide substantial management experience. There are a couple firms that have seed buckets. They should be exploring that avenue as it is an excellent way to test the viability of the business.

Think.. is this an ego trip for the founders or a viable business?

 

[haha]

0.5% sounds very low for someone working without pay. The vesting period is reasonable, although probably at the long end of reasonable.

Peter

Yes; a giant screwing. He is one out of three people and they are looking out for his best interests by offering him 0.5%, if he continues to work for free?

With such friends, who needs enemies?

Ha

 

[eridanus]

What others wrote. .5% is laughable.

You need to figure out your hourly rate, what the product/company is worth, and then decide what your % share should be given that they're working full-time and you're part-time.

In any case, they're taking advantage of you. If you were the 20th employee, you could expect .5%. You're #3. You need a substantial chunk of the company.

 

[MichaelB]

The difficulty with a calculation like this is the total shares outstanding may be diluted down the road as the business looks to raise funds. It is difficult to judge if 0.5% is high or low. Technology startups are often sued by existing companies / industry leaders and prevented from bringing products to market.

What is missing is the employment contract. Taking shares in lieu of pay is a reasonable approach, but you are not on the payroll so you have no agreement regarding the shares unless they are irrevocably yours (which is not common). The contract may allow the company to fire you or engage in other actions to prevent you from selling shares. This is not unusual when venture capital is involved.

If the start-up has a business plan the shares already have an estimated current value. The 0.5% you are being offered should be equivalent (in current value) to what they would otherwise pay you in salary. If the partners are unwilling to share that information with you, then I would agree with haha.

 

[Bimmerbill]

I have a buddy that did 3 or 4 IT start ups in a row. He worked like a dog and none of them paid out in the end.

I'm risk adverse, and will most always choose the steady paycheck over the gamble.

 

[sheehs1]

The difficulty with a calculation like this is the total shares outstanding may be diluted down the road as the business looks to raise funds. It is difficult to judge if 0.5% is high or low. Technology startups are often sued by existing companies / industry leaders and prevented from bringing products to market.

What is missing is the employment contract. Taking shares in lieu of pay is a reasonable approach, but you are not on the payroll so you have no agreement regarding the shares unless they are irrevocably yours (which is not common). The contract may allow the company to fire you or engage in other actions to prevent you from selling shares. This is not unusual when venture capital is involved.

If the start-up has a business plan the shares already have an estimated current value. The 0.5% you are being offered should be equivalent (in current value) to what they would otherwise pay you in salary. If the partners are unwilling to share that information with you, then I would agree with haha.

+1

I'd be curious to know the level of importance of what you are doing for them. If you were/are solely responsible for getting them in "the cloud" and if neither of them could do it and if it was/is a critical path for the business to succeed....then I'd reassess the situation. It's possible, that you have built the backbone for their business for them and you have virtually no guaranteed ownership or employment contract. If this is the case, I too agree with Ha.

 

[RockyMtn]

I would say that .5 is way low, especially if you aren't being paid.

As to vesting, 4 years for an entire grant to vest is fairly typical. I would ask that you vest 25% each year (even if they aren't worth anything yet) as opposed to just at the end of the four years. If someone should come along and buy the company in year 1 to 3 at least you'll have 25% to 75% of your initial shares vested.

I would also ask for yearly grants on top of the initial grant.

Worse thing they can do is say no!

 

[bizlady]

Arre they getting paid? Is there ANY revenue?

If you work for weeks or months, and nothing happens for you, are you OK with that?

Tough call. But as the others say- .5 is nothng. If the company is suddenly worth a million dollars, your time was worth $5000.

 

[braumeister]

I have several friends who were in a similar situation to you, in Silicon Valley. Based on what I know of their situations, you are being taken advantage of, big time.

 

[Texas Proud]

Well, I will say that .5% might or might not be a good percent...

I see a lot of posters saying it is 'too little' without any other information.... we do not know how much money they have put into this venture... heck, maybe millions... (probably not, just saying we do not know)...

There already might be a major investor that has 80% of the company (again, not likely, but we do not know)...

I would agree that if there is no capital input, no other partner and these guys just started, then .5% is to low... remember, .5% of $1 million is only $5K... so unless we are talking the next Google or Facebook... get more stock....

 

[FIREd]

Well, I will say that .5% might or might not be a good percent...

I see a lot of posters saying it is 'too little' without any other information.... we do not know how much money they have put into this venture... heck, maybe millions... (probably not, just saying we do not know)...

There already might be a major investor that has 80% of the company (again, not likely, but we do not know)...

I would agree that if there is no capital input, no other partner and these guys just started, then .5% is to low... remember, .5% of $1 million is only $5K... so unless we are talking the next Google or Facebook... get more stock....

I agree. There is not enough information to know whether 0.5% is reasonable or not.

 

[Golden Mean]

Wow thanks for all the feedback!

Here's a little more info. This startup is in the very early stages. While I'm a bright guy and quick learner, I don't have any experience in doing what I'm going to be doing for this company. So I think that weighs in quite a bit. The founder, the ex-coworker, knows that I desire work that I can do remotely, so I guess you could say he's taking a gamble on me to some extent.

Here's a page describing typical percentages for startups. I guess I'm some sort of Lead Engineer or Architect at this point.
Equity Grants to Startup Employees « StartupHoodlum

I'm pretty bored at work so this is great experience. I figure worse case scenerio, I get a few thousand shares (they vest, about 520, each month) that may or may not be worth anything in a few years. And I get experience that I won't at megacorp. Best case they company does well and/or get's bought and I cash out over the next four years with enough cash to be FI.

I guess the one thing that kind of threw me was, they would do equity and full time work (with the concern that the money might run out late next year), but they didn't what to do equity and part time hourly pay. Basically they said hourly pay is more of a contract position and those don't typically get equity.

Any more insight from startup experiences, good or bad, is greatly appreciated.

GM

 

[FreeAtLast]

I worked for a startup computer consulting company and was their first employee. I think that I was given either 5 or 10% of the shares. The owner opened another business and the investors in that business forced him into working in the other business full time so the computer consulting company was pretty much given to me.

I had to assume some debt, but I had customers and ran the company for 20+ years.
I made quite a bit of money over the years, however, I worked very long hours. I am not sure it was worth it.

 

[Nords]

I was recently contacted by a highly successful ex-coworker that is starting up a tech. company. So far it's him and another partner. I'll be doing backend architecture and coding as far as we can tell. I've already started doing some work and have moved them over into the "cloud".

So far I've worked part time with no pay. Recently, I pushed the subject of coming on full time. They would like to wait on that. Although they could pay me now, their concern was if the company didn't gain traction, they wouldn't be able to continue to do so maybe 8 months from now. I cannot afford to support myself and pay for insurance for long and they know that, so I think they are looking out for my best interests.

So the current situation is, I get a chuck of shares in the company (.5%), I continue to work part time with no pay and we agreed to discuss full time when they've gained traction or June. Whichever comes first.

Anybody been involved in such a situation. Anything I should be wary of or do to protect myself?

As far as I understand, the shares (which vest, each month, over a 4 year period) aren't going to be worth anything for a long time. Is the 4 year period typical. Can anyone share their experience with owning startup shares?

I agree. There is not enough information to know whether 0.5% is reasonable or not.

I can share what I've read about angel investing, especially on Paul Graham's Y Combinator website and in Jessica Livingston's "Founders At Work".

A three-person startup, probably funded by founders, family, & [-]fools[/-] friends (sorry, angel-investing humor) is worth $250K-$1M. Unless you're trying to raise money, in which case it's worth 30% less (and the investors will want warrants, too). The founders are usually setting aside 10%-15% of the common shares as a motivational options pool for guys like you, so hypothetically they'd be able to hire 20-30 people like you and offer them similar options before they'd have to restructure the company's stock.

The "real" valuation depends on the rep/cred/contacts of the founders, the customer demand (based on your server logs), and your path/time to revenue. (Actual revenues would be a pleasant surprise.) If you're the 15th version of a social-networking system, or implementing cloud-based SaaS, then I'd definitely stay at your day job.

At the risk of telling you what you may already know, here's an issue that should concern you. At most startups your software has to scale. It should be able to add 100,000 users from one week to the next (maybe 10-20 times in a row!) without your personal involvement. Ideally you'd code it once and never have to mess with it again, but customers lie and the typical result is that you're looking at one more major re-write before you truly figure out how to make it scale for all the things your customers are really using.

Once you solve that problem and the software scales, then the founders have to start selling. This usually involves a different group of people, and will probably not include you. It's not uncommon for this type of startup to lay off the CTO and all the engineers, except for one or two maintenance/troubleshooting contractors, and spend all their remaining funds on a sales team.

Maybe you're in a software consulting startup where you're constantly solving client problems by designing & programming solutions. In that case you'd have a better promise of employment, but the company would also grow more slowly because people scale a lot more slowly than website servers.

Four years is probably the minimum time you'd expect to grow a successful startup (especially the latter type), and by then it might be starting to attract small VC investments of $3M-$10M. There are always the exceptional startups getting bought out at the 18-month point, but from an employee perspective they seem to be hard to identify in advance. (From an investor perspective they're darn near impossible.) The reality may be that most startups will perk along for 5-8 years before there's an acquisition (or a bankruptcy), and an IPO is relatively rare.

The founders seem to be looking out for your best interests. You have a great story to tell, and some lottery tickets, and maybe a nice résumé bullet. Beyond that you'd want to spend the next 6-12 months educating yourself on typical startup employment scenarios and how you'd handle them. As other posters have mentioned, failures probably outnumber successes at least five to one.

I fear that your question is the answer. If you were really fascinated and compelled by the irresistible idea of working at a startup then you wouldn't be asking us-- you'd already be doing it.

At the very least, however, this startup gives you a "Plan B" if your current employer decides to try to live without you.

 

[eridanus]

Here's a little more info. This startup is in the very early stages.
<snip>
Here's a page describing typical percentages for startups. I guess I'm some sort of Lead Engineer or Architect at this point.
Equity Grants to Startup Employees « StartupHoodlum

That's for post-Series A. You're pre-seed, right? That's worth more than .5%.

I'm pretty bored at work so this is great experience. I figure worse case scenerio, I get a few thousand shares (they vest, about 520, each month) that may or may not be worth anything in a few years. And I get experience that I won't at megacorp. Best case they company does well and/or get's bought and I cash out over the next four years with enough cash to be FI.

It's good experience, true, but that .5% won't get you to FI unless you have a Google on your hands. When capital rolls in, it'll get diluted and diluted again. You'll be left with enough money for a slushee.

I guess the one thing that kind of threw me was, they would do equity and full time work (with the concern that the money might run out late next year), but they didn't what to do equity and part time hourly pay. Basically they said hourly pay is more of a contract position and those don't typically get equity.

It's their company. They can do whatever they want with the shares.

For comparison, at my last startup in 2009, I received 1/2 pay and 14% of the company as a lead/co-founder. This was with a seed round. The other 2 employees received equivalent shares and the angel investor received the rest.

 

[Golden Mean]

I can share what I've read about angel investing, especially on Paul Graham's Y Combinator website and in Jessica Livingston's "Founders At Work".

The "real" valuation depends on the rep/cred/contacts of the founders, the customer demand (based on your server logs), and your path/time to revenue. (Actual revenues would be a pleasant surprise.) If you're the 15th version of a social-networking system, or implementing cloud-based SaaS, then I'd definitely stay at your day job.

Makes sense. The founder is a Ph.D and has done really well at everything (business-wise) that I've seen him do. So I have a lot of faith in him at this point. I think he's the kind of guy that thinks about a problem from different directions, non-stop for days until he's found a plan of attack he's satisfied with.

The founders seem to be looking out for your best interests. You have a great story to tell, and some lottery tickets, and maybe a nice résumé bullet. Beyond that you'd want to spend the next 6-12 months educating yourself on typical startup employment scenarios and how you'd handle them. As other posters have mentioned, failures probably outnumber successes at least five to one.

I fear that your question is the answer. If you were really fascinated and compelled by the irresistible idea of working at a startup then you wouldn't be asking us-- you'd already be doing it.

At the very least, however, this startup gives you a "Plan B" if your current employer decides to try to live without you.

Yeah, I am going to continue learn about this stuff. I'll check out the two sources you mentioned above. And, I am doing it, I'm just not getting paid.

That's for post-Series A. You're pre-seed, right? That's worth more than .5%.

It's good experience, true, but that .5% won't get you to FI unless you have a Google on your hands. When capital rolls in, it'll get diluted and diluted again. You'll be left with enough money for a slushee.

For comparison, at my last startup in 2009, I received 1/2 pay and 14% of the company as a lead/co-founder. This was with a seed round. The other 2 employees received equivalent shares and the angel investor received the rest.

Thanks for the data point. I believe they've already done the Angel funding round. The .5% is of the current share count, so it's a fixed number, set in the Common Stock Purchase Agreement I have to sign. Could you describe how the stock will be diluted as capital rolls in? Just trying to get a handle on some of they ways this could play out.

Thanks again for all the input.

 

[warrentalbot]

I'm pretty bored at work so this is great experience. I figure worse case scenerio, I get a few thousand shares (they vest, about 520, each month) that may or may not be worth anything in a few years. And I get experience that I won't at megacorp. Best case they company does well and/or get's bought and I cash out over the next four years with enough cash to be FI.

I guess the one thing that kind of threw me was, they would do equity and full time work (with the concern that the money might run out late next year), but they didn't what to do equity and part time hourly pay. Basically they said hourly pay is more of a contract position and those don't typically get equity.

Any more insight from startup experiences, good or bad, is greatly appreciated.

GM

Having started a tech startup, done acquisitions for a megacorp, and worked with venture capitalists for years I can say that your situation is interesting. It seems you are providing all the technical work based on their architecture and design. They have a great idea (at least they think so) but have yet to convince anyone else. I will assume they are using their own cash to fund it until it a) starts making money; b) fails; or c) gets some traction and they bring on outside investors.

I would say that regardless of the outcome your skills are more valuable to them than they are willing to compensate you. Yes, you are gaining skills but I am not convinced that they are better than what you will get in your current role. It sounds from your mail that you like the new exciting challenge. If so, enjoy it and treat it as a hobby or volunteer project. It can give you a great technical release from your day job and as such you should have a blast.

However, from a financial perspective you need far better. If this company does take off, even mildly, and you are stuff with stock that is worth (best case scenario) enough to buy a used Volkswagen, then you need to determine how that will make you feel. Especially if you are pouring sweat equity in and getting out a 5 year old Passat. Michael's point above about dilution is BIG so please check this out. Your .5% is going to be more like .005 if a VC walks in and starts telling them how to run the company and what they need to change.

Either way, enjoy the ride. It is one of the most fun you can have in technology and also the hardest you will ever work. Scary as hell on Tuesday and more fun than any roller coaster on Wednesday. I look forward to reading about the progression.

 

[chinaco]

The main question I have is: Are you just working for them or do you see yourself as the entrepreneur? Because it looks to me like you are more of an employee that is taking all the risk with maybe little upside. How many of these things turn into the next google or amazon?

For your .5% to turn into $1M... they would have to sell it for $200M.

Many of these things.. if they survive are bought out much earlier at much less.


If the business looked like it really had some promise... I will still require a sizeable stake in the company to do much more than part-time (on my free time) work.

Make sure you understand your rights as an equity owner... you would not want to go all in and end up diluted out of it or squeezed out by the real owners or some VC company (with the owners allowing it).



You have the skills to make a good living. So you are making a real trade-off. One other thing to consider: What are your life goals and how does that fit in? Do you really want to be the entrepreneur? Do you intend to stick with it? Many people go bust several times before they make it.

 

[rescueme]

I'm risk adverse, and will most always choose the steady paycheck over the gamble.

I'm with you based upon my own life, but I would think that a lot depends on the situation and the ability to take on risk.

My first job after being discharged from the military (drafted) was of the "steady paycheck" type, and continued to be so for the next 36 years, before retirement.

The difference from the OP (I assume) is that first j*b had to support me, DW, & DS. Additionally, DW was unable to help out financially, due to the early stage problems of our (disabled) son.

If the conditions were different - that I had no responsibilities other than for myself, being young and looking at many years of w*rk and the option to resort to a "traditional" j*b if things did not work out, I may have taken the risk to "shoot for the moon".

Sometimes, life decisions are made for you, regardless of your own wants/desires...

 

[Bimmerbill]

Oh I agree that personal risk tolerance factors in a whole lot.

The guys I worked with pre-tech bubble to post-tech bubble didn't have any huge pay outs. The only folks who made out in the serial startup round I witnessed were the owners/founders.

My willingness to take financial risks was very low, and after I became a dad its even lower!

 

[Golden Mean]

It looks like dilution is one of the main things I have to worry about. I'll bring it up with the founder next week.

If his answers make sense, my plan is to work part time for nothing until at least the first couple weeks in Jan. and then re-evaluate. We have a tentative date of June to re-visit discussing full-time, unless things go really well in first part of the year in which case we'll have the discussion earlier.

GM

 

[Nords]

Makes sense. The founder is a Ph.D and has done really well at everything (business-wise) that I've seen him do. So I have a lot of faith in him at this point. I think he's the kind of guy that thinks about a problem from different directions, non-stop for days until he's found a plan of attack he's satisfied with.

A startup has to have a guy like that to succeed.

Unfortunately a guy like that cannot always keep a startup from failing. There's just too many other random events that will kill a company before they can prove their worth. The trick is not to get sucked into staying with the company solely because you have faith in the founder. I don't want to get into how many times I've attended that class.

Thanks for the data point. I believe they've already done the Angel funding round. The .5% is of the current share count, so it's a fixed number, set in the Common Stock Purchase Agreement I have to sign. Could you describe how the stock will be diluted as capital rolls in? Just trying to get a handle on some of they ways this could play out.

That number's never fixed!

As the company needs more expansion capital (or *gulp* operating capital), the controlling shareholders will sell off their shares. However they'll also create more shares as needed to raise the capital. Creation typically requires approval by the board of directors (not just the controlling shareholders) but it's easily done. Shareholders will always take 1% of a smaller pie when the alternative is of 10% of a bankruptcy pie.

Angels (and VCs) buy preferred stock instead of common. You may (or may not) be able to purchase preferred stock. You may (or may not) be entitled to reduce the impact of dilution of your common shares by being permitted to buy more common shares when the company sells preferred to other investors. However that (1) isn't common and (2) requires you to give the company more money (paper of some speculative value) to get your shares (paper of dubious value).

Angels & VCs actually want a company to have a pool of common stock to give to the company's employees as retention incentives. However dilution is a fact of life. Many founders are lectured that it's common to see their original 50% stake reduced to 1%-5% by the time the company is [-]folded[/-] sold.