r/hwstartups • u/prettyborrring • 2d ago

How much equity should I be giving an early (pre-pre-seed) employee who is important but not critical?

I've been working with a designer who has been very helpful in getting our cosmetic prototypes designed and made. He's even helped source a supplier when our original supplier turned out to be not up to the task. He's very knowledgeable and willing to put in the time needed to make things happen. I would love to formally bring him onboard to lead the industrial design moving forward. However, there are a few things holding me back

  1. His function isn't the most critical piece at the moment. We've taken the industrial design as far as we can at the moment. The vast majority of the remaining work will be on the electrical and software engineering side
  2. He may not be in it for the long(ish) term. The only reason he has been able to help me so far is because he was laid off earlier this year and had some time to kill as he looks for his next opportunity. He also has a family he has to take care of so finding another role is a necessity. While that's not necessarily a deal-breaker, it does make me wonder if he would be able to continue contributing as much as he's had given his responsibilities as a family man
  3. While he's very knowledgeable on the CMF side of things, his "artistic" side leaves a bit to be desired. While this isn't a huge deal, it does affect my opinion on his competency long-term just a little bit.

As additional context, we are currently in the angel/f&f stage. Given all that, how much equity should I consider offering him at this stage?

1 Upvotes

67% Upvoted

14 comments sorted by

3

u/snorkelingTrout 2d ago

I’ve seen 0.03% to 1%. I am assuming this is for work going forward and a show of gratitude, assuming you already paid him for work done.

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u/Liizam 2d ago

That’s if they also get a salary. No salary, then increase comp.

3

u/FRELNCER 2d ago

It seems like you are using equity to replace 'real' compensation which is probably a bad plan. If you can't afford to pay the employee, how are you funding the legal work to get a proper contract assigning equity written?

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u/theDoodoo22 1d ago

Prob worth understanding start ups globally as this is norm

0

u/prettyborrring 2d ago

Are most early stage startups not basically doing the same thing? Maybe not to this extent but from what I’ve seen it’s pretty common to be paying below market rate in exchange for a larger amount of equity simply because they can’t afford it. Also I can’t imagine drawing up a few legal documents which I’m sure firms have pre-written templates for would be anywhere close to being as expensive as a competitive full-time employee’s annual salary

2

u/PineappleLemur 2d ago

Why do you think they fail and stay with nothing?

Most people can't really work for over 6 months on peanuts.

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u/FRELNCER 2d ago

Do a quick web search on the topic of 'risks of early equity grants for startups' or similar language. You might also plug the same search into Reddit Answers.

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u/prettyborrring 2d ago

I’m aware of the risks. But the alternative at this point is to spend the rest of my runway on a single person’s salary which will get me nowhere

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u/Liizam 2d ago

Normally you do 0.5%-2% plus market salary. If you don’t have money to pay you increase the equity stake. If you don’t want to give salary or equity, morally to me it’s wrong.

2

u/1x_time_warper 2d ago

None. Companies that give away equity just for working there are seriously undervaluing its future value and are very likely to run out of it to give away before they become profitable.

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u/sebadc 1d ago

The question is: how much would they cost you for the work as employee / freelancer (whatever is the cheapest) and how much would you give to an investor giving you this amount.

If the person costs 50k and you would give 1% to an investor giving you that amount, then, that's (pretty much) what you should give.

There are some differences (e.g. that person is only good at 1 thing, whereas money can buy any service), but considering the information you provide that gives you an idea of the logic.

But beware of the share types and privileges. Early ownership from novices can destroy your next funding round, and a fragmented cap table is a huge no-no for many institutional investors.

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u/alecrimi 1d ago

none, if you really want less than 1%