This guest post came from an email conversation that led to a blog post.
I was recently approached with the following question by a designer looking for ideas on how to decide on working for equity in a startup:
If I were to work for equity at a startup, what is a typical percentage one asks for? 25%? 5%? 50%? 15%? How do I go about estimating that sort of thing? I know how to estimate a project’s cost based on my hourly rate but working for equity, as you know, can’t really be quantified in the same way as the project’s value is based on some future continent heretofore unknown. And I’m not an equal partner. I’d be the lead designer. What’s that worth percentage wise? What’s typical?
Here’s my answer:
This is a tricky question. In my experience there is no standard percentage. Different people value their companies in different ways, and some people value design more than others. I would say it’s best to have a good honest conversation with the founders and ask how the value the business (multiple of revenue, assets, etc). If they’ve had a professional valuation you can look at your rate vs how they price company stock to see what percentage to ask for.
If you’re in the gambling mood (which we all are from time-to-time) you can discount your time against the valuation with hopes of a nice upside. You’ll need to consider how you would liquidate your equity stake in the future, too. Sometimes early equity is bound to restrictions on sale to prevent the company from dissolving too early.
You should also consider whether your shares are voting or not. That can play a huge part in valuation and your role within the company as it grows.
Overall, just be careful not to invest too much time or money in something you don’t really believe in or have zero control over.
Hope that helps some of you.