You've been presented with an exciting opportunity to get in on the ground floor of a promising new startup venture. The founders have a bold vision and you're eager to roll up your sleeves and help make it a reality. But there's one big catch - they don't have funding yet, so they're asking you to work for free until investments come through.
While the potential payoff could be huge if the startup takes off, the idea of working full-time without any income is understandably daunting. You have bills to pay and can't afford to donate endless unpaid labor, no matter how compelling the idea. But you also don't want to miss out on a potential windfall if you pass on the opportunity.
You're caught in a dilemma many aspiring entrepreneurs and startup employees face. The early days of a new venture are lean and cash-strapped, with everyone working on a shoestring. Founders often can't afford to pay market salaries until they secure funding from investors. So they dangle the promise of equity and future riches to lure in talented people willing to work for sweat equity.
But you've heard the horror stories of startups flaming out, leaving those who toiled for free holding nothing. Or raising money and then minimizing early contributors' equity to bring on new talent. You don't want to be taken advantage of and look back with regret at all the time and effort you donated for an empty promise.
Yet you also don't want to be paralyzed by fear and miss a life-changing opportunity. There has to be a way to strategically negotiate fair terms to safeguard your contributions from the start.
The key is to treat your involvement like any other business transaction - get everything formalized in legally-binding documents before contributing any work. Don't fall for the "We're all in this together, don't worry about paperwork right now" line many founders use to kick negotiations down the road.
You need to establish upfront what you'll receive in equity, vesting schedules, future compensation, intellectual property rights, and other key terms. That way you have contractual rights guaranteed rather than just a verbal promise that can be altered later.
1. Negotiate equity earnout and vesting schedules
Don't just accept a broad promise of "getting equity" somewhere down the line. Get the details nailed down of exactly how much equity you will earn, with a reasonable vesting schedule that incentivizes the founders to want you sticking around long-term.
A typical employee equity earnout could be something like 1% of the company, with a 4-year vesting schedule where 25% vests after year 1, then the remaining 75% vests monthly over the next 36 months. So if you leave after 2 years, you'd walk away with 0.5% earned equity.
For founders, vesting may be longer like 5+ years to prevent a co-founder from taking equity and running. The key is tying the full equity grant to sticking around and contributing real value over a meaningful period of time.
Common Pitfall: Accepting an equity amount that gets heavily diluted in future funding rounds, leaving you with an inconsequential stake.
Pro Tip: Model out your equity ownership across various funding round scenarios to understand what a 1% or 0.5% stake could be worth if the company exits successfully.
2. Get minimum cash compensation terms in writing
Even if you agree to work for free or take below-market pay during the pre-funding stage, get legally-binding terms documented for the minimum cash compensation you'll receive once the startup raises its first seed round or Series A funding.
For example, you could negotiate a provision stating you'll receive a minimum salary of $75k per year (or $6,250 per month) upon the closing of a seed round raising over $500k or $50k annual consulting fee if you'll remain an external contractor rather than an employee.
The key is getting this future cash comp locked in writing upfront, rather than leaving it open for debate and potential renegotiation down the road when you have less leverage.
Common Pitfall: Founders delaying or renegotiating cash comp after fundraising, claiming they need to preserve runway or bring in new talent at market rates.
Pro Tip: If you can't get firm numbers, at least contract for your cash comp to be within a guaranteed percentage range of the funding raised (e.g. 10-15% of funding goes to your first year's salary).
3. Clarify intellectual property ownership
Any work product, inventions, code, creative works, or other intellectual property you generate while involved with the startup needs to have its ownership properly assigned to the company through documented work-for-hire and IP assignment agreements.
This prevents any ambiguity or legal battles down the road over who owns the rights to what you created. It's an important legal formality that ensures the company maintains full ownership, even if you were to depart down the line.
Common Pitfall: Failing to document IP ownership, then having disagreements later when trying to divvy up equity from a valuable patent or product you helped create.
Pro Tip: Use airtight IP assignment templates from reliable legal sources, not just quick online forms which may have loopholes. Platforms like Gust and Clerky have solid startup legal templates.
4. Propose advisor shares through a FAST agreement
If the founders balk at giving you employee-level equity, propose taking an advisor role through a Founder/Advisor Standard Template (FAST) agreement. This is a standardized contract that grants you equity without employment status.
FAST agreements are designed for advisors who contribute sweat equity through advisory roles, mentorship, business development assistance, and other non-employee contributions. They outline equity vesting schedules and can include cash compensation as well.
Common Pitfall: Negotiating a bad FAST deal that gives founders excessive control or the ability to terminate your equity prematurely.
Pro Tip: Use the industry-standard FAST templates from the equity management platform Carta to ensure fair, founder-friendly terms.
Further Reading: Slicing Pie Handbook (book on equitable equity splitting models)
5. Set clear milestones and performance expectations
Don't let your equity earnout be at the subjective discretion of the founders. Establish objective milestones, KPIs, and performance criteria you must meet in order to continue earning scheduled equity over time.
For example, as a marketing hire you could have quarterly targets for number of leads generated, website traffic, email list size, etc. As a developer, it could be shipping new product features or hitting uptime metrics. If you meet these clear expectations, your equity continues vesting as scheduled.
This protects you from being ousted for subjective reasons or petty disagreements with the founders. It holds both parties accountable to delivering measurable value.
Common Pitfall: Vague or unrealistic expectations that are impossible to meet, allowing founders to withhold earned equity.
Pro Tip: Negotiate a system of escalating reviews, warnings, and good faith dispute resolution before termination to avoid knee-jerk firings.
6. Involve lawyers to formalize agreements
Don't try to draft legal documents on napkins with the founders over beers. Hire an experienced startup lawyer to ensure all equity agreements, vesting schedules, IP assignments, and other key terms are reviewed and formalized properly.
A good lawyer will add the necessary legal substance and protective language to make your agreements bulletproof and enforceable. They'll also ensure you don't miss any critical provisions that could jeopardize your interests down the line.
Common Pitfall: Using self-service legal templates or online forms that have gaping holes or lack the nuance for your specific situation.
Pro Tip: Negotiate having the startup cover all or part of your legal fees for formalizing your agreements. It's a worthwhile investment to get it done right.
7. Propose alternative equity-based compensation
If the founders refuse to grant you direct startup equity, explore negotiating alternative equity-based compensation structures that still align incentives. A few options:
Vesting "box" securities that convert to equity in future funding rounds
SAFE agreements (Simple Agreement for Future Equity)
Profit interests or carried interests
Synthetic equity through stock appreciation rights
These can be complex financial instruments, so do your homework. But they allow you to share in the potential upside without getting common startup equity initially.
Common Pitfall: Agreeing to convoluted terms you don't fully understand that could dilute or diminish your future earnings.
Pro Tip: Bring in a financial advisor or securities lawyer to evaluate any alternative compensation proposals and model out different scenarios.
8. Set a walkaway time limit
While you may be willing to work unpaid for a period to prove your value, don't let it be an indefinite, open-ended situation. Decide a reasonable time window you're comfortable working for free, and make this clear to the founders upfront.
For example, you could say: "I'm willing to work full-time without cash compensation for 6 months. If we haven't secured adequate funding to begin paying me by then, I'll have to re-evaluate my involvement."
This protects you from getting strung along endlessly and allows you to cut bait if the startup stagnates and can't gain traction. It creates urgency for the founders as well.
Common Pitfall: Continuing to work unpaid for years, draining your savings and missing other opportunities, out of misguided loyalty or fear of admitting failure.
Pro Tip: Negotiate a small monthly stipend even if not full salary, like $1,000/month, so you at least have some income coming in during the pre-funding stage.
The pre-funding stage is inherently risky for both founders and early employees/contributors. But you can mitigate that risk by negotiating fair, legally-binding terms before contributing any work. Treat it like any other business transaction where you're owed reasonable compensation for your time and effort.
With foresight and smart negotiating, you can position yourself to share in the upside if the startup succeeds. But you'll also have your interests safeguarded if things don't pan out as promised. Don't be afraid to play hardball - the founders need you as much as you need them at this fragile stage. Approach it as a true partnership from the outset.
