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?"

Comments

you're a contractor

[Anonymous Coward]

...and therefore not indispensable ...
Good luck, you are greedy indeed...

Don't imagine that you're indispensable.

[jcr]

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

Re:Don't imagine that you're indispensable.

[ScrewMaster]

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

Yes, because it's not really that strong a hand to begin with. People often overestimate their own value. By his own admission he's well paid already.

Re:Don't imagine that you're indispensable.

[Anonymous Coward]

^^ What jcr said. Also, what's wrong with simply asking how you can be a bigger part of the company?

However, you also said this:

however we're doing very very well and have a very significant revenue already.

If that's the case, you should expect the answer to equity sharing to be "no, we're happy with where the equity positions are at already."

Additionally, the "price" of equity is inversely proportional to the risk involved. If it's 3 guys just starting up and scraping the cash together month-to-month, equity can be pretty cheap - you can make an offer for a big chunk of equity because you're assuming a big part of the risk. If, as you say, they have significant revenue already, then the equity should be relatively expensive - after all, there's not much risk anymore, and any cash you offer to put in might not be much in comparison to month-to-month revenue.

As a contractor, you'd probably have to offer a pretty hefty reduction in salary/rate for equity. As a full-time employee, you could probably command more for a lesser price, as you'd essentially be assuming some of the risk - e.g. the risk of being an at-will employee getting sacked if revenue turns south vs. a fixed-length contract.

Re:Don't imagine that you're indispensable.

[Fluffeh]

You are going to be in a bad negotiating position. The thing with start-ups is that they generally offer a lot of options early to the first bunch that comes into the fray. If they have decided to go with contracts rather than options, you are in an even worse negotiating position. You see, if options are offered early, then the folks behind it are offering options to potential employees to negate their own risk in the venture. If these chaps have decided to gather enough funding and then simply offer contracting rates, then they have taken the risk totally upon themselves. At this point (where there is good revenue coming in ad the business is in a stable financial postition) they risk associated with the venture is all but gone.

Not to be blunt, but why on earth would they offer you equity in the venture now - especially that they have weathered all the early (and biggest) risk? It seems to me like you want the best of both worlds - contractor rates while the venture is risky, then equity when the venture looks safe and stable. Unless you have something to offer that will be worth equity to them - such as being able to greatly increase their revenue, or bring more clients to the company - or something else that is just as valuable - giving you options at this point would be a poor business act on their part.

equity versus salary

[GreatDrok]

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.

You are a contractor

[MyLongNickName]

You get paid by the hour.

Folks who stand to lose money if the company goes under get equity. Not you.

Re:You are a contractor

[BasilBrush]

Yes, he's a contractor, who risked nothing when the company was starting out. But got paid contractor rates for his work.

The company owes the greedy bastard nothing.

Re:You are a contractor

[FooAtWFU]

It's true that the company owes the guy nothing. But the company must continue to pay him in the future if they want his work, and there's no reason that equity can't be part of that. Of course, there's no reason it has to, either, but crying "greedy bastard" is perhaps a little much.

You were paid to do a job, right?

[Anonymous Coward]

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.

Re:You were paid to do a job, right?

[AK Marc]

However, the premise of the scenario is the guy thinks he has become indispensable.

Don't ever let the company you work for think you think that. If I had an employee who thought he was indispensable, I'd fire him. Why? Because as much as I defend Terry Childs (read my posts on that if you like), the issue there was caused by him thinking he was indispensable. That mentality doesn't work well in a company. They segregate information, horde information, and start to work in a manner to grow their power base, rather than just do the job asked of them.

I've seen it before a number of times. And it always ends the same, badly. And never once has the employee been indispensable. In fact, three times I've replaced the person who thought they were indispensable, and I certainly didn't have any delusions of grandeur when I was then as indispensable or more indispensable than they were.

Switch to permanent employee

[LynnwoodRooster]

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.

sign on bonus

[wmbetts]

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.

Re:On the other hand...

[similar_name]

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.

Ask, Politely

[Anonymous Coward]

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...

Re:On the other hand...

[Anrego]

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.

Tough to say

[Anonymous Coward]

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

Re:Tough to say

[rastos1]

You have no idea what goes in to running a business.

You are too fast to judge. I'm an employee in a small IT company. My contract says programmer-analyst and 42 hours a week. However I'm at my desk since 7:30 until 17:00 nearly every working day. Then I get home and put more work in. Write skeleton code that gets later used by the company, write tools that make my job easier and that get later used also by my colleagues, etc. . I rarely go sleep before midnight. And I do this also during the weekends and holidays. I do it not because I was asked, but because I enjoy it. I respond to e-mail alerts from automated tasks running late in the evening - when something breaks in the evening, I log in remotely (using my computer and my Internet connection) and fix stuff so that people don't need to wait for the fix in the morning. When the building alarm goes off, I'm the one that is notified and goes to check whats going on. When an e-mail exchange with customers in foreign language reaches the developers, they come to me for help with translation. When the internet connection goes down, I'm the one talking to our ISP. When I consider it all around, I'm exploited. But I don't mind that much, because I have good relationship with the boss, colleagues, flex time, free hands in some areas, ...

I doubt that the boss/owner puts significantly more time and effort in the company. Yet I don't think I'm indispensable, but replacing me would mean that for a handful of projects the development would stall, and the bugfixes could do more harm than good because my replacement would not know all the bits and details that I learned during 10+ years.

I'm not trying to downplay the importance of business owner. He provides something that I can't. But you also should not downplay importance of a dedicated subordinate.

Re:On the other hand...

[nomadic]

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.

On top of that ...

[Barbara, not Barbie]

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.

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

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.

The IRS is already going to

[nedlohs]

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.

Re:On the other hand...

[ZorinLynx]

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?

Re:On the other hand...

[Anrego]

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.

Re:On the other hand...

[exomondo]

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'

Re:On the other hand...

[Danse]

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.