I have a technical co-founder who has been doing most of our development but there’s way too much work for him, and we’re slowing the growth of the company by putting it all on his shoulders. I want to bring on two developers to work with him and guide the development of the product. These individuals will be very important to the company and I want to compensate them as such. Of course I want to be careful about giving too much equity away and disenchanting future investors.
For top engineers with big roles at an early stage startup, where would you ballpark their equity?
Equity at this stage represents potential and at this stage the perception of that potential is dragged down by a large amount of risk. The amount of equity you will need to give to recruit a developer will depend on the difference between his salary working for you and what he could make elsewhere.
Your equity offer should be based on a calculation that includes assumptions around how long until the equity will have real value, the total difference in salary vs market rate the engineer is forgoing during that time period, how likely the equity is to ever have real value is and finally a realistic estimate of what the equity would be worth when liquidated.
If I was an engineer evaluating your offer I would be doing my own analysis of how accurate I think your assumptions are and factoring that in to my decision. I would also be looking at how my equity could be diluted over time and what they will do to the value.
All that said, generally engineers and developers prefer mostly salary with a small amount of equity unless they truly believe in your vision. A developer can do an amazing job day in and day out and still have little to no control on whether the company flourishes or fails.
You want to pay them with common shares? I would never accept commons - just too many reason they would be worthless one day even if the company is successful.
I would give them a note with interest and warrants. Pay them a normal salary. Give them warrants in the amount of the peak loan value.
Also got to ask - why can't you raise money? It is a fallacy to think it will be easier to raise money after you have the product. If you can't raise money now, you will not be able to raise money latter.
Always get a lawyer involved whatever you do!