Startup Compensation: How much equity is appropriate for the first employee (and first designer) to get when they join a company?

Question:

I'm talking with a two-person team (both founders) about joining as their first employee (and first designer). They've made me a cash + equity offer, and I want help analyzing and evaluating the offer. What is a reasonable amount of equity to receive, assuming market salary? What are the best resources on the topic?

Dan Walter's Answer

Here's the basic issue.

To make a good estimate on equity you need to know a lot of things. The most important is what it the REALISTIC potential value of the company/idea. Next is How much investment will it take to get there?. Next, how much work? Next, How many people? Next, How long?

1% may be perfect. But 30% may also be perfect. 1% of a company with a potential IPO value of $1B is super-fantastic. 30% of a company with a potential acquisition value of $20M is fine, but not earth-shattering.

Here's my suggestion:

Figure how much cash you need to maintain and survive (and make sure you know how long you can survive this way). You need to get at least this much cash or you will end up quitting before the equity is ever worth anything. Then determine how much it will take to make up the difference between your survival and your comfort (and finally your celebration.)

The difference between survival and comfort is a good place to structure your equity value. If you are unlucky or unsuccessful you will still survive. If you are lucky and/or successful you can celebrate.

If there is simply no way to bridge the gap between survival and comfort your are either at the wrong company or doing the wrong job for that company.

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