Founders · Minimum Viable Product

Equity compensation for building a MVP

Rashad Bartholomew Change Everything

February 16th, 2014

I'm building an MVP which should take about three man-weeks of work.  I plan to split the project between two coders evenly and compensate the coders with equity.  How much equity should I give up in this case?  If things go well, with customer acquisition it may be a situation where one or both coders join the company down the line.

Robert Winslow Founder at PlaceParse

February 16th, 2014

I'd find the cash and pay for it upfront. An upper bound estimated cost is:

40 hours a week * 3 weeks * $100/hr = $12,000

Learn some front or back-end coding to reduce costs, too.

Pej Azarm VP at Fluxx

February 19th, 2014

I'm assuming it's not realistic for you to learn to code or pay the market rate for the coders, otherwise you would have already pursued those paths.  The answer is likely a combination of what has been said above -
- Try to define a realistic valuation for the company. Since you are very early stage, this will result in a fairly nebulous output, so the key is to get the developers to agree to the figure.  Phrase the offer in terms of 'shares' and don't focus on the percentage of the company.  If you give them 100K shares at $0.10, but get them to buy into the idea that those could easily be valued at $2 or $4 in a year, that's a big win.  In terms of equity %, I would start with 0.25% to 0.5%, it really depends on their experience and skills. 
- Determine if the developers are potential CTO caliber folks, if so, giving away equity is a lot easier to stomach
- Sell them on your idea. If they believe in your vision, they are more likely to work for less money and more equity considering the potential for being part of a great new venture, success / recognition, further compensation, etc.
- Provide incentives for good performance by offering more work after the release / test of the MVP. 
- If you have some cash on hand, I'd suggest the best course is to give them a combination of cash and equity - the exchange of cash makes the whole process 'real' for both parties.  You can add incentives such as allowing them to convert cash to equity down the road, but I wouldn't bring that complexity into the equation unless necessary.

My 2 cents.  Good luck.  

Frederic Laruelle Founder & CEO at inkWire, inc.

February 16th, 2014

I'd second paying with cash, much cleaner, esp. if you haven't worked with your coders until now.
Granting equity should be done with great care as it means entering into a long term relationship, very much like getting engaged.
You could mention that your goal is to grant equity to them, provided you are satisfied with the results and there is mutual interest.
... but you should definitely test things out first with a paid work engagement.
 
If cash is not an option, I would not value 1 month of work at more than 1% of equity, assuming a valuation of < $500K at this stage of the game.
Consider playing around with a vesting schedule to foster a long(er) term engagement.

Gilad Beeri Software Consultant

February 17th, 2014

My 2 cents as a coder are that I wouldn't take little equity for a short period of time, and would rather get cash.
If everything works out, I would be happy to have the option to convert the cash to equity, or just get some equity in the amount that takes into consideration the change in the value of the company.

Maybe you should try to define the MVP as something that doesn't require coding skills, be it by using drag and drop tools like Wix.com, or by trying some video\landing page that tests customers' first reactions.

Joren Winge iOS Developer

February 16th, 2014

Since you are asking for work for no cash, I would say 5-10 percent. More if you expect them to stay on and be your CTO. Then use vesting. Of course that 5-10% should be dilutable and tied to your own shares.

Kovey Kovalan Entrepreneur and Consultant

February 16th, 2014

I don't think anything valuable can be built in three weeks, but if it can be, then just built it yourself without giving equity. Equity is expensive in the long run. The way to calculate equity is by putting a value on the company you are building. You can lookup pre-money calculator on the web that can help you with this. Then take 75% of market value of the coders, and compensate them according to the value. For example, if the company is $1M, and the coders rate is $100k annually, and you only need 3 weeks, you can use a 50 work week to do the math. ----- Reply message -----

Ahmed Muzammil Jamal

February 17th, 2014

If you just want to build an MVP. Better you go to some MVP consulting companies around . Won't cost u more than 5000$

Mike Moyer

February 17th, 2014

Hi Rashad, My company, Lake Shark Ventures, LLC builds MVPs for equity using the method outlined in Slicing Pie- a book about dividing up equity for bootstrapped companies. The method, called a Grunt Fund, will tell you exactly how much equity to give your developers, how to calculate a fair buyout price, and what to do if they can't deliver.

Send me an email to mike@slicingpie.com and I'll send you a copy of the book (I wrote it)

Aji Abraham

February 17th, 2014

If you plan either of the coder for down the road, it makes sense to give equity to your developers. If not it will cause unpleasant experience for the entire team as you have people contributed just few weeks with decent equity. As others have explained paying the developers cash, with an understanding they get decent equity if they join full time down the road would be much better. That said if you do not have any funds equity might be the only option. 10-15% to each developer if you are the only founder. Slightly less if multiple founders.

Alison Lewis CEO/Creative Director

February 17th, 2014

We have just had a similar experience. We have paid the coders for the first MVP that allows is to showcase the concept, and now are in an equity discussion. However, as a hardware and soft good company it makes sense. If your planning to be an applications company, it's better to find a co founder with development experience or learn yourself so that the core of the technology is in house.