While there are several approaches available, and a lot will depend on the stage of the startup, status of funding, criticality of your role, etc.
Typically, if your role is critical to the success of the startup, the founders will be willing to give a higher equity in lieu of normal salary. However, if you bring generic skill sets to the team (e.g. social media marketing, sales, coding, etc.) then the percentage of equity will be, understandably lower.
A good way to think about this is to multiply the difference between ‘normal salary’ and what is actually paid by a number that you and the founders feel is right to justify the ‘risk’ associated with the engagement.
E.g. (and these numbers are just for illustration) if your ‘normal’ salary should be $ 10,000 pm, and suppose the startup was giving you $2000, and that this lower salary was to continue for a period of 18 months, then the total salary that you would not get would be $8000 pm X 18 months i.e $144,000. Now, assume that the founders and you agree that you should be compensated in equity worth 3x of the amount that you are foregoing, in which case, you would need to be given $450,000 in equity.
Now comes the tricky part… i.e. of estimating how much equity would be worth $ 450,000 when it is given to you. Here’s where the math changes into art/perceptions/negotiations. Assume that the founders feel that the startup will be valued at $ 45 million, then they would give you 1% equity, whereas if you feel that they would be valued at $4.5 million, you would want 10% equity. Here is where you and the founders would need to agree on the vision, aspiration, potential, etc.
Of course, this conversation will happen only if you are critical to the team… else, you will be given equity in line with the ESOPs policy of the startup.
