Joining an early stage company isn't about getting paid market wages. It's about job satisfaction (assuming you like having responsibility, working hard, and don't mind chaos).

There's a lot of people who think that the only people who get rich in a startup are the founders and investors. I believe that. If you do the math on a good exit, let's say $100M after six years including earn-out and dilution from A&B rounds, then your very-good-case scenario is a personal payout of $300k after taxes. If you think this company has a 1/10 chance of a good exit, then your average benefit from these options is $30k (spread over six years!!!). Looking at it that way, I can't see why anyone would work at a startup for any reason other than it seems like a lot of fun.

I loved the two startups I worked for but the benefits were getting responsibility nobody else would give me, excitement, and seeing how companies are started.

I guess that's not a very direct answer to your question. Here's my direct answer, ask for 2%. But don't make your decision based on whether they say yes--make it based on whether you're excited for the company and team.

* Very few people, founders or otherwise, really make a lot of money on startups

* Single-digit percentage equity grants are actually huge, regardless of how small they look when you write them down on paper.

If a startup's success depends on the team, then you have to figure out whether or not the current team can pick up additional skilled people. If you're the first technical hire, most likely you will be responsible for gathering a team (though not always). But in either case, you are directly responsible for the value of that stock.

Are you willing to give it everything and make that 1.25% be worth something? Or are you going to sit and rely on hope & expectation?

$0.02

It is a big leap for me because I am currently employed, and jumping into a startup company, taking large pay cut, is quite a risk.

Take the percentage you probably think you're worth, and divide it by 10.

Is 5% a "good" number? Well, YC takes 6%. If the company had to choose between you and YC, would it be almost a coin-flip?

That said: the number one rule of stock options valuations for employees (not founders) of private companies:

The numbers don't mean anything. The company can succeed wildly and still ratchet you back to any level they'd like. Every round of funding is going to rewrite the terms, and so will the acquisition. The exceptions to these rules occur mostly in cases where "employee #2" stock options are so clearly and inherently valuable that you won't care about the specific number.

For more data, check out http://compstudy.com/. It's an annual survey of startup compensation. This year there were over 1000 companies that participated in the survey and there was a huge jump in pre-VC funded companies.

You need to know 1.25% of what. 1.25% of a 50,000,000 company is $650,000; nothing to sneeze at, but not a massive pay day by any means. Especial with taking the risk of 1/2 salary for an extended period of time.

Second, you need to know the projection on when you will level off on salary to return to market. If it is a year no big deal, but what if it is five years.

You need to weigh this level off period against the percentage of market cap projection and see if you are comfortable with the numbers.

I am thinking of putting in my contract that my salary would be renegotiated every time they take on funding or after the company has become profitable until my salary reaches a pre-agreed on market rate for my position.

The point is not to get it exactly right, rather to get some number that you may or not be comfortable with. The second option would be to project potential customers as well as potential product price and work into your numbers that way.

I strongly urge you to try to project these numbers even on highly subjective data points.

As for you salary, do not put in your contract renegotiation, that puts you in a disadvantageous position at every round rather you should negotiate a schedule up front to return to market rates. e.g. if the company reached x capitalization you move to y% of current market rates.

With this model it puts you in the position to have a bargaining chip as funding rounds come around and not get diluted out while still being paid less than market.

With this structure if they continue to want to keep you below market (to keep the liability light) then they have to negotiate with you to further sell your earning potential.

Which is exactly what you are selling so you really need to know the price of what you are selling. Just as you would not sell a car without knowing its market value you need to analyze the value of your lost earning potential against the investment risk.