Ask YC: Thinking of joining a startup - is this a red-flag?

[paulgb]

I'm considering joining a startup as an early employee. The company has a promising product, a smart and passionate team, and a big client. However, the team hasn't decided what share of equity everyone will get and doesn't plan to until they have something to divide. While I trust the team and I'm sure they intend to fairly distribute the equity, I worry that this could potentially cause tension in the team. Am I worrying too much, or is this something I should be concerned about?

[dkokelley]

Just tell them you'll join on the condition that equity is on paper. If they're your friends, explain to them that it just makes sense to do this right away in order to focus on your business and prevent any greed or disagreements.

Imagine this hypothetical scenario: 1 Year from now, you have a decent amount of cash flow, and are steaming along smoothly. As far as personal income is concerned, you've all somehow survived on savings, credit, and a small salary. Now an investor comes up and wishes to invest, or say that you have a buyer or some other liquidation event. How will you split the harvest? Now each of the founders looks back and evaluates how much they feel they've contributed. Disagreements arise. The programmers claim that they built the product, the sales guys claim that they brought the income in, and ultimately, the legal owner with 100% equity gets the money and you never speak with each other again.

The moral of the story: It's easier to divide a hypothetical pie now than a real pie later. Get the equity worked out now.

[tptacek]

I'll be the contrarian here.

Unless you control the company, or the founders (or whatever the "board"-equivalent is at this nascent stage) are dumb, no matter what the paper stock agreement is, you can get screwed.

All you people with private company options plans are pretty much deluding yourselves about your recourse in the event of an unfavorable (to you) liquidation. The pecking order is, latest VC, VC, founders, every executive, and then you. No matter what your paper says, everyone above you in that chain can screw you over.

I've seen this go both ways. Companies with 20-30MM+ in revenue have been acquired by $5Bn gorillas, and the VCs and m-team walked with everything but a few thousand dollars. And companies have gone public and larded everyone with windfall options.

If you want to have some idea of how much your "equity" might be worth, you need to know not only how many shares you're getting, but how many shares are outstanding, how that pool is going to change after multiple rounds of funding, and, finally, how much the company will liquidate for. A bunch of those questions are basically unknowable.

So, you can work for people with this sketchy answer, or you can work for the people who make shit up about their equity to make your questions go away, but in neither case is the answer to this question really helping you. Do you trust the team or not? Is the project worth it even if you don't trust them?

[neilc]

I think it is still a serious red flag if you're offered a job at a startup but the equity terms haven't been settled yet. Sure, even if the terms are fixed, it is possible to get screwed down the road. And of course, employees are typically the last people to cash out if a liquidation event occurs. So what? A written agreement in a nascent company might not be worth a whole lot, but it's worth considerably more than a verbal one. If you aren't promised a specific equity stake in writing (in addition to information about the total # of outstanding shares etc.), then I'd assume you're not getting any equity -- you're probably not going to be too far off.

Furthermore, the fact that the equity hasn't been arranged is a sign that these entrepreneurs seem pretty clueless. I doubt that any reputable investor would sign on to invest in a company like that, for example. Not settling the equity up front doesn't "save time", as you've suggested elsewhere: sorting out the equity after the fact is likely to be more time-consuming and contentious than doing it earlier, when the company is smaller and consensus is easier to reach.

[nostrademons]

There are degrees of screwedness, though. If you have an option plan in writing, you at least have some guarantees about "If you're with the company over this vesting schedule, and if we don't get acquired or go out of business before then, and if we aren't diluted by multiple rounds of funding, and if we have a liquidity event, and if you exercise your options, you'll get this much of the company." That's a lot of ifs, but it's still a helluva lot more than having nothing. Plus, the inability of the founders to make this hard decisions makes me wonder what other hard decisions they won't be able to make.

[dbc]

If the promise isn't on paper, it doesn't exist. Don't let them guilt-trip you by questioning your trust in them.

[streblo]

Agreed. You're doing volunteer work until you have your stake down on paper.

[brk]

I'd be very concerned if I were you.

To me, that indicates that they haven't really thought the whole financial model through very well, which isn't often a Good Thing.

Lot's of good opportunities out there right now, don't make a fast decision that you'll later regret.

One thing you could do is get them to agree to some rough bracket, like you'll get 10% of what the founders get, or at least 90% of what already-existing employees similar to your role get.

[tptacek]

Say for the sake of argument the company has been in business for a year before our friend arrived. Say there's another employee who has been there since day 1, but is skills-wise pin compatible with our friend.

You think he should get 90% of what the day 1 guy gets?

[paulgb]

Thanks. It's not so much my own share that I'm worried about, as much as potential disputes between the rest of the team members.

[skmurphy]

They absolutely have something to divide, the current equity. You are working against your own interest by helping to add value to the company without setting your option price and share count. If the 100% owner isn't willing to share now, something is wrong. There are a number of ways to address the issue of actual performance: time based vesting, milestone completion vesting, a cliff for a probationary period with no vesting (typically 6-12 months and then the 6-12 months all drop in). This is a very serious red flag if they have incorporated and tell you "they don't have something to divide." It's much better to have the disagreements now (and perhaps let some folks go along the way for poor performance) than effectively make it a competitive free for all on an ongoing basis (can you imagine the discussion in 6-12 months "I did more than you" "No I did a lot more than you, and I spent most of my time fixing your mistakes"). You are right to worry about team dynamics.

[tptacek]

The company has a strong team, a strong product, and market traction. The equity argument is as much about risk as it is about effort, and it looks like everyone else on the team has borne far more of that than our friend here. He's an employee, not a founder; his code contribution likely does not entitle him to demand equity reallocation.

[cstejerean]

Definitely a red flag. There's nothing to be determined later. Later on they will get more funding and be able to hire people without handing out (much) equity and when there's a handful of developers already you won't have much power to negotiate. Work out an acceptable deal now.

[theremora]

issue of real estate and equity are not verbally binding. this has the potential to turn bad. they have something to divide, the equity. are you saying they have not incorporated and dont have stock? seems that you are not paranoid and this is indeed a red flag. Keep looking or wait until the equity issue is resolved.

[paulgb]

Thanks. They are incorporated, but one founder legally owns 100%.

[daveungerer]

The people in the team you mention remind me of a mistake I made a few years ago. It taught me a very valuable lesson though: Don't even think of negotiating with someone unless you are prepared to walk away if no satisfactory outcome is reached. But all the effort put in before splitting up equity makes it virtually impossible to walk away. Talk about shooting yourself in the foot.

These people obviously desire to be part of this business so much that they don't care that they have no equity yet. Desire blinds.

Then again, my opinion is more than a little coloured by my personal experience.

[icky]

> Don't even think of negotiating with someone unless you are prepared to walk away if no satisfactory outcome is reached.

Words to live by!

> But all the effort put in before splitting up equity makes it virtually impossible to walk away. Talk about shooting yourself in the foot.

If you're going into any sort of business transaction, always do it with a watchful eye on sunk costs and opportunity costs.

[burnout1540]

Get something written down on paper before you do any significant amount of work for them. I went through this and spent several months working full time for a startup only for them to try and screw me over. I had to quit and take the issue to court.

The equity share was written down (although not in the form of a contract), but the founder of the startup tried to add on a lot of ridiculous restrictions which would essentially give him the right to strip me of all equity for whatever reason he wanted. If I had had an actual contract he couldn't have done that.

[bokonist]

Oh god. That's an absolute disaster waiting to happen.

[mixmax]

Speaking from experience I can only second that.

[dazzawazza]

While I am sure they intend to be fair, intentions aren't good enough. It's a red flag, tell them why, if they can't fix it asap, walk away.

At the end of the day there is no 'fairness' in equity, just equity. Some people will put in more units of work per equity unit then others. This doesn't really matter if each person knows where they stand and what they stand to gain and loose. This allows the members of the group to asses their risks and rewards.

No one will be able to asses risk/reward so there could be a massive shock when the reward is put in front of them.

[powerflex]

You get what you negotiate going in. Period. Ive seen people negotiate majority shares, get it, then request 300k salaries and leave in a huff. They still get their millions of real stock.

[CoreyKossack]

There are a few perspectives on this. The first one, which everyone else has voiced, is that verbal promises are worth nothing. Things can always change and you could be left behind...

However, in some ventures I have been involved in, equity distributions are not decided in the very beginning because you don't know enough yet. If you give equity too early, you can mess up big time in many ways. In my opinion, the best thing you can do is sit down and talk through the terms. Figure out what is going to impact the decision about how much equity you do receive, and at what point in time that is expected to happen. Lay out some terms in advance, even if the actual equity percentage is not laid out from the get-go.

The last thing to say is that contracts are only as good as the people who sign them. Trust should be the #1 factor in your decision to deal with business partners. That said, you have to protect yourself, so do what you are comfortable with and roll with the punches. If you are not getting paid and don't have a 100% promise of stock in the company, the time you are putting in right now is "volunteer" time, and that is something that only you can decide if it is worth to you. I wouldn't let the lack of set deal terms scare you off just yet, if you think this is something you could really benefit from. But of course, it's all your call!

Corey Kossack President Club E Network http://www.ClubENetwork.com

[DarrenStuart]

get it in writing up front. if the company takes off and the founders get greedy you will be kicking yourself that you didn't.

At the end of the day they may be paying you but you are taking the risk that you might end up not getting paid if it goes wrong.

[bayareaguy]

If they don't make you a good written offer then they haven't really done anything to stop you from finding something better to do once the novelty of working with them wears off (which will probably happen really fast the moment you think you've been screwed, true or not).

It doesn't sound like they are complete fools, so the only rational explaination is they aren't concerned with you staying or leaving, and neither is their client.

[asisproperty]

I agree with the comments below. Your worries are completely justified. In fact, I'd call it wisdom and intuition, not worries.

[boredguy8]

The problem that people have hinted at, but nobody's come out and said: Fair changes when money's involved.

[flashgordon]

do you know how much time you have before they may decide on the big equity equation? Do you know how much the others are investing (especially money wise)?

[pius]

Be concerned: you've got to know what you're getting beforehand.

[foonamefoo]

Huge warning flag.

[tptacek]

Because why? The team hasn't wasted their time dividing up their fictitious millions?