Ask HN: How should I evaluate an equity offer vs. hourly rate?

3 points by peanut_merchant 5 years ago | 5 comments

I've been made a purely equity offer at a unfunded early stage startup and am able to complete the work in my spare time outside my day job. I have a rough estimation of the amount of hours required and I obviously know how much I earn at my current job. I do believe in the product, but I am realistic about the chances of success.

The offer is based solely on milestone deliverables, and will vest when those are complete. I'm trying to assess what percentage of equity is a reasonable offer. There is no dilution protection and I'm not guaranteed any more work or stock after the deliverables are finished.

Essentially my inputs are: hours of work required, my current salary at day job, finger in the air valuation decided by lawyers/founders at time of formation.

My inclination would be to do something like this: https://guides.co/g/how-to-split-startup-equity/3522

i.e. (current hourly rate * risk modifier) as a percentage of valuation.

I'm struggling to come to what that risk modifier should be though, that article suggests 2x. Any thoughts?

davidajackson 5 years ago |

Without all the details here, but my gut feeling is this a bad offer, here's why:

Problem 1: >The offer is based solely on milestone deliverables, and will vest when those are complete

This is a classic way to continue delaying giving equity/increasing comp. There's always more to build to deliver features -- 'Sorry, but the app UI doesn't work on certain newer iPhone models yet, you don't get your raise/equity/whatever was promised until that's fixed...', and then something else after ('Sorry, we've had other people join the team and contribute to those milestones, we need to rework your equity model'). Not saying all these are legally possible but I've seen stuff like this done. Time based vesting avoids this.

Problem 2: You have 0 diversification. That's fine if you have the cofounder potential upside but doesn't sound like you do. Why not start your own startup? You are investing all your time into an illiquid, high risk company, why aren't you a cofounder?

muzani 5 years ago |

Equity is worthless if it fails. I've done a lot of equity deals and all of them have failed, except the ones I'm on board in.

If they're paying you for code, chances are you're not a passive investor and the company could likely die without your continued input. It might not be code, but instead something like interviewing engineers, support and maintenance, among other things, and would likely be "volunteered" work next time.

You'll have to factor that it's not a one-off deal. The risk goes lower with further investment of time and effort.

And while you say you believe in the product, it raises the question whether the founders can pull it off; a great product and half assed founders will usually fail, while a great founder and mediocre product will usually succeed.

Right now, it sounds like you're taking on the role of a temporary tech founder and can actually negotiate a substantial amount, more than you think it's worth. Unless you're going to take on a godfounder kind of role, you should probably take on an artificially low equity so you don't take the space of a really good tech founder in the future.

batmaniam 5 years ago |

As others have said, it's a bad deal overall. There's many possibilities for the founders to screw you over: from vague milestone definitions, equity being worthless (most startups fail), adding to mental stress, etc.

If you really want to work in the startup, ask if you can own the codebase. That is, you write and own the code, you deploy it on a server you control with a budget they give you. Don't give them a single line of code. If it all blows up, then at least you come out with something you can demo to future companies. If they launch your codebase to production, then you have leverage to ask for a payout from a milestone completed.

If they don't want you to own the codebase, then they're most likely gonna screw you over. Business is business, always remember that.

staticautomatic 5 years ago |

If you aren’t signing on for the whole ride and are not guaranteed any more work after the deliverables then this is just a regular contract. When you get paid cash for a regular contract the cash doesn’t vest, so I see no reason why equity would. That’s some next level bullshit. The equity should vest on written acceptance of the deliverable or you should walk.

peanut_merchant 5 years ago | |

Perhaps vest is the incorrect terminology here, or I wasn't clear in the explanation.

The essence of it is, the equity will be allocated to me on written acceptance of the deliverables.

I'm trying to determine, as quantitatively as I can, how much equity is reasonable for my time.