Equity · Equity distribution

How much equity to give to freelancers?

Stan Zhekov CEO, Reverd.com | Looking for Software Architect co-founder

February 12th, 2017

I have not seen recommendations on any of the equity split teachings.

So my question is:

How much equity to give to freelancers from my start up?

I think they can be considered a part time developers/workers...

But it might be good to keep some of them for a longer time by creating long term interest in the company...

I believe it is critical for the company progress.

Thank you for your thoughts.

Shingai Samudzi

February 12th, 2017

Don't give equity to freelancers. If you can't afford to pay cash, get a cofounder who can do the work instead.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

February 12th, 2017

Stan: There is nothing wrong with incentivizing a freelancer or employee with stock. But the idea would be to pay the $10 per hour the freelancer charges plus the stock, not discount his fee and replace it with stock. If you want him to give your project priority give him $12. Your stock has no value. As I said, if it did you would sell it to investors. Bootstrapping is what founders do. Everyone else gets paid.

Jonathon: I would be happy to walk this through with you. The number of people who take stock that actually pans out is minimal. Most smart people who value their own work want to be paid the rate that they charge. The promise of a reward later is specious. Pay the rate asked and offer them the opportunity to buy -in at the founder's rate if they want. The smart one will say thanks, but no thanks.

You are both trying to solve your problem, having not enough money, by making it someone else' problem.

Chicke Fitzgerald

February 12th, 2017

Stan, the best method I've found is Slicing Pie by Mike Moyer. No matter what the status, if the work is valuable and you want to be able to entice them to come "inside" once you have money to actually pay then, then equity is a good idea. If it is a payment mechanism, then no. I'd do a deferred compensation arrangement tied to revenue generation. If they aren't doing anything to get you to cash flow positive, then you need to rethink things.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

February 12th, 2017

None. If you are only going to hire people who will work for equity you are not going to get the people that are likely to do the job well. If your company is that good that good people will work for equity, sell the equity to investors and pay the best people to work for you. If you have a really great person who insists on equity then you make whatever deal makes sense. Really good people who will work for equity are hard to find, so don't expect to hire a whole crew that way.

Mike Moyer

February 13th, 2017

Equity can be used for anything and can be a great tool as long as you do it right. Most people do it wrong.

If you pay him his full hourly rate of $10 you should not get any equity.

If you pay him less than $10, like the $8 you mentioned, he is risking $2 per hour.

Think about this $2 as a "bet" on the future profits or sale of the company. Every hour he works he is betting more, just like every hour you work you are betting whatever you would otherwise get paid from a company who could pay you.

Plus, you are betting the $8/hour you're paying him in addition to any other out of pocket costs.

Every day, more bets are placed. The betting continues until you reach breakeven or raise a Series A round. You will never know when the betting will stop and you will never know what the payout will be.

However, you can always know how much each person has bet.

A person's % share of the equity should be based on that person's % share of the bets placed.

This is the essence of the Slicing Pie model (mentioned in another answer). It is the only way to create a fair split.

Every other method is just guessing. Only Slicing Pie can give you the right answer.

The whole process is outlined at SlicingPie.com

Stan Zhekov CEO, Reverd.com | Looking for Software Architect co-founder

February 12th, 2017

Let me clarify with an example:

a freelancer is doing excellent job with understanding, cooperation and passion, and quick (it happens rarely) so I want to keep him for a long time. His hourly rate is $ 10/hr. It is kind of complicated system - the longer one works on it the better he knows the system.

I wonder if there is a ground (precedence) to negotiate for example: $ 8/hr + equity, so he will know that the quicker we move forward the quicker he will get a portion of the pie... Also of course freelancers are looking for interesting / challenging projects - I understand that. I don't mind if he works on other projects as well (this is not an employment anyway) but I would like him to give weight / priority to my tasks when it needs a quick turn around...)

Just wonder if such arrangement will work. Obviously I cannot afford having full time employed developers yet for it is bootstrapped startup.

Jonathon OBryan A Serial Entrepreneur! W/ Values...

February 12th, 2017

Let's talk through this together, as us start-ups use Freelancers a lot, and they are even apprehensive most times...

Stan Zhekov CEO, Reverd.com | Looking for Software Architect co-founder

February 12th, 2017

Hi Jonathon,

I agree. My whole site was built by freelancers.

my email mark_mark [at] reverd.com

Fred Stein Advisor at Fanout

February 13th, 2017

First get educated about financing and legal issues. Consider joining an accelerator where there are mentors that address your specific situation. Without specifics, all of us on this thread are just guessing.


February 13th, 2017

None, you pay them for their services.