Internet startup input

[Golden Mean]

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.

Right. I'm interested, because I have faith in him. If things don't progress at a reasonable rate then I will have to re-evaluate, but until then I'm on-board. Meanwhile (once I (and they?) sign the stock agreement) I will be getting a portion of shares that I own each month. Whether they ever end up being worth anything remains to be seen.

That number's never fixed!

I was referring to the number of shares I own. It is a fixed number, which is .5% of the current shares.

If/when there is a VC round then my percentage will drop but not the number of shares I have been alloted.

 

[Golden Mean]

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?

I don't see myself as an entrepreneur, but I'm not sure I'm taking all the risk. So far I'm working part time for equity with the intention of coming on full time when/if the business begins to move along.

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

Looks like with dilution it'll probably be half or less of that percentage. If things go bad and even more rounds of funding are required, it gets even worse. So, no I'm not going to retire on just this set of shares alone.

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

If they are bought out much earlier for much less, I would get less but I would get it earlier. Hard to say if that's a good or bad trade off.

Thanks for the insight.

GM

 

[clifp]

I'll add to the chorus of the I think you are being under compensated severely, although without more data is difficult for us to know by how much.

However, it isn't all that hard for you to figure it out. You just need two pieces information how much you are worth and much the companies worth.

As a starting point I'd use your hourly rate at Megacorp as minimum. Of course they don't have to pay benefits etc. Now you may well say I really don't have experience in this compared to my engineering job at Megacorp. However,a couple of things you need to consider. First of all you have one pretty unique attribute you are engineer who is will to work for stock and not cash.This isn't common. I personally don't think it is out of line to ask for twice your hourly rate at Megacorp because of this.

Second, having watched scores of entrepreuners give pitches over the last many years and can tell you that when the PHd gives his presentation to investor group. You are listed on the team as "brilliant harding work senior engineer at Megacorp". As an investor, and Nords will attest to this, I don't care how many PHd the company has if they don't have local engineer to do the actually coding and/or supervisor the Chinese/India engineers, they don't get any of my money. I
strongly recommend that other avoid investing also. Now if the guys PHd is computer science and he is actively writing software than this doesn't apply as much.But in most case the entrepreneur PHd is in some other field and without somebody to write the software all he really has an idea. Ideas aren't all that valuable.

The other thing to figure out is how much the company is worth. If the company has actually recieved funding from an Angel Investor, then this is pretty straightforward. Ask to see the term sheet the Angel got and find out what the post money valuation was.


If there hasn't been any outside investors (family doesn't count). Then valuing the company is more difficult. The first step is to ask the CEO, his value will almost always be too high for the same reasons that parents always think their babies are the most beautiful and supersmart.

The range is Nords gave is reasonable. You can also try using this somewhat simplistic high tech valuation calculator.

The final step is to compare the value (# of hours X hourly rate) of your input with the .5% of the company and see how close they are.

Finally a comment on vesting. A four or even five year vest period for options is not unreasonable for a company that has raised a couple of million has a dozen employees and most importantly is paying you a salary or cash compensation. In which case the stock options are a bonus. In your situation the stock is being paid in leu of cash and should not be subject to vesting.

I am attending a conference on start up next week in Silicon Valley andI will ask the SV veterans how they treat people provide services for stock.

 

[Brat]

I second the comment about doubling your salary at megacorp as a way to calculate your value without fringe benefits. They may comment that they are paying payroll taxes, you counter that you are forgoing megacorp bonuses, IRA matches and whatever else (make a list and put a number to them) for, essentially, a dream.

When I worked for the Feds and I needed to estimate a company's annual gross dollar volume I would take the payroll, double it and add the cost of materials. It was uncanny how close I could come.

 

[ChadR]

Agreed with everyone else that 0.5% sounds too low based on the limited facts you have provided.

Dilution is an extremely important point.

The other thing I haven't seen mentioned regarding vesting is an acquisition clause. If you have shares subject to vesting then they should automatically 100% vest if the company is sold/acquired.

Clifp makes a good point about vesting also. It depends on how much the 0.5% (which is a ridiculously low sounding number for the "first employee") is worth. If the 0.5% has a 4 year vesting period then it should at a minimum today be equivalent to 4 years of free programming for this company. Otherwise, there should be no vesting and you should be entitled to receive more shares as you continue to work for the company. The point being that under vesting or no vesting scenarios the value of the shares you are entitled to increases ratably with the cumulative value of your contribution to the company.

 

[Golden Mean]

Thanks for the input. Although I primarily posted to get other people's experience working for a startup, you've given me some things to think about.

I've spoken to the founder and the 0.5% is for the part time work. If/when I come on full time there will be more equity along with salary.

GM

 

[Brat]

Part time work is 'prime time' work, it should be worth even more IMHO.

 

[BigMoneyJim]

I worked for a tech startup in 2000, but as a [-]partner[/-] [-]employee[/-] commission-based [-]salesperson[/-] cold-caller. I thought the idea sounded great, I would have 4,000 shares, etc.. The CEO had another successful startup. Everyone had so much energy.

We'd go to Chamber of Commerce events and similar gatherings, but I quickly discovered those are full of startup salespeople trying to sell their products and services to other startup salespeople who are only talking to them because they're hoping to sell theirs.

I also quickly realized almost none of my peers had the experience or skills to make this work, and they were hoping to learn it along the way. I quit the company, and they folded about a month later. I don't think the employees got their last checks.

There was also the scale problem Nords mentioned, only internally. After they got their concept down they started opening offices in two new cities each week, and the sales lead database slowed to a crawl in a hurry.

The CEO had a lot of energy, sounded good and had a previous successful startup, but I read between the lines along the way and realize the investors make the go/no-go decisions, and they know when to fold, which is most of the time.

Also, the CEO and executive management had money and contacts to fall back on. I had a nonexistent company on my resume with nobody to call for work references.

There are tons and tons of startups, and they all have fantastic ideas. If the ideas didn't sound good to at least a few people then it wouldn't be a startup. Most of them are gone within a year, along with any concept of equity shares.

Some other ways to build your skills are self-study, helping charities, finding a trade-based community and go to their meetings or hang out in their online social environment.

 

[pimpmyretirement]

My first job out of school was at a startup. Got some shares, our primary investor bought the company for the technology side of the business about 18 months later. I got $1000 bucks out of it. I had no idea if that was good or bad, but it seemed similar to what everyone else at my level got. The company was losing money anyway. A number of the non-technical people went through significant salary deferrals that they never got paid out.

4 months after that, the guys who started the original company spun out a new company, essentially doing some of the same things. I went with. I didn't know enough to chase shares. I stuck around for a few years and watched as the shareholders pumped more and more money in, growing to about 20 people, but never quite turning a profit.

I left, shortly after the recession hit, the company sold their employees off to clients, to avoid firing them. The software went to one of their clients as well. It's still around in the industry. I don't think anyone ever made much profit off of it. I earned a salary, learned a lot, and have no real complaints.

IMO, you cannot know if the company is going to succeed or fail. You are working for the compensation you get today and the experience. The shares are a total gamble and have to be assumed to be worthless.

I find that it s more financially certain to invest "extra" hours in earning a higher paycheck from a stable company. Not slaving away on overtime, but making myself more valuable through developing relationships and learning skills. You could certainly view the startup after hours as a way to do that. IMO there are probably more efficient paths.

The certain path certainly is not nearly as exciting. I like that these days.

 

[Golden Mean]

Thanks for the stories.

Things are going slow and steady so far. I've gotten to brush up on my Python and Bash skills, so that's been fun.

GM

 

[web_diva]

A few questions you may want to look into or ask yourself:

-have you seen the business plan and am i comfortable with it?
-is there a clear opportunity in the marketplace for the product?
-is the product going to address whitepace or are there competitors? Is the edge the company has over the competitors quantifiable or wishful thinking?
-is there something different/special in demand about the offering that makes it likely to succeed?
-can the new startup career be worked part time as a consultant in addition to the current job to mitigate the risks? (since most companies fail in the first 5 years)
-does the fact that they will employ you when you have stated this is a learning/growth opportunity for you, make you question their judgement on other new employees who may not be as committed to learn as you seem to be?
-what milestones (and how far out are they) that would require capital infusions beyond the net worth of the two key players?
-SWOT analysis: company strengths, weaknesses, opportunities, and threats

 

[ShortInSeattle]

I used to recruit for those tech startups in the Bay Area and saw a couple things that may be relevant to you.

- If VC money is part of the plan, your shares will be diluted. So the .5% is optimistic.

- Startups are a gamble. For every Ebay there are tons of ambitious failures. Talent and a good idea don't equal success. Timing and market receptivity are equally important.

- A good architect is the crown jewel of a software firm. Core talent is the one place good startups don't scrimp. The fact that you are relatively inexperienced and that they can't/won't pay for labor means they are either underfunded (in which case you should be an owner with significant stock, not an employee) or they are going to chuck you to the curb as soon as they have funds to hire, or they don't see the value in what you do.

- the fact that you are appreciative that they are "taking a chance on you" when from the outside it seems they are working you for no compensation makes me wonder if you are undervaluing yourself.

This opportunity is kind of like volunteering. You get some experience, they get free labor, and the stock is the equivalent of them offering you lottery tickets as a perk. There is nothing wrong with this scenario if it suits you, but I wouldn't expect much financially out of it. Keep clear eyes my friend, and I wish you luck.

 

[ER_Hopeful]

Thanks for the stories.

Things are going slow and steady so far. I've gotten to brush up on my Python and Bash skills, so that's been fun.

GM

If that's what excites you, be it Python, Ruby or Groovy(substitute whatever language/tech that fancies you), then all you have to is work on some open source projects. That will both get you the experience/skills and fill the void of boredom at work. The newness of whatever thing will wear off in a few months.

can't really comment on the financial side of things though...

 

[simas]

Golden Mean - I am amazed and how badly you allow people to take advantage of you, and concerned about incredibly low amounts of self worth (and self esteem) you place on yourself, your time, your talents and efforts. Your 'friend' is no friend of yours, here is why. I am Russian so I would be rather direct

1) Forget "taking chances on you" and other BS - what you doing for them is highly valued and highly paid work. The other alternative is to engage traditional consulting company which would run from 150-300 per hour and would be project measured in weeks (40 hour weeks). Few days for initial understanding and formulation of requirements followed by design/prototyping, followed by coding, followed by quick correction and delivery - all together easily 3-5 weeks at 300 an hour just to get them launched through normal channel. and this does not include any additional changes they later want to make , new scope, continuing support ,etc.

2) 0.5% AND vesting for those shares is beyond insulting - if startup wants to hire you they will offer you real money of 1.5-2x of above market rates to compensate for lack of stability, lesser benefits, longer working hours PLUS percentage of the company as incentive that is way higher than 0.5% unless you are looking at company with 8 digit valuations. that is typical 'Lead' role (architect/developer/qa whatever needs to get done role). Earlier in the start up (first 5 employees) the technical person is basically CTO, architect, CIO, developer, designer, supporter, etc - the percentages for such people are easily in double digits of the total pool for the founders.

You are being treated as some high school drop out script kiddy and even then that kid would get paid first and not with promises of "very little of nothing some time in the future".

4) I fail to understand your incentives - you are willing to work at the best time possible after working at megacorp, taking time away from your family, without pay, for a "friend" - why? If you have that time and willing to put the work in, you will get much better return and rewards putting that time at your megacorp, guaranteed.

If you want to work for them and is interested in idea- they need to pay you.
If this is not a real company yet, tell them you are willing to meet up for lunch at good stakehouses once every month or so to let them bounce ideas off you (and this is a great deal for them that you only agree to because of potential interest).


Remember, ideas worth nothing , implementation is everything. The worth of implementation is the number of actual clients who are willing to put real money on the table for their product or service. If you create that worth and value , you should be paid in abundance far beyond what you have described here or you are badly cheating yourself and your family.

good luck to you

 

[Brat]

Many people remember the start-up heyday when people worked out of their garage to start a company. IF it succeeded those initial hires who stayed on until the company went public did well.

The reality today is that few start-ups go public because that process is expensive, if they do well they are acquired by another tech company and employees with an equity interest receive stock in the acquiring company. The people who cut the deal with the acquiring company are rarely the founders, they are the investors. The odds of becoming wealthy by virtue of holding stock in a start-up is small. I recall a conversation with my daughter (who works for a VC) about the tax situation of start-up employees holding stock. Their stock was priced (and tax valued) at the date it was granted but by the time they could sell it the market had dropped. Some owed more in taxes than the stock was worth.

I joke that it is tough for SV professionals to buy a home because they are competing with long time Goggle Admin Asst with lots of stock. That is true but rare.

 

[Hamlet]

One important question that no one has asked is "how many hours is part-time?"

Is this a 5-10 hours a week thing or a 20-30 hours a week thing?

If you're working a lot of time, I'd feel like you are probably getting taken advantage of.

If this is just an enjoyable hobby that isn't taking time away from other things that you would rather be doing, then I'd feel better about your situation.

 

[walkinwood]

What does your current employment contract/agreement say? Does it say that all work you produce while employed belongs to them? This could lead to problems in the future.

 

[Golden Mean]

What does your current employment contract/agreement say? Does it say that all work you produce while employed belongs to them? This could lead to problems in the future.

I signed something to that effect. What problems are you thinking of?

 

[Texas Proud]

I signed something to that effect. What problems are you thinking of?

The obvious one... anything that you write, even at home, can be claimed by your employer as their product... and since you are writing for another company, they do not want the possibility of someone claiming that they own that code...

 

[mh]

The obvious one... anything that you write, even at home, can be claimed by your employer as their product... and since you are writing for another company, they do not want the possibility of someone claiming that they own that code...

(in california at least) i believe that kind of "even at home" clause was found to be un-enforceable long ago. As always, be advised that i am not a lawyer.

 

[BigNick]

(in california at least) i believe that kind of "even at home" clause was found to be un-enforceable long ago. As always, be advised that i am not a lawyer.

If the OP's buddies went to IPO for a few hundred million, I can envisage his Megacorp trawling their proxy logs to see if he ever visited their IP address during his employment with them. If they find anything from before when their site launched as a public service, they could have a case that he was working on the project at least peripherally in company time.

 

[mh]

If the OP's buddies went to IPO for a few hundred million, I can envisage his Megacorp trawling their proxy logs to see if he ever visited their IP address during his employment with them. If they find anything from before when their site launched as a public service, they could have a case that he was working on the project at least peripherally in company time.

That kind of thing has been attempted in california courts before and they lost. It's happened to me. I was threatened w/ such things in a similar situation, but I knew there wasn't really a case there. Things like visiting their web site or sending an e-mail about a project you are doing that went through their SMTP server does not give them a case (in CA. anyways) Of course it doesn't mean they won't try something and cause you more headache than you are willing to stand.

Bottom line, they need some substantive proof that you worked on stuff on their time in a significant magnitude. And again , in CA anyways, you can't say "all your time is our time" on a piece of paper and make it stick.

In any case, i will agree that it would have just been better if the OP had not signed something w/ a clause like that and saved himself the worry.

Hopefully in previous posts the OP has gotten the idea that his associates will in all likelihood not be "taking care of him" if any money actually appears from the project in the future.

Again remember i am not a lawyer.

 

[Brat]

I remember being asked to sign such a letter. I wrote, 'except as attached' above my signature and then attached a long list of stuff I was working on and activities I had in mind. My boss shrugged her shoulders and put it in my personnel file.