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Ask Slashdot: How To Ask For Equity In a Startup?
Uncrase writes "I'm a contract software developer, and have been working for a small startup for over a year now. Not a bad position to be in of course. The company consists of a handful of people, all of which (I believe) are contractors (by their own choice), however we're doing very very well and have a very significant revenue already. Call me greedy, but I've worked hard (as the main IT guy essentially) to get the company to where it is now, and of course get paid contractor rates for this. I would like to get some kind of equity (options) in this. The company is continuing to grow its operations and I am basically indispensible for the continuation of this growth. I'm definitely not planning in any way to force a hand, but I would like to know what could be a good way to approach this. I'd essentially like to ask for a raise — being a contractor — but in the form of equity. Any experience with this? Am I completely off here?"
...and therefore not indispensable ...
Good luck, you are greedy indeed...
If you're charging a rate that you're happy with, then offer to give them a discount for equity. Whatever you do, don't overplay your hand.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
Just tell the guy who signs your paycheck that you are interested in getting some stock options since you feel you've put a lot of effort into the company. Tell them the options would secure your long term interest in said company, so it would be in both of your best interests.
Never trust an atom. They make up everything.
say "I wish to (1)trade large amounts of money or (2) decrease my rate of pay in exchange for equity in this company"
If you are just a contractor, you should have negotiated for for a decent rate up front and then offered a lower rate in exchange for equity. If you gave them a lower price because they were small, but didn't ask for equity then, you can either renegotiate or walk away. They might prefer to stick with you instead of finding someone new.
Good luck, though. They might feel that just because they are suddenly making more money, it doesn't mean they owe you a piece and the same fee.
Equity is what you get when a small company can't afford to pay you the full market rate for your skills. You're gambling your current income against a future payout in the event that the company is successful. If they're paying you well and you're happy with that, you're really not in a position to ask for an equity stake. If you believe the company is going to be successful, buy some shares like any other investor would.
"I have the attention span of a strobe lit goldfish, please get to the point quickly!"
You get paid by the hour.
Folks who stand to lose money if the company goes under get equity. Not you.
See my journal for slashdot ID's by year. Mine created in 2005. http://slashdot.org/journal/289875/slashdot-ids-by-year
You were paid (an evidently fair compensation) to do a job. Kudos for doing it well! That said, as a biz owner myself, we take all the risk which includes employment of contractors from day one when the company was deeply in the red and then pray hard that someday we'll transition to black.
Be thankful you have a good job and if they offer it, certainly jump on options...but..again, as the owner of three startups, 2 of which are tech related, we take the risk, not you, ergo we take the reward.
From your perspective, it sucks, I know....I was a contractor for 10 years. From our perspective, it sucks when you ask, because then we have to look at potentially canning you. So, it sucks all around.
with the money you just got from your raise, you greedy bastard!
And give up the higher contractor wage. That's the deal you make: permanent employee who earns less per hour, but gets a long-term stake in the company, or contractor who makes bigger bucks but nothing in the way of ownership.
Browsing at +1 - no ACs, I ignore their posts. So refreshing!
OK, you're greedy. You're also not irreplaceable.
You've taken none of the risk, and have no reason to ask for any portion of the reward. You've gotten what you contacted for.
you made a deal up front to get paid well to do your job, because at the time, you thought the options were not worth much. They paid you accordingly.
Now that you see the company is doing well, you want to get paid and get options too. Pretty raw deal that you present to the company, you basically didn't take any of the risk and want all the reward.
Ask to be moved to a full time employee and tell them you want this because you believe in the company and see it being a huge success. Stroke their ego, but don't lie. They already know what you're worth and there for you're less of a gamble than bringing someone else on and you can still ask for a good market rate. The bonus to this is if you work it right you'll be able to get almost as much as you are now and have taxes taken out and get stock as a sign on bonus. Tell them you're wanting to take a pay cut (because you will have too) in order to get stock as a sign on bonus. It basically costs them nothing and they will save money by paying you a slightly lower hourly rate.
"Ubuntu" -- an African word, meaning "Slackware is too hard for me". - stolen from Dan C alt.os.linux.slackware
Then your boss should know that. The thing is in small companies the developers are often directly involved with their bosses but it seems you are not. If you can't trust him enough to simply ask about it then I doubt he trusts you that much.
Also getting equity is usually something that is reserved to people who have a high interest in seeing the company succeed. As a contractor it is sort of assumed you don't. Think about it from your bosses standpoint, he's put in money and taken risks and the profits he's seeing will help him expand and develop his company into what he wants it to be - and if the company fails he looses everything. You just get paid by the hour, if the company fails you find a new job and you don't loose anything, and the vision of how the company will develop is not your own vision. If you are willing to believe in the company vision and stick with it - even if the company were to go into the red and you had to work without pay for a year - then equity could be on the table.
And never think you are vital. You could be the best programmer in the world but if you have a crappy attitude you're out.
If you really are indispensable
No one except the owner is indispensable. It will completely depend on the relationship he has with them. If he's considered a "friend" or "good guy" he might be able to talk his way into something. If he's considered an asset then it's like the copier asking for a raise. A lot of people deride that this is the case or they deride that somebody thinks it's the case but I just think it's human nature and understandable.
As a CEO of a startup (I've done a few, before), I EXPECT contractors to ask to be included in the group of founders. If they're savvy enough, I concur, sometimes converting them to employee status.
1. Start with a question: Ask for a formal review, just like other employees get (usually annually). They'll be surprised, because most people don't WANT a review. But, it helps to know if you're held in low or high regard by the decision-makers. It might not be a formal process in a start-up, but even getting senior folk to commend you for what you've done is a starting point.
2. Later, (so it doesn't seem so obvious) ask to attend the strategic meetings, so you can do a better job (e.g., Strategy/planning sessions, Board meetings).
3. After you've assessed your "cred," and shown you're ready to move beyond simple following of instructions, THEN it's time to ask the critical question: "How could I become a more valuable member of your team?" If they brush you off with a short, "You're doing fine as you are," you've got more work to do. If they offer you the opportunity to "become a more valuable member of your team," the door is now open for negotiation: Ask for fair compensation (salary or fees), and offer to take SOME of it in equity. Now the burden is on THEM to turn you down. But, if you've gotten them to admit you're valuable, and they want you in the inner circle, it's going to be hard for them to reject you.
Advice from an old hand who's both gotten and granted equity in starts-up...
>> and I am basically indispensable for the continuation of this growth.
That is funny. You must be new to the industry. One of the first things anyone in employee/contractor position learns (should learn) in their first 5 or so years is that EVERYONE is replaceable. Well ok, Steve Jobs turned out to be not so replaceable, but that's Steve Jobs. In all likelihood, you are flattering yourself - you are very much dispensable.
Presently I do a lot of contract work for one customer, and I too would not mind getting a royalty from every unit they ship. And yes, I'm kind of 'indispensable' - several products developed for them, a couple of them are fairly complex. But I know full well that if the push comes to shove they will find a replacement for me. Just the same as they've found me to replace the other guy who was with them for like 10 years before that :)
First, you are asking the wrong crowd. You'd be better off asking entrepreneurs and start-up dudes.
Second, don't start the conversation by making an offer. That puts you in the worst position because now you are setting the bar, be it too low or (worse) too high, and they have to react to that. You are better off just asking "So, is there a way that I can start earning equity in the company, rather than just straight compensation?" That way they can evaluate the question itself rather than whether or not they want to accept your offer, and in return you will get to evaluate the deal they are prepared to offer (assuming there is one).
If you're as essential as you think, raise your rates -- you're the seller, after all. If they seem ready to consider going with a price hike, offer to take it in the form of equity (because you believe in the company's future and want to be part of it, blablabla. Asking for options in lieu of a rate hike or straight equity would be an easier sell, as it gives them a stronger hold on you and gives you more motivation to work at the top of your game. But the real question is, are you getting paid less than you deserve, and are you willing to demand more. The form of the increase is secondary.
Honestly, don't overcomplicate this or it could turn out for the worse. It's a small startup so I assume you know the owners, just sit down with them and ask how you can get onboard with some equity options. Most small startups would have considered equity options in their planning and you should get a simple response either way. I've been on both sides of this situation and in my experience it's always better to be honest, open and direct. Do it now, waiting will just decrease your upside if the company is growing already and there could be external timing constraints which may mean you miss a window of opportunity. Just be prepared that you may not get the response you want, but you should definitely ask the question all the same.
I've been amazed on more than one occasion at how quickly someone who I would have described as indispensable is quickly replaced. There are always issues and will be some lost money... but people step up and surprise you. Having seen this, I'd say very few people are _actually_ indispensable.
I have a feeling this guy thinks he's more important than he actually is. Which is fair.. most people like to think they are the main cog keeping everything running. Rarely the case. If he's not even a full time employee, chances are he could be replaced with little more than a hiccup. Management probably has a transition plan in place.
As someone who is running a startup with a partner, I am trrying to think of a good way for someone to approach me would be. I pay anyone I have doing contractor work very well. In fact, between expenses of the business, hours myself and my partner put in, and startup costs, the contractors make an hourly rate far beyond anything we take out. The majority of the money is re-invested back into the business to make it grow. That and the endless hours working on the business is what will continue to make it grow.
So the question is why would I share the gains? And under what circumstances would I share the gains? I honestly cannot think of any compelling reason that a contractor I pay could come to me and justify any shares of equity. How long was the company in business before you were brought in? How long before the business was actually incorporated was it being worked on before becoming real? And that is where, if someone I pay very very well came to me asking for equity I would probably stop using them. It shows a complete lack of understanding of the amount of time and effort the partners / owners put into the business and in all honesty, I would be insulted.
IF and this is a huge IF, I had a contractor that went so far above and beyond what was expected I would consider it. If that contractor was with me in the beginning and did countless hours of work, not always counting the pennies in the check, then I have something to work with. I know when someone puts in 40 hours of work in a time sheet and did 20 - 25 hours worth of work. I know the opposite as well when someone puts in a timesheet for 40 hours and clearly did 60 hours or more of work. That contractor is bleeding with me and is regarded above others. If you have not put in serious blood, time, and your own skin into the game you have absolutely zero right to ask for any equity. Where I am in my startup, there are only two people who have done the time: myself and my partner. So unless you are putting up money to buy in or working for free, you are on the outside of the circle. I am on a 3 - 5 year outlooks, expecting to break even on the amount of work invested after 7 years of hard work. What that means in that in year 7 or so I expect to finally stop reinvesting all profits back into the business and finally start taking out some for myself and my partner. So yeah, after 7 years I may start driving a really nice car, buy a nice new house, or have a nice retirement fund setup, but trust me I earned every last cent. You got paid for the work you performed.
You are replaceable, no matter what you think. You may be good, even great, but trust me, in my position I would let you go without a thought. Then again like I said I pay very well, so if you are making $50-$75 / hr, ok I may be a bit more lenient. But what I pay my contractors, I pay because they are good and I expect to get things done and I know few can go out and make more. You also are naive. You have no idea what goes in to running a business. I cannot even describe the hours spent doing things like collecting on payments due, finding and maintaining insurance, state / federal filings, evaluating and implementing new systems for the business. Sales and marketing, closing new business, etc. On top of all of that I still do day-to-day programming, just to get more money to reinvest back into the business. You want equity and not want to be laughed at? Offer to come aboard and put in no less than 80 hours a week making less than you did as a contractor. It may be worth the bunch of hours and the couple of thousands of dollars to work it out, figure out workers comp, insurance and other stuff.
LOL, the programming is maybe 30% of the business after it is all said and done. And quite frankly is the easiest by far to deal with. Talk to me when you have the state breathing down your back questioning your business on the use of contractors. Now do it when states are hurting for cash and want everyone on payroll to get their taxes each month or qu
I have a feeling this guy thinks he's more important than he actually is.
Come on, when have you ever heard someone in IT with an inflated notion of their own importance? I mean, that is completely absurd.
Depending on his jurisdiction, he may not be a contractor, but an employee, and both him and his boss are looking at substantial tax penalties and fines.
From your current situation, it sounds like the IRS will want a word with you
And no, having a written contract saying you're an independent contractor means next to nothing when compared to the rest of the evidence.
If they set your hours, your workplace, your work environment, pay you weekly instead of by deliverables, there's no specific "the contract is now complete" condition, and it's a key part of the business (and you have indicated yes several of these), you're an employee, not a contractor.
Let's call it what it is, Anti-Social Media.
I've seen this attitude plenty of times. One job I had, they were using a contract IT guy for both desktop and server support. This guy claimed to be "on call," but if you did have a problem, it would have to wait until he swanned in at 3:30pm to take a look at it, and then not on Mondays (because he wasn't available). When they hired me to be a full-time IT guy, he didn't even seem phased. He seemed to feel he would be spending the next six months "training me" to do stuff he couldn't be bothered to do in the first place. Within about three weeks after I was on the job, the company stopped calling him altogether (and then it was basically just for things like passwords and settings that he hadn't documented anywhere). I felt for the guy -- I guess I basically put him out of some work. But his attitude just made him seem like a prick, and it was costing the company money in lost productivity.
Breakfast served all day!
If he's doing his job and documenting what he's doing, and if he's coding, he's writing passably decent code and documentation, then yes, he is replaceable. This company is in a potential nightmare situation if he isn't documenting everything, not just because he might get fired, but what if he gets hit by a bus?
I'm just putting together a company with a few partners, and part of the incorporation process that our lawyer has told us to do is succession planning; right from the share structure to how to deal with the death, departure or incapacitation of one or more partners. You see, not even the owners should be indispensable in a properly setup company.
The world's burning. Moped Jesus spotted on I50. Details at 11.
Not sure where I heard it but it goes something like this..
Place your hand in a bucket and fill it with water.. now remove your hand..that is how much you will be missed.
Given that the missing is inversely proportionate to the size of the bucket..in almost all cases.. you are not missed substantively after a week or two.
Without me, it is just a collection f vans and equipment.
And no, not even a corporation and well written succession plan could change that.
Without me, the licenses are pretty pieces of paper and worth exactly whatever a paper mill will pay for them.
There are still businesses where the owner is indispensable.
With me there the company is a money making machine. Without me, it is just vans, tools and some supplies, worth very little in real terms.
ruin you both and you want to add equity to the mix just to remove any doubt at all that your "contractor" status is pure tax evasion.
That doesn't seem such a wonderful idea.
Ask about buying shares now, before any IPO. That doesn't cost them anything and it shows you have faith in the company (or that you like to gamble). Buy as many shares as you can. Borrow money if you have to.
Ask about buying "directed shares" when the company goes public. These also don't cost the company a thing, but it's a nice way for them to throw you a bone. The downside is that you won't have the shares in hand until the IPO, so you run the risk that they change their mind at the last second. Buying directed shares, and selling them as soon as the lockout period ended, allowed me to put a down payment on my first house. I did have to risk $5k of my own money, though.
My gods, you people are greedy.
If there's a small startup, and a half dozen people are working there and manage to turn it from a small startup into a successful company, don't you think the employees deserve to share in some of the success as well?
This isn't a case of what they deserve legally. It's more a case of "We built this company. We did it together. Let's all share in the spoils!"
I think it makes sense. There's that famous story of Apple's startup days, when Woz noticed some of the employees who were criticial to the company's success didn't get any stock, and Woz gave them some of his own because he felt they contributed.
If the owners of a six person company become billionaires and the employees only get their piddly (in comparison) salaries, and NOTHING more for what they accomplished, who's being greedy now?
Asking for equity earlier would not have done him any good, because he wouldn't have gotten any then either.
The reason many startups give out equity at the start is because they can't afford to pay the going rate for the talent they need, so the principles are forced to trade a lot of potential payoffs later for cheaper help now.
If this company is hiring contractors, then they have enough money to just pay the going rate for the work they want done. If they've decided they are going to just pay the going rate, having asked for equity at the outset would have just caused them to hire a different contractor.
Fact of the matter is, the guy was offered a compensation package for doing a job. There's no reason to expect any equity when you're getting paid up-front. Equity is compensation for risk. No risk, no equity.
paintball
That's where equity comes in.. up front.
People take some equity in leu of being paid the full going rate, and absorb some risk (but also stand to make serious money if they work hard and the thing takes off). The time to negotiate for equity would have been up front, not after the business is somewhat established and running smoothly.
If the owners of a six person company become billionaires and the employees only get their piddly (in comparison) salaries, and NOTHING more for what they accomplished, who's being greedy now?
Those owners also took all the risk. Again with the trade off. Some startups give out equity as a way of distributing the risk to employees (and the potential reward as well). This employer chose not only to not do this, but not even have him as a full time employee. More importantly this employee chose to work as a contractor at a contract rate (which is probably far from "piddly").
And this is all assuming this guy is really as indispensable as he thinks he is. He could just be a replaceable cog.. most people working on contract are. First step would be to go full time.. next step would be to talk about buying into the company some how.
If the owners of a six person company become billionaires and the employees only get their piddly (in comparison) salaries, and NOTHING more for what they accomplished, who's being greedy now?
You're suggesting that if you take no risk, make no investment and get contracting rates you should then also be able to reap the rewards of the people who took the risk, provided the investment and paid you those contractor rates. That is absurd! 'Yeah if it succeeds i want some of the profit, but if it fails i don't want any of the debt'
By the same hardline reasoning no CxO or political leader is truly indispensable either. However, it is very likely that they are valuable enough to their employer that if their employer should do all in its power to keep them on board, even if that means paying them what seems to be a lot more than the going market rate for someone doing the job that person is doing.
I'm definitely not saying this goes for everyone, but I can definitely see a few types of startup companies in which the IT guy is pretty much valuable enough to the company that having to replace him would be a major financial hit to the company (hell, I've been the outsourced helldesk monkey for a couple of organizations that were very much "IT companies" yet only had one or two people working for them full-time that actually knew anything at all about the technical sides of their business, those people were very very valuable to those companies since no one else there really understood what the company did and was either a manager of the PHB variety, a "money person"/investor or involved in marketing or sales).
Greylisting is to SMTP as NAT is to IPv4
You're suggesting that if you take no risk, make no investment and get contracting rates you should then also be able to reap the rewards of the people who took the risk, provided the investment and paid you those contractor rates. That is absurd! 'Yeah if it succeeds i want some of the profit, but if it fails i don't want any of the debt'
Working as a contractor, especially for a startup, is always a risk. You could be out of a job at any moment if things don't go well. Seeing as this guy is apparently one of the main people ensuring that things go well, getting a cut of that success doesn't seem like too much to ask. If he is over-inflating his actual importance, then he will probably be unsuccessful in getting that cut. If he isn't, then I think they'd be more than willing to give him a cut in order to retain him. If you don't ask, you can't expect them to just hand it to you, even if they think you probably deserve it.
It's not enough to bash in heads, you've got to bash in minds. - Captain Hammer
Working as a contractor, especially for a startup, is always a risk. You could be out of a job at any moment if things don't go well.
That's no different from being an employee, you wouldn't be much of a contractor if you didn't have a contract.
Seeing as this guy is apparently one of the main people ensuring that things go well, getting a cut of that success doesn't seem like too much to ask.
You can't have it both ways, a cut of the success but no risk of suffering a cut of the failure whilst all the while being paid to do the job you were contracted to do.
If you don't ask, you can't expect them to just hand it to you, even if they think you probably deserve it.
No harm in asking.
I'm so very pleased to see so many before state the painfully obvious. The very notion that anyone other than the proper, majority share holding owner is indispensable, much less a contractor, is naive at best, arrogant at the middle ground, and anathema to productive continuity. While we should all value our positions in whichever line of work we are in, we owe it to ourselves to come as close to objective assessment of the skill sets and their subsequent application toward the overall operation. I hold IT personnel in high regard, but let us all face reality: There are countless others that seek these jobs, many of whom no doubt come without the baggage of misplaced importance or inequitable sense of self-worth. I say this with full recognition that I do not know this person posing the question. That being said, in a place such as Slashdot, I do believe my words fall on many ears that have heard this type of talk stemming from behavior demonstrative of that which fosters ill rapport and declining morale.
Horseshit. People often take on loads of personal debt - included secured debt, like mortgages - to fund startups.
"It is our blasphemy which has made us great, and will sustain us, and which the gods secretly admire in us." - Zelazny
Setting up business is not a risk/reward thing, it's a have money/reward thing.
Bullshit. I did some work for a startup a few years back, which was paid entirely in shares (I needed the experience a lot more than the money - it was during my PhD, so I had my stipend to live on). Eventually the startup went bust. Limited liability meant that I was not liable for any of its debts, so I lost nothing. The people who set up the company, however, were. The bank refused to lend them any money unless they accepted personally liability for the debt (not uncommon - otherwise everyone would set up companies, borrow money, pay themselves a salary to do nothing, and then fold the company). They were left with a large bank loan to pay off.
It's different if you have a lot of venture capitalist funding, but then the reward is less too, because they end up owning a large stake in your company.
I am TheRaven on Soylent News
If the replacement can't figure out the super-secret file path to a shell script or function call they use to do X, the replacement won't be able figure out a way of getting X done. Not the case.
In most cases, yes. In some situations, the setup may be so completely batshit insane that there's no way anyone else could unravel it. Of course, in that case the original employee isn't indispensable, he's a liability.
I am TheRaven on Soylent News
You've clearly never set up a company.
On the contrary, it's clear you haven't. You need money to start up a business. And you're either going to be supplying it out of your own pocket, or it's going to be a secured loan. Very often people have their houses backing their loans. If their business fails, they lose their house.
There is a difference between Valuable and Indispensable. If an employee was truly indispensable the company will be bending over backwards to make sure they stay. Normally they are Valuable where they are paid better then the other people in the job, trying to make sure that they just don't walk out the door, but if they do it isn't the end of the world and no one should really threat.
If something is so important that you feel the need to post it on the internet... It probably isn't that important.
I wouldn't presume to judge my own value to the company, but I might invite the business owners to do so. "I know I'm just a contractor and am easily replaced, but I enjoy the work I do here, and I support the company's mission. If a suitable position ever became available, I hope you'd be willing to consider me, because I'd certainly be interested." Then end the conversation promptly so they don't feel any subtle pressure to comment on your value.
I've noticed that the people who bring the most value to an organization tend to presume the least about themselves.
Do you have any evidence showing that all contractors make less than fully employed equivalent employees? I'd be surprised if that was the case with more skilled IT folks.
No, but that's not what I'm claiming either. I'm sure there are some folks with specialized skills that get brought in for a specific project for a limited amount of time. I bet they make great money too. But I also don't believe that those folks make up more than a rather small percentage of contract workers in the US.
Contractors don't necessarily cost the company less. I worked as an on-site contract employee at a local government site. The county director wanted to pull a few of the contractors in to work as government employees (we were working on the 911 system conversion). When I compared my pay and benefits from being a contractor to what the government offered, I was better staying where I was employed. Add the overhead of the company i worked for and I'm sure the cost for me as a contractor was significantly better than a direct employee.
It seems to be pretty much common knowledge that contractors are generally cheaper than full-time employees. I've read several estimates of the costs, but most put the savings at around 20-30% over a full-time employee. This, of course, isn't for people with rare skills or knowledge. I know quite a few people that work as contract employees on annually-renewed contracts. I definitely wouldn't want to be in that position.
It's not enough to bash in heads, you've got to bash in minds. - Captain Hammer
Your dream of a serious start-up with the potential for serious returns, on trivial capital, is just that, a dream. You've never done it.
Well, well, someone's projecting, aren't they? :-)
What, to you, is "trivial capital"? Is it like the $18k that Y Combinator initially invests on average? That may be a significant amount to someone in his late teens, but if you wait a decade until you have gained experience and knowledge then you should certainly have the money management skills to have a lot more than that in savings (if you're cut out to be a businessman). For those who really have too much testosterone to wait and save, they'll be reassured to learn that bootstrapping money from friends/family averaged around $20-25k (before the implosion), "and further, 58% of the fastest-growing companies in the U.S. started with $20,000 or less.”
When, in a former capitalist life many years ago, I started up a business, the initial amount my partner and I put in from savings was comparable.
Have a nice day.