You're missing out on $25K post-tax dollars per year by working at this company (assuming US taxes in CA or NYC and 80K "real" base)
You plan to stay there 4 years and in that time if all goes well, you hope the company to exit for $25M. I assume a low exit because the company is raising a 2nd seed implying that it isn't a moonshot business and seems to be struggling. This means you're looking for a very minimum of $100K in post-tax returns in 4 years and assuming you have not purchased your options yet and filed a 83b, will be subject to AMT (roughly 35%). Assuming the FMV strike price values the company at $1M today, you'd need to spend $ to buy those options as well so let's increase what you need by 1/25.
Sooo... to break even on missing $100K in salary over 4 years you need to own at least $160,000 in stoke or about 0.64% of the company AT EXIT. Over the 4 years, I'd anticipate a conservative 25% of dilution so now you need 0.85% of total equity in options.
To just break even on a $25M exit compared to salary loss, you need 0.85% of the company's total value today. Let's say that the company has a 33% shot of exiting for $25M meaning that you need 2.55% in options to break even on expected value. I'm guessing that if there's a $25M exit, you'd also like some upside beyond making up for loss salary so let's double it to 5.1% in options. If I'm being purely logical, I think 5.1% of the company in options is fair today for you.
Based on the model, if there's a $25M exit:
You'll own 3.82% at exit.
Pretax is $956,250
Post-tax is $583,312
Less salary loss = $483,312
This is a fair reward for 4 years of working hard and taking on risk.
Okay. Now some sanity. I don't think this founder is going to give you 5.1% of total equity in form of options. He just doesn't sound like the guy and given the undermarket salary, you also don't sound like a long term lead engineer. I could also be wrong to suggest that the company would only be worth $25M and could be worth $25B instead. That obviously makes a big difference so you could ask for less.
What would I ask for? I'd ask to be brought to market rate after the next round closes and threaten to leave if not. I'd also ask him what an optimistic outcome looks like and when then I'd cut that number in half and extend the time table by 2 and run the above calculation to come to an equity number.
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary."