I’ve gotten some emails recently from readers of this blog with questions about early stage startups. I’m sorry if I haven’t responded to all of them yet. I’m happy to try to answer questions but would generally prefer to do them on the blog so they can be shared/discussed.
Here’s one I got recently:
So you’re joining a startup as one of the first, or the first, non-founding members. At the moment, the company generates little or even no revenue, but they do have a working first version of their product and a few early users. To this point the company has been surviving on a modest amount of “friends and family” capital, which has largely been used to support the founders as they built the company and their product. The founders, however, are convinced that a significant investment is imminent and you will be receiving a reasonable salary in short order. They are equally certain that their product and their plan is ready to take off.
Determining a fair equity grant at this time is tricky enough; there seem to be far fewer established norms and guidelines for determining compensation in a pre-investment startup than there are following such a milestone. To further complicate this situation, fast forward 6, 9, even 12 months into the future. That “imminent” investment has not yet materialized and you have yet to receive any salary (though perhaps the founders have continued to subsidize themselves from the earlier friends and family investment). The original product has been slow to build traction. The product has undergone significant upgrades, and one or more new products have been developed, all with your input and assistance.
At this time, both sides decide to sit down and more formally address the issue of your equity grant, but by now the boundaries of your role have become even more blurred than when you first joined the startup. To be sure, you are not one of the founders, but it seems the founders were not as far along as they believed when they brought you in. Of course both sides are still likely to overvalue their contributions, so what guidelines and norms can you and the founders possibly look to in order to reach a fair and reasonable agreement on your equity grant?
Honestly, I’m not sure my top worry would be my equity grant at this point. If I understand correctly, you’ve been working for a year with no written equity grant, no salary, for a company that has gotten little traction, and for founders who were way overly optimistic about their chances of raising money…? (perhaps even misleadingly so?) I guess if you really love the vision or have no other options then you stay, but otherwise I’d recommend looking for a new job. At an absolute minimum you should be given an option grant in writing ASAP, and I think that given your sacrifice and the uncertainty of raising any money beyond friends and family that grant should be significant. If your skills are as important to the company’s as the founders, I’d say it should be at or around founder level.
I worked for a startup once where my equity grant wasn’t in writing. Needless to say, when the company was sold, I got nothing. Always, always get your equity grant in writing. Quality entrepreneurs will simply give you your grant in writing without you even needing to ask.