If you’re good at what you’re doing and you have friends in the start-up scene then there is a chance that at some point you will be offered the chance to join a newly minted company. Imagine two guys, one has the idea for a product, the second can sell it. They incorporate, maybe they have a bit of savings, maybe they have a third guy with some money as an initial investor. Now all they need is to get a guy to build the thing.
That’s where you enter the picture (or any other mix of skills where you are essential but a little bit later to the party).
So they approach you with this offer: how about you join our company as our first employee? There are all kinds of good reasons, such as the possibility to end up as their CTO, working with your friends, stock options and so on. The only negative is that given the amount of money they raised they’ll have to pay you a bit less than what you’re making today (a bit over half or so), but that will be compensated by your stock, somewhere between 1 and 3% doled out over the next 4 years.
Sounds like a great idea, no?
No, it doesn’t. And here is why: if you are good enough to be that first employee, you are a very small step away from being a co-founder. You’re an essential part of the mix, and that will substantially alter the chances of this start-up succeeding or failing, you are sharing in the risk and you should be compensated accordingly.
If you are not going to be paid a market-rate salary and your stock is not equal to or close to equal to that of the other co-founders (possibly offset a bit by what they brought to the table in terms of cash) then you are doing a disservice to yourself. What you are giving up is the next couple of years of your life + that many years * your drop in pay for a small percentage * an even smaller chance of success! The most likely outcome (given that most start-ups fail) is that all that you will get out of this is the salary component and that the rest will work out to a big fat ‘0’.
If you’re going to take on a task of this magnitude and you’re apparently trusted enough that you can be responsible for a large chunk of the eventual company then you really should be a co-founder, not a first employee and you should negotiate accordingly. The skills and responsibility differences between the two are vanishingly small.
And if that is not an option, then maybe you should think about saving a bit and becoming a co-founder in a start-up yourself. After all, the risks are pretty much equal but in the case of a success the pay-off will be dramatically better. And it also positions you much better in the case of an eventual success or exit, it is very hard to screw a co-founder and extremely easy to screw early employees.
So think twice before you join a company as a first (or very early) employee, and if you do decide to join negotiate for as large a chunk of stock as you think your position/commitment/drop in pay justifies and be prepared to walk if that is not possible.