I've been asked if I'm interested in working as the lead developer at a startup e-commerce site. I am very interested and very confident in mine and the startup's ability to succeed.

But I have no idea how large of a share I should expect and how much I should ask for. Right now there are two employees: A salesman, and a customer-service representative. They're both working for equity.

So in terms of calculating the equity I should expect--
On one hand the developer position is usually more highly paid than those positions. On the other hand, they're already working there and I'd be jumping in kind of late to the game. On the third hand, well frankly I feel more essential.

I've never worked at a startup or for equity before so I'm just not sure what to expect but I want to be sure I don't get myself a raw deal.

Update: Everyone wants more details than I can provide right now. I only heard about this on Thursday morning and I simply don't have much information yet. The owner is someone I know and he asked me in casual conversation and the question got me thinking. I don't have all the details yet, so I can't provide all the numbers.

I have a full-time job right now and I don't know if I'll need to quit my job. I don't think so though. It's been mentioned that some cash is available to pay me salary but if possible I'd rather pursue this startup opportunity only for equity and without quitting my current job. But I just don't know yet what the demands are yet.

Well, first of all, sales is more essential than development. Especially for a startup. Sales earn more than developers, so I'm not sure where you're getting your estimates from.

If the founders have got it right, there is about 20% allocated for staff - existing and future. I have no idea how many people are at this place, normal equity for a developer is significantly less than one percent. 0.1 feels right.

You're short on all the details - is it funded, how many rounds, how much staff, do they have revenue, are they profitable, are they growing etc.

You're also unclear on the salary you want, its normally a tradeoff, equity and salary. So.

If you were all salary, then you presumably know what you'd ask for. If, then, you were all equity, well, I'd expect a baseline of the amount that represents that value, over five years, as a percent of current company market value, less some amount for company growth. Baseline, because that's tremendously risky.

So let's say the company is valued at 2mm (not revenue, value, revenue might be say 500k). With a growth rate of 20% y/y, over five years that's about 5mm. Then if you went all equity, assuming a market salary of 200k, that's 200k*5/5mm. You'd account for salary inflation too, but this is just an example. That's 20%. You would want more than this, of course, because of the titanic risk you'd be taking, but given most of your compensation will be salary you aren't taking anywhere near as much risk, so in this scenario 20 is right enough.

SO if you were all equity you would expect 20%, give or take. Now work out what your salary is, and adjust blah blah. ie if your salary is 180k, then only 20/200 of the 20% is your fair value equity, or about 2%.

You can ask to see the numbers and use ask the above to work out a fair amount. Even if you're not early your should ask this.

If you are, as you indicate, quite early, then you have a stronger risk of failure, so you can ask for more.

Now If this were a large company, say more than 100 ppl, you'd only get 2% if you were the management team.

More information is needed. How are you paying for food and rent?

All the calculations in other answers are reasonable, but it all comes down to - how much money will you earn, compared to your value in the real world.

NEVER work soley for equity unless you already have a daytime job that pays the bills. The vast majority (or even more than that) of startups never go anywhere. Don't put all your eggs in the basket of Equity. They may offer (say) 2%, but that means nothing when shares get diluted when the VC funding comes in. If the company does become one of the very few that succeeds, you can bet that the other owners will plot, and find, a way to get your shares off you, or devalue them completely.

Trust no-one, and make sure you can cover your expenses.

Preamble:

There's a lot of confusion on this question.

Here are two totally different paradigms of discussion about "shares and percentages"

(1) Go to angel.co

(By the way OP, your first stop should be angel.co to review the market.)

So regarding startups that are already "underway" ...

Note that, a VC will think of and describe these are "very first days" startups. But TBC they are already established on paper, have an office, all the founders, all paperwork done, logos and such crap, and likely

You can should and must go browse angel.co to come up with such a percentage. the fact is you'll end up with a (meaningless) figure like "2.5%".

All of that is for what we would call "established" startups and what VCs think of as "absolutely just got going."

(2) Item 2 is totally different. It's when 2 or 3 or 4 people sit around and say "let's start an ecommerce site, I have this great idea that it should only sell yellow clothes, yelloware.com"

As I understand it, this is what the OP is talking about.

Here are actual examples:

i) Project B. A guy and a money guy. Money guy will donate a bag of cash with $150,000. Money guy will get 30% - 60% (just a negotiation). They considered adding an engineer (who'd want 5-25%, just a negotiation), a well-known designer bloke (5% - 15%, just a negotiation), an "industry insider" type (5%-10%, just a negotiation).

Of course these are just negotiations. If the engineer would do it full time for no cash, give him 20% or so. If he wants "$20k to build the prototype" he can maybe only negotiate 5%. If his skills are absolutely key in the field maybe more %.

ii) Actually I can't be bothered giving any more examples, you get the idea.

As I understand it, (2) describes the situation more than (1).

In brief, the bottom line is you're going to want 5-10% or so if I've understood the situation and you're the key partner on the product side making the whole thing.

Again, you've not mentioned at all whether you'll be getting any ca$h as such, and how and when?

Regarding the key questions asked by @Dukeling below

Can you elaborate on how OP is supposed to come up with the $1.5m figure,

The other founds and the OP will absolutely have such plans. They merely have to state their goals, that figure is their goals.

The "sales" person will instantly give a full discourse on how much they he/she expects t have coming in next week, next month, and next year.

or how thinking like this helps more than just saying "I believe I deserve 21% of the company"?

Indeed, all you are saying is "I want 20%". The rest is just words - negotiation.

Thinking in terms of concrete numbers might help, but the "in two years" figure seems like it's almost certainly going to be way, way off - OP might not even know their expansion plans.

The five of them altogether including the OP surely know all this.

Note though that you may be thinking of more "type (1)" companies as on Angel.co

In that case the solution is at hand. You look on angel.co (some 400? similar ecommerce startups presently, use the search) and just pick a number you can negotiate based on that evidence.

The answer is very simple.

First, put aside concepts such as share or percentage amounts at first. Write down what you think the incoming cashflow of the company will be in two years, and what you think the company will be worth in two years. (It's true that for better or worse, some internet affairs are worth money even if they have no cash coming in, but in your case it's a real sales site, so that's great.)

So you've now written down two numbers, how much money is coming in to the company 24 months per now. (So, the amount coming in in that month annualized.)

$400,000

Great! You're expecting about $40k a month to be coming in in two years. Write down, indeed tell us, what figure you see there.

Can't guess? Ask them.

All the better. They are then negotiating for you.

So, when someone asks us to do one of these, the first thing I ask is "how much cash do yo expect to be coming in 12 months from now?"

So then, how much is the company then "worth"? (As VCs see it.) Let's say

$7m

It could be $1m, it could be $20m, but we'll say 7.

OK. So at that point, how much should you get (think of it as a "bonus" - think in cash terms), there and then?

Since you're doing all the software, you're probably going to say

$1.5m !!

There's your answer.

Regarding shares, mechanisms etc that's for the accountants to work out and it depends what level of organization they are at so far.

State to your partners that

"Two years from now I expect to get shares that will be worth 1.5m given that the company should be worth 7m by then."

and someone else can work out the details and mechanism. Of course, nobody's going to give you 1.5m in two years, they will vest (or whatever) over the years following that (and of course, be worth more as you go along - assuming anyway that this is the 1 in 5000 e-commerce startups that works out).

Until you can state what you think the incoming cashflow of the company will be in two years, you don't have anything to go on.

Indeed if someone glibly says unto you "how many shares do you want?!" or some such, tell them "Hmm, let's have a sit-down and figure out what we think the incoming cashflow of the company will be in two years..."

Negociating equity is simple if you have :

1. A rough estimation of your market value in terms of salary (I suppose you have this, it's not hard to know)


2. A rough estimation of the value of the company.

Since point number 2. is the most difficult and controversial thing to estimate here is a simple method that works for very small company size.

Sum total assets + sum market value of work invested - wages already paid

So if for example (values totally made up), two fulltime associates work for 12 months without being paid, have invested 30k each, and would be paid 3k a month on the market, the estimation is 30 * 2 + 3 * 12 * 2 = 132k.

Then if yourself estimate you are worth 3k in the market but the company only pays 2.5k, then you know you can ask 0.5/132 -> 0.35ish% the first month to compensate, and a little less month over month as the company value increases (one year later maybe 0.2 a month)

Note that:

1. This is probably a lot different than what they intend to give you


2. This is a lot different for bigger companies which make revenues and have a lot more sound ways of estimation based on their financial results and current orders.

However for small size companies this method enable to ground negociation in real values and make reasonable demands.