Questions

Shareholding negotiation for first employee

We are a startup with some initial commercial success. We have committed to negotiate some shareholding % with our first employee who was an important developer to get the product off the ground. How should we approach and prepare for this negotiation?

5answers

Hi there,
My name is Luke, I work for start up and I should be able to give a little more insight from the employee perspective as I am in a similar situation right now!

I think what you will find in this particular situation is there is no one right answer. Only you will understand the relationship you have with this individual and how you believe they will want this to be approached.

I think the best way to prepare for this it to try and get an idea of their expectations. If you have a rough idea how they see themselves valued, that should help better bridge the gap in your offering.

I know from my perspective as an employee I would want to come into that meeting with no bs and have a well though out offer ready for me.

For you, I think it is important to base this off not only on what that person has done / their role now but also identify what you expect from them moving forward and give him the opportunity to communicate the same things back!

If you have any more questions for me from a "employee perspective", feel free to book a followup call.


Answered 3 years ago

There are key issues to consider: your company's best interests, the employee's best interests and your potential investors. Equity in your company is a legal issue and not a simple handshake and internal document deal. An attorney experienced in equity agreements will explain what the options are. You may find the best option for all concerned is not what you thought. Also consider how does equity change if the employee leaves or the company fails. Seek legal advice and have an attorney prepare the agreement to safeguard all parties.


Answered 3 years ago

If this employee is important for you, my suggestion would be to discuss it with him, to share with him your thoughts and to agree together on the stake. It is so valuable to put the employee, especially in early stage, in the loop. It will make him more involved and he will appreciate you. Of course, come to that meeting with a range of % you are willing to give.
We can continue our discussion and share with you my last experience which was the same.


Answered 3 years ago

Hello I am Priyanka.
I can give you more information about it as I have a similar situation right now.

If you're negotiating salary, here's how I would approach this discussion:

Ask what other people at the same position are being paid in cash, equity, and benefits. I would first ask whoever has extended you the offer, framing it in terms of wanting to understand what the range on these items are. As you interview employees about the position, ask them as well. People may not want to give you the information, but (1) they shouldn't lie – if they do, I would think twice about working there – and (2) if you explain that your goal is to ensure you are compensated reasonably, compared to others at the firm, you may have a better chance of getting the information. Your position should be, "Look, we're going to be a team, and I want both the way we decide on compensation and the compensation itself to let us function well together."
Do background research to understand industry norms. Look at to start off, and ask people in similar roles who joined companies at similar times to get a feel for what is reasonable.
Realize that the equity compensation of current employees in a similar role is often a ceiling. If you're applying for a PM position, and other PMs have been in place for 1-3 years, they were more critical and faced more risk upon joining than you do, so whatever they own will be a ceiling. The exception is if the company has had a major strategic development that makes things riskier or makes you more critical.
Understand the company's business model, milestones, and fundraising plan. You should know what assumptions the company is based on, how much cash the company has, how the company is investing that cash to prove the assumptions (in other words, to mitigate risk), and when (in terms of time and milestones) the next fundraising round will be. This lets you position yourself in the overall narrative of the company – for example, you might realize that there has been little progress in strategic milestones / risk mitigation since the other PM joined 1 year ago, and advocate for the same equity stake.
Decide whether you prefer cash or equity compensation. Look for ways to create performance-based compensation. For example, if you really believe in the company, offer to take a lower salary in exchange for equity. For example, if you're joining a seed stage company, you can advocate taking some of your salary in convertible debt (or an equivalent vehicle) to save cash, maximize equity, and demonstrate your passion and commitment.
Look for other options. As in any negotiation, your best strategy is to create other alternatives. Find jobs that promise better economics (salary, equity, benefits) and better growth opportunities (you get to run a team, manage people, etc.). You can also look for "better startups" – i.e. those with less risk or greater value if successful – but I'd only focus on the economics or career growth in your negotiation. No one wants to hire someone who thinks another startup is a better opportunity.

For further queries you can consult me


Answered 3 years ago

How many other founders are there? Are any of them also developers? Is this developer a junior person -- or someone who could conceivably become your CTO? The answers to these questions are important, as they could dictate an equity stake of anywhere from 1% to 10% or higher. You also need to craft a vesting schedule (4 years with 1-year cliff is standard). Happy to discuss further.


Answered 3 years ago

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