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What is the best option?

I have been asked to work in a high position as co-founder of a startup for 5% equity and $40k salary - this requires over 40 hours of work(hard grind) etc as any position like this would. It has also received funding of $200,000.

I have also been offered a job $75k salary, 40 hours a week with perks etc.

What is the best option? and why?

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    There's really not enough information here to answer the question. How much do you expect the company to eventually be worth? (Is there a market analysis that informs this estimate?) How long before you can cash out your 5%? Can you live on $40k/yr in the mean time? (Are there loans or obligations that will cost a lot in interest if you take that lower salary?) Do you believe deeply in the potential for a much bigger payout down the road? Are you at a stage of your career that you need mentoring? Will you get that mentoring at one or the other of these places? – NL - Apologize to Monica Apr 2 '19 at 22:15
  • I can't estimate the worth. It would probably be 3 years before I can cash out. I can live with $40k/yr. I believe I will get paid more longer down the road. I'm not sure what type of mentoring but I am very good at what I do. Financial mentoring maybe :D. – Doug Apr 2 '19 at 22:41
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    Are there other salaried employees? Because on $40k salary for you, plus all the related taxes and such the business must pay on top of that, generally will cost the business a total of 60-80k per year on you alone. 2 other employees with the same pay as you and minor non-labor expenses and that $200k funding won't even last 12 months. If there's an office and basic equipment, I'd be surprised if that's more than 6-8 months of funding at best. Without more information, I'd value that 5% at $0 - only you can say if you know why it might be worth more. – BrianH Apr 3 '19 at 1:23
  • There will be future rounds of funding and the numbers I posted above are sample but the same scale. – Doug Apr 3 '19 at 22:38
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The equity could be worth anywhere from 0 to billions. So there's no way to know if it will be worth the $35k you're missing out on. So it all depends on how much of a risk you're willing to take.

You could put a current value on the equity depending on the funding agreement. Was if for a % of equity? Then just translate that to your 5% share and see if it's at least starting out in a good spot. But where it goes from there is anyone's guess.

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  • I thought there would be a easy formula to solve it e.g: Investors $200k = company valued at $200k = my share price = 200,000 * 0.05 = 10000. 50k<75k I assume its not that simple? I have to regard what I think the company will be worth in the future and if I am paid more in the future. I'm not really good at these things :/ if you are saying you can't really compare what is best because of a unpredictable variable I will just have to chose one or the other. – Doug Apr 2 '19 at 22:45
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    @Doug The 200k investment wasn't for 100% equity, so if it was for 50% of the company that'd be a 400k valuation, 25% 800k valuation, etc. Just remember that 200k to some people is insignificant, they might view it as pocket change on a long-shot, do your best to estimate up-side potential and if you can handle the equity being worthless. – Hart CO Apr 2 '19 at 23:34
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You sort of have to go with your gut on this one. Startups tend to fail, but the ones that make it big can get really, really big.

If you can afford to take the lower salary and you think the startup has a potential exit strategy (IPO, sale) that will make your 5% stake worth a lot of money, then sure, go for it.

Don't think of your 5% stake as "worth" $10k, though. The value of your stake is based only on the price that someone else is willing to pay for your shares. If you think you will contribute to their eventual success where that stake is worth a lot of money, then perhaps it is worth the risk.

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The company must be valued by some means.

For instance take the revenue-growth-percentage, divide by 10, and multiply by the revenue. For example 30% revenue growth values the company at 3 times revenue. Or 0% revenue growth says take the salary.

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