I hope I didn't just get screwed then..I've been given 1.5% equity as a first employee, with an option to get additional 1.5% over the next 9 months (0.5% every quarter). With a salary of 65,000. I'm the web programmer developing the product from the ground up. We haven't yet raised any VC money, it's self funded by the 2 co-founders, one of which is a doctor who is primarily the finance arm. Did I just seal my fate? I'm 22 and have not dealt with being part of a technology startup so I wasn't really sure what percent equity was fair. I believe my shares won't get diluted with investment rounds based on the paperwork that I signed though, they're preferred as opposed to common, if that makes any difference?
Well you're building their product for 1.5% or potentially 3% and the product hasn't even been validated by outside investment... I think you know the answer.
You're only 22 though, so I'd make the most out of it (learning experience).
One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation. If that happens, try not to be a dick about it (small world), but at the same time make sure you're appropriately compensated for bringing a successful product to market.
"One thing to keep in mind, is if the 2 co-founders see you as just a code monkey, chances are they don't understand how fundamental you will become to the success of the product. This means if the product becomes wildly successful you'll have an enormous amount of leverage down the road to renegotiate your compensation."
If they view this guy as a code monkey now, when he comes in to renegotiate they'll tell him to take a flying leap on the assumption they can just hire some random off craigslist to replace him. Assuming he's a good developer this is of course not true, but they won't know it. Eventually they will realize the terrible mistake they made when the replacement screws the pooch, but that's like 6 months later after the original developer is long gone.
If they're just becoming successful they probably won't want to rock the boat too much by firing their first employee. You could be right though if they're real douches.
It hasn't yet been validated by outside investment, but it's somewhat being validated by user tester sessions -- 3 user sessions thus far which were pretty positive (albeit they're somewhat close to the co-founders so judgement/impressions might be skewed, which is what I'm afraid of..I think they feel the same way and are looking for several outsider testers)
My dad told me the same thing, to use it as a learning experience and see how things play out over the next year...if nothing else I made 65k and it could potentially be a hit of which I own a 3% stake, worst case scenario I now have 65k in my pocket that I can use to come up with and fund my own ideas (as I have several).
With a salary of 65,000, you aren't making that much below market for a 22 y/o developer. The CS grads I know got offers in the range of 40-85k, so you are square in the middle. It's not like you are making $30k.
Typical 22 yr old developer making market rate isn't in charge of creating the foundational product of a company single-handedly. So those numbers are irrelevant. For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary. He's not a code monkey, he's the main guy in charge of, and doing, it all.
> For someone with this level of responsibility and involvement, $500,000 would be a more reasonable salary.
This is delusional. $500k isn't the going rate for senior software architects even at major companies. It's certainly not the going rate for a junior engineer building a product that may not even have a market.
A typical 22 year old developer is not capable of creating a foundational product. Sounds like he's getting what he's worth. Doesn't matter what the developer they should have hired would be worth.
People always want to skimp on developers. Would you hire a new college grad to design a $100 million building? No? Then why hire one to build the foundation for a $100 million company? It's certainly not simpler.
I was in a similar situation to the OP about ten years ago - 21 years old, very little experience, first technical employee at a company founded by two doctors, low pay, meagre equity given my responsibilities - and honestly, in retrospect I think they should have taken on a full-fledged technical co-founder with more experience and full equity instead of me. I did pretty well on the technical side, all things considered, but I didn't have the knowledge, confidence, and authority to assert myself when the founders pushed the product in unmarketable and technically unrealistic directions. We wasted far too much time writing code that did more to resolve disputes between the founders than to address the needs of potential customers.
As a result of that experience, I'm extremely skeptical of companies with older non-technical founders that hire inexperienced programmers as their first technical employees. It usually means they just want a code monkey to implement their brilliant ideas, and don't understand the engineering and financial challenges inherent in any startup.
I do find that some of the co-founders "ideas" are technically not feasible and this is causing some distress, when trying to explain it to them how things work. Both of the 2 co-founders are mid-to-late 30s, one is a doctor and one had successfully built and sold a company (although in an entirely different industry, a consultant recruiting company actually). Both of the founders have limited technical knowledge and I don't think they understand the iterative process that programming is, they don't understand about refactoring code and rewriting/etc...and so as soon as I create a new feature, they already want to move onto creating another feature without refining what we have
They basically have a time-line of launching in March 2012, and we only started in May of this year. One thing that's worrying me is that I haven't yet done a second iteration of the code and they keep wanting more things added..and I feel that we're not focusing on solving one problem but many (too many). Products that are successful start off as being simple and then more gets added over time...
One of the issues is that one of the co-founders is my Dad's former co-worker's Son, and even though I have some say now that I have equity, it won't necessarily be heard because what does a 22 year old know anyway, right? My suggestions might seem too radical to them, and that is to drop a bunch of what we have, and now that we've had some testers, to focus on what the testers liked, and remove what they didn't.
Several of the testing sessions that we had, the people using this new service had mentioned that because of the relatively private nature of this service, that they feel uncomfortable with a linkedin/facebook login button on registration because they feel like the private information available on the service will be shared with other more public networks. My vote is to drop these "features" but the cofounders seem insistant that we keep them and feel that it "adds legitimacy" even though the testing sessions seem to show otherwise. There are other examples of this based on tester feedback, this is just one of them
"A typical 22 year old developer is not capable of creating a foundational product."
Yes that is what I said. I'm not sure if you're restating my point as a rebuttal or if you are agreeing with me though.
If you can create a foundational product, you are worth what I say. If you can't, then it appears the founders don't know what they are doing and the equity is worth absolutely nothing because the business has no chance of success.
I am very wary of assuming too much from the limited details you've given.
However, it sounds like your role is much closer to being a founder than a first employee. You're in before outside money/validation, so there is a huge risk that your equity will be worth nothing. Are you also the entire technical department from the start, and therefore the only person who is actually building the founders' big idea for now?
If that is the case, it sounds like you did not get a good deal at all. I would definitely take advice from someone independent, where you can share all the relevant details. If you want to renegotiate, doing it early might be possible, but doing it later is very unlikely.
Curious what the co-founder does, is he the idea guy, or is he the dude that will start thinking about marketing and sales sometime after the product is done. Is he getting a salary from the primary investor or is your salary the only expense.
If your salary is the only expense, then you are investing $65k a year as well since you are working for half normal salary in order to design and build the entire product that is the basis of the company from scratch. Given this, I'd estimate your contribution as either 50% or 100% of the company value depending on whether or not you are getting this salary from the investor, aka founder man.
Not that you'll get this of course, unless you had previously chosen to go for 100% by simply developing it on your own after asking yourself what the other guys were contributing (not much).
But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job. Thinking you were screwed won't do anyone any good, but if a job appears that offers more than $65k, if it was me in your position I wouldn't feel all that bad about taking it.
"But it's too late for all this, you've signed a contract, so you should follow through, be happy with it, and do a good job."
No. Per your contract, you are an at-will employee. You are free to quit at any time, and if you're a valuable employee that gives you a constant source of bargaining leverage.
$65k for a 22 year old is not "half normal salary". In many places in the US, that is full salary. And you are way overvaluing the contribution. Sure, building the whole system is a big part of the company but lots of people could do it. You are also undervaluing sales which for many companies is harder and more valuable than the technology.
He is single handedly creating the product that is to be the source of their income from scratch. $65k is much less than half salary for this position.
But he's also been given a % equity stake as well. You can argue it's not enough, but he's got a % stake in this which is far beyond what most people have where they're working.
But that's not how it works. There are a lot of people who could do it. In fact, there are consultancies who could do it, probably better, for less than $65k.
That is a perfectly fine deal for you. $65k plus 1.5-3% equity is generous compensation for a 22 year old at a pre-funded company. Don't get too hung up on the fact that you are "developing the product from the ground up". The going rate for that is perhaps $10k-100k.
1.5% - 3.0% is fair for a first employee if you are also earning a decent salary, it's comparable to the deals I've seen around the Valley.
If you weren't making a salary, you should have a conversation about being a cofounder instead. It would be reasonable for you to ask for a lower salary and more equity, or no salary and a cofounder title.
You would probably be making $20,000 - $30,000 more at a non-startup job but getting no equity (and have a more boring job). The tradeoff is probably worth it depending on your risk preferences.
You should make sure that your stock is the same kind as the founders stock. If not, you should understand the difference. As long as everybody gets diluted equally in case of stock issuance and the guys aren't super shady, you are probably safe. Also, make sure that your stock grant has an acceleration clause and that it all vests in case of an exit. Otherwise you are definitely a chump.
The value of your equity depends. If the company never takes outside investment then a $35 million "dipshit" exit makes you a millionaire - a $10 million exit in three years would offer an ROI which would give you options (though not (Fuck You Money").
On the other hand, how much of a track record do the cofounders have in building and selling companies - as opposed to building and running lifestyle businesses?
The issue regarding preferred shares is a potential lack of voting rights. The other issue is what particular preferences those shares get.
Finally, at 22 just see what happens and learn something - the difference between serial entrepreneurs and serial failures is largely a matter of semantics and persistence.
On my To Do list is to invent a time machine and send a decent lawyer 15 years back in time to teach the younger me some sense about early stage companies.
