If you hire 100 employees and split that 5% equally then you get 0.05% per employee. What else would you propose? If you tried to give everyone something like 0.5% then the first 100 employees would have to own 50% of the company. Doesn’t really work.

Most startups don't pay dividends. Even Microsoft barely does. Owning 10% of a technology startup basically means you get 10% of the proceeds if the company gets bought, or hold 10% of the now tradeable shares if it goes public.

Someone holding 51% could pay himself all the company's profits as salary only if the company hadn't taken substantial investment. Otherwise the investors would have protection against such abuses as part of the deal terms, and the employees would thus be protected too.

I've been a first 10 employee (As an infrastructure contributor, not core engineer) twice in companies that eventually were valued at greater than $1 Billion. The first time I received 0.03% Equity (Before Dilution) - the second time I received 0.1% Equity (Before lots of dilution).

For one of those companies, I know that some of the core engineers received 3-4x what I did, so - extracting to all of the six core engineers in Layer 1, Plus the Administrative crew - comes around 6 * .4% + 3 * .1% = about 2.7% for the first nine employees. We had our series A before anybody came on board, as an employee.

There is probably a different allocation method for teams comprised of "Serial Entrepreneurs" - Your risk in joining that team is much less, so your equity is typically much less. Also, the approach usually goes like the following:

Step 1: Two - Four Founders create a company. Roughly sharing the equity, though, if there is a "Named" founder that will Garner Press/Financing/Customers, they take a bigger chunk.

Step 2: Founders brainstorm for month or two, commit to working together for a minimum of four-five years, and then go pitch their preferred VCs. VCs give them a valuation of $5-$10mm (pre-money) and invest $1mm-$2mm.

Step 3: First 5-10 Employees are hired, with a stock pool of 3%-10% - Sr. Employees with a great track record who currently have great jobs at Google/Facebook/etc.. will require a larger equity share. Out of work contributors who have a solid, if not exceptional track record will receive significantly less. The team now has a clock ticking, and has to demonstrate some traction within six-nine months to get their next round before the money runs out.

According to this I would count as the first employee as the company has existed for a year and is making money. Thereby ascribing 10% to me, their first layer of employees. However as this layer grows my value may gets diluted. Moreover it assumes that I am getting paid market wage. As part designer, part developer and part project manager - im not sure what that number is but lets say its at least what im getting paid now $70K per year.

Since I am not getting paid market wage I feel like it should be reasonable to ask for sufficient equity compensation. This is one of the main reasons join a startup right? Not the pay but the <em> potential <em> reward.

All this being said, its a young company the founders are my friends and I feel strongly that the company has potential and that I have a strong opportunity to grow.

(in general the shares reflect engineers' preferences, as they do require a certain level of salary and don't want to take as big risks as the founders. founders would be happy to give them more share and less salary! they have a huge impact on success.)

It can get depressing trying to hire people sometimes.

If a startup's success depends on the team, then you have to figure out whether or not the current team can pick up additional skilled people. If you're the first technical hire, most likely you will be responsible for gathering a team (though not always). But in either case, you are directly responsible for the value of that stock.

Are you willing to give it everything and make that 1.25% be worth something? Or are you going to sit and rely on hope & expectation?

$0.02

It ends up rewarding early employees more than the normal company structure, but I think that's a good thing; they normally have to go through a lot of disruption (and a fair amount of risk; the chances of the startup not being able to make payroll occasionally are high) and are a key element to the success of the organisation anyway.

I really liked another blog post by Sam about equity distribution as a startup grows: "a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50"[2]

Quora has anecdotal evidence that 0.5 - 1.0% is common[3]

[1] http://blog.samaltman.com/how-to-hire

[2] http://blog.samaltman.com/employee-equity

[3] http://www.quora.com/What-are-the-typical-amounts-of-equity-...

"I would say the only startup worth working on is your own."

I think you are, without realizing it, criticizing the small amount of equity normally given out to people who join startups. Yes, if you are getting less than 1% of a startup, and making a big sacrifice for that startup, then the sacrifice may not make any sense.

Ellen Beldner does the same thing, in the indirectly linked article. She writes:

"Senior engineers / VPs / early directors may get somewhere between 50 and 150 basis points (0.5 - 1.5%)."

Those are very small amounts of equity. Such small amounts do not make sense if the idea of the startup is utterly unproven. It is valid to criticize those amounts, but the conclusion should be that early employees should get larger stakes.

For the first 3 or 4 people working with a startup, I agree with you that they should be working on "their" startup. And that is the point of equity - to make it theirs. But clearly, early on, with the idea unproven, the equity stakes need to more like 10% or 20% rather than less than 1%. Give someone 10% - 20% of the company and then they are doing what you suggest: the only startup worth working on is your own. They are substantial owners at that point (10% to 20%).

And yes, the equity stakes will get diluted later on, if the company is successful, but that is fine, since that is such a great problem to have to worry about - it means you've been successful.

Right now, I'm trying to get friends to work with me on my startup. The shares we are considering are all in the 5% to 10% range, rather than the less than 1% range. (It helps too that my startup has already had a few customers, so the idea is not completely unproven.)

Non-founders rarely, if ever, are given that much equity (commonly cited numbers tend to top out around 2%). The most likely candidates are engineer #1 and an early VP, but engineer #1 has likely been diluted by over 30% since seed stage and even the exec will have been diluted by 10~20%.

At $5BB, a nonfounder needs about 0.6% of the company. By this point though, dilution is usually even more severe, and engineer #1 will likely have had his/her initial share cut by close to 50%. This means that only the earliest of early employees, along with the VP level hires, will have $30MM at a typical $5BB startup (though $5BB startups are hardly typical).

It's the companies that are another order of magnitude higher in valuation that mint wealth of that kind to dozens of employees.

[1] ignoring liquidity preference for the sake of simplicity.

There's three problems with your plan:

First, if the high-end of what you'd think of asking is 18%, then it seems likely that even the low end of your ask is in the founder/first-employee range. You're talking about numbers that hired CEOs get.

Second, the stake you're looking to take in these companies practically guarantees conflicts down the road; you're asking for so much that you're going to have to take an intense interest in valuation and dilution concerns. Who involves a contractor in things like that? Who gives a contractor a veto on funding or acquisition? Who funds a company that values 8% of their company so low?

Third, despite having risked virtually none of your own capital (again: evenings and weekends, divided among multiple companies), you're asking for a share comparable to what early employees who dedicate themselves to the company and take reduced salaries get; those employees, by the way, will all vest, unlike you.

I don't think this is a workable plan.

I think there may have been an interesting conversation in the 0.1-0.5% range, although my plan was to explain why it's dumb for both sides to give 0.1-0.5% of a company to someone as direct compensation for a transactional service, and how you could have made more money and made startups more happy by coming up with a clever deferred comp scheme pegged to equity valuations.

But at 8-18%, I'm not sure where to go with this.

So that they care about the company on a similar level to the founders, and feel a real sense of ownership, dedication, and responsibility.

I've been in a position several times now where at work I'll have a reputation as a very capable engineer, typically placed on or leading the most critical projects etc. —but, my employers still have no idea what my contribution could have been if I were made to feel like the company was partially my project too, and that there wasn't some massive (though never explicit) social divide between the founders and everyone else, the rest of us being mere tools for the founders' use (only one job I was at really gave that impression—the others were pretty good about creating an environment where everyone felt equal. But from speaking with many other prospects, it appears to be a typical attitude).

There are thresholds in perception of ownership which when crossed give access to new categories of behavior in the perceiver. Think about 1%, 5%, and 10% equity in terms of sharing an object among a corresponding number of people: how much do you feel that thing is yours when sharing it with 100 people? With 20 people? With 10 people?

For me, 10% is about where the line would be where I'd be willing to drop side projects etc. and seriously dedicate myself to the company. (And in my experience, this is not atypical: in the very early stage startup I was in, basically everyone was laying groundwork for their own startups on the side, or at least had other projects they were more interested in—but they'd make sad, fake displays of their dedication to the company to try and cover. At our largest there were still only ~7 people in the company.)

I actually had this issue bite me in the ass at my first startup, where I was offered a flat # of shares.

I was pretty much fresh out of college, but for the record, I did realize it was important to find out what percentage I was actually getting. When I asked what the total # of shares outstanding was, the company snaked its way out of answering the question directly. The job had a lot of perks (a big title, very respectable pay, work-from-home, greenfield development), so I took the offer rather than press the issue.

Eight months later, we were acquired. I was the only engineer. You could say I was a bit peeved to learn how little of the company I really owned.

I really think non-founding employees (especially early ones) would be shocked if they saw what the cap table really looked like when they signed up.