Startups · Equity distribution

Need inputs on Equity Planning and Outsourcing Firm as technology partner

Ryan P Product Marketing, Growth Hacking

October 5th, 2016

Hi All,

I am a first time solo entrepreneur, working on building a B2B SaaS startup. As it’s a technology product and I come from Product Marketing background, I will probably need a technical founder going forward.

As I am not able to find a suitable technical person to become my partner, I thought to start with outsourcing the MVP version and at the same time validating the idea and market. I came across a very sound technical person who runs a own software development firm (came to know him from close contact) and fund his technical expertise to be really good and what I was looking for.

So the deal we discussed initially is

1 His firm will take care of product development and I will pay for the costs and marginal profits to make this sustainable for his team. (The cost will be 30-40% lesser than actual costs; basically he will make little profits but cover all expenses and overheads of team)

2 He will spend his own time as a technology partner to build product, architecture and also giving all the necessary consulting in exchange of 5% equity. He basically invests his own personal time and the equity is basically combination of his own time and discount he is giving for development costs.

As I don’t have any other founder with me yet, I will be holding remaining 95% equity and might need to dilute some when I find the right person onboard. I plan to allocate 10-15% equity for those early employees who will be joining the team (as a part of motivation and long term commitment)

Do you all think it is ok to give 5% equity for this technology partner because without his support the produce development work may not be that fast as I am not a technical guy to make any technology decisions here.

I am totally bootstrapping this startup right now and probably will need do it for another 1-2 years till it gets traction and then looking for outside investments

Pls advise

A great idea is 1% of the work. Execution is the other 99%. In this course, we’ll teach you how to conduct market analysis, create an MVP and pivot (if needed), launch your business, survey customers, iterate your product/service based on feedback, and gain traction quickly.

Jeremy Pavleck Design Director - Future Technologies and Automation at a financial company

October 5th, 2016

5%?! For what sounds like the person who is actually doing all the technical work in addition to running his own company? 

That doesn't sound very motivating. I know I wouldn't even make a half-ass effort for that little equity. 

And your overall plan is to devote 10-15%, which means you'll maintain at LEAST 85%? 

Plan on giving away a minimum 49% all said and done if you're really serious and sane. No one will work for someone who they see as having the VAST majority equity for.... what exactly will you do, anyway?

matt matt Web Developer

October 5th, 2016

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Manav Chaudhary Healthcare | Consumer Experiences & Journeys | Analytics | Start-ups | Mentor

October 5th, 2016

Ryan:  I agree with that Jeremy is saying above? A successful venture needs a good idea but more importantly needs a strongly motivated team of skilled professionals to make it a success. So you should consider options before going in for a combination which is a non-starter. 

If the technical team partner believes in the idea, have him cut-down on revenue expectations from you but increase his equity component significantly. That ways, you would have him committed more to the venture. Or give him complete revenue but no equity at this stage. Post MVP, you should work out the equity conversation. 

Jeff Gindin Creator of a cycling accessories

October 6th, 2016

Hi - It is hard to quarrel with the above comments. If I have read this correctly, you are prepared to improve the deal / offer  better deal if / when you find a "permanent" partner. If it were me I would either go with the person / company you have now or find a permanent partner. If you are able to cut a good deal with the person / company you are currently talking with then all the more power to you. My caveat is that you must be prepared to provide detail specs (in whatever form they want them in) and be prepared to test everything they do. By test I mean not only for appearance and functionality but do everything you can to "break it".  Good luck.

Sebastien Mirolo CEO DjaoDjin inc.

October 5th, 2016

Hi Ryan,

It is interesting. We, at DjaoDjin, have started to implement the same kind of deals but from the engineering/dev side of the equation. We usually find partners with experience and connections in a specific vertical. They come to us with a very niche product to build. Depending on various factors, we either:

1. charge a one-time setup (i.e. build) fee and maintenance/hosting fee
2. customize our platform for a percentage of revenue
3. provide dev resources for equity

Sharing equity though is like buying a house together. I would only do it with someone I know well and have worked with in the past. Plus there are tax consequences when transferring equity after the company is incorporated.

I like revenue-share deals, especially with clauses like "devs get 1% more for every passing month the business has zero revenue". They focus entrepreneurs on sales and finding customers real fast :).

Ryan P Product Marketing, Growth Hacking

October 5th, 2016

Hi jeremy,

Thanks for the reply. The idea is to give 10-15% equity among other employees, another 10% for a technical founder whevever I found some and remaining 10-30% equity to raise more funds when needed. (could be even higher if there are more rounds)

So eventually my equity will be close to 51% or may be less than that as well.

Does it answer your query?

Ryan P Product Marketing, Growth Hacking

October 5th, 2016

Jeremy, Madhav,

Actually i am not really too much concerned whether I will have 51% or higher equity. My objective right now is to build product with right technical expertise/ advice.

Post MVP, I will have better understanding on how to move forward

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 5th, 2016

Those founding entrepreneurs selling equity if there are royalty investors available are both foolish and less than sincere. See Royalties.Website.