Contractors · Compensation

Cash and Equity for Contractors?

Alex Tang Co-Founder/CEO at Gruv Music

May 21st, 2014

I've got a very early stage startup and I'm looking to hire a contractor to do some iOS dev work.  I was originally hoping to hire him as a first hire, but for reasons of his own, he's not interested in that right now (but he is interested in contract work).  
In any case, I've got some cash to pay, but not tons, so I'm considering doing some sort of cash + equity deal for his work.

Has anyone else done anything like this?  What were your terms?  How much equity did you provide?  In this case, we discussed his monetary rate being about 68% of what he normally charges depending on the amount of equity.

Thanks.

Jake Carlson Software Development Manager at Oracle

May 21st, 2014

Contactor vs Employee makes no difference. Their commitment to the work you are doing is what matters. I was given the choice to become an employee or stay contact with a startup I'm working with right now and was given equity either way. Being an employee does not magically make someone harder to replace; what matters is the actual work they are doing and value to the company. Giving equity is a good way to entice the person to stick around a do a good job, but equity can be granted to contractors as well as employees.

Mike Moyer

May 21st, 2014

I do this all the time. I invented perfectly fair equity model to determine exactly how much equity each person deserves. It's called a Grunt Fundand it will tell you exactly what to give your contractors. Send me your email and I'll send you a copy of the book I wrote on the subject called Slicing Pie: http://www.slicingpie.com/contact/

Ron Sheridan

May 21st, 2014

idea A: Take the dollar amount OUTSTANDING and add a premium percentage say 20% and offer him a convertible note, with no fixed valuation and no cap, (likely you don't have that anyhow), add on a small interest percentage and when you raise a big seed round or A round you will have a valuation, and he can convert at that rate.

The key is closing those deals you have to close in order to SHIP the product and start gaining traction..imo.

Manny Acevedo Business Systems Analyst & Entrepreneur

May 21st, 2014

Only cash. Never give up the equity. If he's not willing to come aboard in some way, then keep it simple. 
Get a quote, pay only for milestone delivery and just move on. 

As a side note, learn to code if you don't know how and be your own technical founder ;) 
You can't do it all, but at least you'll know if the dev work is up to par

Duane Nickull Chief Marketing Officer, Co-Founder at Cheddar Labs

May 21st, 2014

We do this very well and at a low cost.  Hot Tomali (www.hottomali.com).  Contact us for a quote too as you more forward.  duane at nickull dot net.

Kevin Lentz

May 21st, 2014

I have done this in the past, and if you go the equity route, I recommend that you structure it as an earn-out or some other performance/milestone-based approach.  Everyone needs to eat, so those projects that are paying the contractor will take precedence over equity-only projects.  This can lead to weak deliverables or missed milestones.  And you don't want to be locked into a fixed equity percentage in those scenarios.

If you can absolutely nail all the requirements up front, and then determine the value of the end contribution, you can calculate the equity percentage of the contribution against your pre-money valuation.

Ron Sheridan

June 2nd, 2014

@Alex Tang of Jun 02, 2014:  I think you have it exactly as I stated it.

Upon a new funding round (an A round or even a Seed round), this person has the option of converting their note plus interest (add on the premium (the discount)), into equity in that round at the valuation for that round.

I recommend you establish that they would not receive a Cap in valuation. For that small an amount that should be expected.

Best,

Rick Nguyen Cofounder @ Spot Trender

May 21st, 2014

Depends on the developer's experience and how complicated your project is. Some factors that can affect cost:
-How complicated is the product?
-Level of experience of programmer + Seniority of programmer's current job. For instance, a VP of Engineering from Google might want half of your company - but then you can happily put his/her name on pitch deck.
-Your general knowledge of programming and project management. The more experienced you are with managing project, the more efficient you will be at managing price.
-Your ability to sell your vision. The better you sell, the less equity you have to give.

I've done a range of these, from paying full time market salary to offering 50% of company. Some scenarios that worked well for me before:

-When looking for cofounder: 25-49% equity, no pay - with badass engineers that share your vision and passion. Major plus if he/she understands business fundamentals.

-To get prototype done: outsource this stuff with independent contractors. Pay per milestone, no equity. I paid $5k/month for a fulltime outsourced dev.


Alex Tang Co-Founder/CEO at Gruv Music

May 22nd, 2014

@MannyAcevedo: I code. And am already doing most of the backend (and some of the front end for that matter), but i want to get someone with more skills in the particular area that this piece is being done (iOS/mobile/CoreAudio). 

Alex Tang Co-Founder/CEO at Gruv Music

June 2nd, 2014

@Mike Moyer, @Ron Sheridan: So, if  I understand your concept of using a convertible note: If the contractor's normal rate is 800/day, and he's charging me $550/day (11/16 discount), after we work out all of the usual targets, milestones, etc etc etc and we agree the contract is for say 30 working days.  the difference in the normal vs. our contract rate is $7500.  We'd draw up a convertible note for $7500 with a discount (say 25%).  At a series A event (or other similar), he gets $9375 (125% of $7500) worth of common shares?  Is that correct?