MattMaroon.com

Interesting question here from Hacker News. My thoughts on it were a little long for that site, so I thought I’d respond here. The question is:

So there are 2 guys that have an idea for a company. Granted it’s a great idea, if executed properly. They are offering the first developer (also the first employee) a 2% equity stake and no compensation at this point. Being that it’s a web company, said developer will probably be doing just as much work as the founders.

Is 2% reasonable? I don’t think so…I would expect an “unofficial” co-founder to get at least 10-30%.

First off, I’m skeptical about a startup with one dev and two non-devs if it’s a pure web play. If that’s the case and they’re offering you 2% I’d probably say no right there. If you can sum up their idea with something like “a social network for [insert dog breed/auto maker/fashion designer here] fanatics” then you’re better off passing.

If it’s something like Amazon and you have to deal with vendors and inventory, or maybe if it has some sales requirements, then I could see it becoming possible. But for something entirely digital that seems like too many chiefs and not enough Indians. Something to be wary of right off the bat (and I’ll explain why in a post I’m working on and should publish shortly about group dynamics).

As far as how much equity you should require goes, there are a lot of factors in play. What is the startup idea, and who are the two guys? If it’s some sort of enterprise software, and they have massive experience and connections in the industry they plan on serving, as well as the ability to sell, and possibly a line on funding, 2% might be acceptable. If it’s just two random guys with an idea looking for someone to make it happen, you should probably require far more equity, or avoid the situation entirely.

In the end you have to figure out how much you think that 2% is worth. How much do the other guys bring to the table? If it’s a lot, then 2% could be worth more than your day job. If it’s just an idea, then it isn’t. The most important thing is to examine your options.

If you’re a good hacker (or a not so good one who can sell himself) you can make a lot of money in California. You can get an excellent salary and some small share of stock in a company that recently had a Series B and will retire you if it hits big. And you can do it with a company far less risky than one in the idea stage is likely to be. Or you could take a more risky (and potentially more lucrative) job with an even earlier stage company for a bigger chunk. It wouldn’t be too hard to get 1-2% of a company that just had a large angel round or small Series A if you were the first or second developer on board, and you’d have a salary and much less risk than with two guys and an idea, unless those two guys add a ton of value.

Also, the fact that they’re offering so little equity means that they are either extremely naïve about market rates for developers or extremely confident in themselves and their idea and value add. Or both. If it’s confidence, that’s fantastic, and if you feel it’s warranted you should try to negotiate. Even if you still don’t think 2% is worth it, you might as well take a stab at getting them to a figure you’re comfortable with. It’s worth the little time you’ll spend.

If it’s a blend of naivety and well-deserved confidence that’s not necessarily that bad either, since I am sure there are many brilliant people in non-tech industries with impeccable reputations, invaluable rolodexes, and great ideas who know too little about how Silicon Valley works to realize how small that figure is. They might simply be unaware that they’re offering such a low amount that they’re potentially hurting themselves by ensuring they end up with a mediocre developer, if any at all.

And they may not realize how big a discrepancy there is between an excellent programmer and a good one. There aren’t many professions where someone who is great at his job would be preferred over 10 people who are merely good at it, so it’s quite possible for even the most successful people in non-tech industries to have never encountered such a thing.

So if you think lack of knowledge market rates for developers is the case, you might want to explain to them that they’re shooting themselves in the foot and see if they’re willing to go higher. If you have two bright guys who bring a lot to the table but don’t know much about your industry they can still be great partners, as long as they’re willing to learn and adapt. So try explaining. It’s possible, albeit unlikely, that they’ll realize how much they need your assistance, and if not, at least you tried to do them a favor.

So the answer to your question, I suppose, depends on the variables, and it would be silly to answer definitively in one direction or the other without more information. But I have to think that most combinations will lead to that deal being somewhere between bad and horrid. The odds of 2% of that company being better than a market rate salary and some fraction of a percent of equity at Zillow or Xobni seem pretty slim, but not impossible, going on the little information you’ve given.

So I’d tend to say no, unless you really had a lot of faith in those two guys. I suppose you’d have to have some to even consider the deal, but you should require a ton to take it. And even then, take a stab at getting more. They won’t blame you for trying, in fact, they might think less of you if you don’t,

 

This entry was posted on November 2, 2007 at 12:22 am and is filed under Startup . You can follow any responses to this entry through the RSS 2.0 feed Both comments and pings are currently closed.