1% isn't enough equity to justify a below market salary for something with a 10% chance of a $100,000,000 exit in five years...and if only the outlook were that good and imagining no dilution and benevolent actions by controlling shareholders.
If the equity is important, then it should have some chance of producing fuck-you-money at liquidation. 0.05% is only fuck-you-money if there's a Google IPO size liquidation and there's been no dilution ($11,500,000 @ $23billion). That ain't significantly more likely to happen to a software developer than a chef.
They're pointing out that, even if we assume a ridiculously high value for the equity, it's simply not worth any money. You're absorbing substantial risk for equity that has no chance of being worth real money.
This seems to be a common pattern in finance, where one party tries to shed all their risk cheaply.
It depends on how far below market you will get, but you're right, for plenty of the offers out there 1% would be (way) low. But 0.05% is to be laughed at (politely, of course), no more than that and then simply counter with an offer that you'd be happy with.
As soon as it becomes hardball negotiation, then the context of later events is the same "what can I get out of this" finite pie. The goal is not a percentage but an opportunity for a life-changing payout. 1% or so means that the major shareholders aren't concerned if my working hard doesn't get me rich in circumstances where they become rich.
They're fine with us all having worthless stock together.
What I am getting at is that taking equity means getting a lawyer to oversee the business terms. Going into business with someone who doesn't value the long term success of those with whom they are in business is a bad idea in my opinion. It's better to hang out with people I trust.
That goes to the heart of the most frequent cause of trouble between shareholders: badly aligned interests. Even so, if you're looking at the stock as a lottery ticket and the company does take off you're in a good position to make a fair amount of money, you just shouldn't count on that. But if you're going to play you might as well play for stakes that are worth it. Each to his own, I think a big part of the 'compensation' in being part of any start-up is that you get ring side seat on how that whole thing works and you can - if you are not just heads down coding - get some very valuable contacts out of it.
This can turn out to be worth more than either the stock or your salary but that's a long game and one with even less guarantees.
Still, I'm pretty sure that very few people that were on board with one of the bigger SV successes of the last 2 decades are going to complain about their pay-day, whereas for everybody whose company did not make it it hardly matters how much stock they got. And that's really where these founders miss the boat: they should be happy to share a sizable chunk of what is essentially worth nothing. They are essentially already busy with their exits when they should be building a company and that alone is a good reason to avoid those companies.
Badly aligned expectations are perhaps worse than badly aligned interests because they spoil what could be an otherwise good relationship.
Shares that signify that the owners want a person to help run the company are different than shares as a form of payment. There's nothing wrong with either so long as everyone understands which it is. If it's compensation, then it's mostly a distraction from evaluating the job offer. The ringside seat to a rocket-ship ride comes with or without shares.
If the equity is important, then it should have some chance of producing fuck-you-money at liquidation. 0.05% is only fuck-you-money if there's a Google IPO size liquidation and there's been no dilution ($11,500,000 @ $23billion). That ain't significantly more likely to happen to a software developer than a chef.