Fundraising · Equity

How do you determine the equity for the developers during the prototype phase?

Anonymous

March 21st, 2016

I am working on building a software with 3 of my colleagues. This is still in very early stages. We met couple of times where I explained the concept and my colleagues were thrilled to work for me on the product. At this point, I have decided that only I would put money in  the company. These guys are great and have not asked a lot of questions on equity or anything. They just want to be a part of the product. But I wanted to be prepared for any such future discussions. These are all developers and will be writing code for the prototype. 

- How do you decide how much equity these individuals get? How much do I own? Is this the right time to talk about it? 
- When I try and get seed funding, does the numbers change?

I am still at a very early stage of the process and have a long way to go before we launch. Are there any good resources for me to understand the basics of investments and equity? 

Tom Jay

March 21st, 2016

@Ema, most people who talk with me tell me upfront that they have a $100M or $1B idea, they mostly offer me 1% if I can do the UI/UX design, simply write all the code, create the apps, create all the back end servers and web sites and get the product to market.

All that is left for them to do is market it and make all the execution happen, most people feel they can do that even with no experience.

Then people ask me to introduce them to investors :)

Rob Christian Software Engineer at TrueCar Inc.

March 21st, 2016

"The Founder's Dilemmas" covers this a lot. The book is research based, definitely read it. Do a search for equity calculator. Also consider a flexible equity scheme (the book recommends flexible equity). Fixed equity agreements don't account for the changes that life always brings, and assumes everyone has generally the same work ethics. Set expectations as early as possible.

Johann Taljaard Social Media & Digital Marketing Professional

March 22nd, 2016

I am more sceptical than most so here is my take. Don't chase the money, chase the vision, deliver against the dream and the money will follow. I would very seldom if ever rely on what is being said over a quick beer, meal or any occasion other than a formal meeting. 

I support the idea of binding NDA's and when it comes to the developers; contracting with very clear intent. In the end, if the love what they do, and do for you and want to be part of it, draw up a contract with very clear remuneration numbers, possibly after given them a small % of equity, provide options to buy further into the company.

Never be influenced by what others are saying without researching things for yourself i.e. coming to this forum. Remember, these are only opinions albeit some steeped in rich experiences.

Get yourself a mentor with expertise in the area that you'll be operating in. The best money you'll ever spend

Hope this helps

Ema Chuku Designer. Product Developer. Founder @ NuPad

March 21st, 2016

Not everyone who wants to be part of a product development is entitled to equity. Reserve equity for those who wants to be part of a company and not the product. Sometimes the exception is if that's the only way you can pay them instead of cash compensation. In this case, your idea, your investment, give up total 5-10% equity, and on the condition their involvement does not stop once product is live.

@Thomas, just wondering how you came up with $100M as a valuation for a business idea (not even yet qualified as a startup).. This is why the industry is getting a boom.

Jackson Powell UI/UX Designer & Front End Developer

March 22nd, 2016

I recently read a great article on deciding how much equity to give a fellow FounderDating member wrote. Hope it helps you.

Ema Chuku Designer. Product Developer. Founder @ NuPad

March 22nd, 2016

@thomas I take the last part as quite humorous indeed. But well said.

Corey Schwartz President at Loanatik.com

March 23rd, 2016

Read Slicing Pie.  Each employee has a value i.e. market rate salary.  If you are not paying them, they are earning equity at the equivalent of their salary at the current valuation.  It's very fair and flexible.  Make sure you include vesting and cliffs so that you don't get screwed by them walking too early with significant equity.

Tom Jay

March 21st, 2016

If its your idea then you own it. Have them sign NDA's so they understand its your idea.

If there are 4 people total you want to make sure that everyone gets a fair share. If you value the idea at $100M you want to make sure you have the largest part so if you offer then each 1% that's giving them each $1M and that leaves you with 96% so $96M. That's a lot of money.

You only need developers to create the product and roll it out, then you no longer need them.

You might think about paying them instead of giving stock this will keep things cleaner and keep you with 100% of the company.

Creating a company and software product is all about the execution, you might even be able to learn how to program yourself and not even need them, lots of founders do this.

I've met lots of founders and they all tell me that they will get "Suite Cases of Cash" for their ideas from VC's so I guess this is the normal mode.

I've made very good money working with startups but not the huge money you will make since I'm only a developer.

Good luck with your project and make sure you protect yourself and don't give it all up to a scammer.


Jack Bicer Founder & CEO at Sekur Me ("Father of Uninstall")

March 23rd, 2016

Dave Berkus, the SuperAngel in Southern California, values startups in 5 categories, each with a value of $500K. Assuming the idea is great/you have a good value proposition and the market is large, your idea/startup is valued at best at $1M at this stage. The $100M valuation for an idea is unrealistic. Figure out what their contribution is worth then offer them a reasonable ownership. I would recommend a milestone based vesting for the stock, just to cover the case where one day, someone decides not to deliver their end.

Al Hussain President, EZblue Software Corp., Linux Server Software Products

March 21st, 2016

The road to hell is paved with good intentions is a proverb or aphorism. However, it serve as a good reminder that it is best to have everything understood and agreed upon and in writing. It is wise to have a lawyer draft everything. That is the only way to go. Don't forget money is not everything so don't loss your friends because of misunderstanding.