Technical co-founder · Equity contracts

What is a reasonable equity proposal to this senior engineer?

Kodjo Hounnake

February 25th, 2016

I currently employ a senior engineer full time @ about $2,000/week. He is very strong and I would like to offer him equity in exchange for his fees (until we raise seed, at that time he will start getting salaries again).

My startup is already generating revenues albeitde minimis, but nonetheless revenues, so it's not at a micro stage. I've also recently secured a major partnership plus strategic pre-seed funding so his risk coming in at this stage of the company has been reduced. In light of this, my bid to him was 20% equity in return for no salary until such time as we raise seed funding. After a few back and forths, his final ask was 25% equity ownership with the caveat that he hired someone under him (that he's already identified). He (the senior engineer) will work for free and still taking on other freelance jobs, while I would be responsible for paying his hire market rate.

I just can't accept this deal. The point of offering equity was so that I can forgo paying salary until we raise seed.

What would be a reasonable counter to his ask?

John Wallace President at Apps Incorporated

February 25th, 2016

Before making the offer did you have discussions to find out if he was financially able to work in return for equity? If not, then start the discussion there. It may be that he is financially unable to do any deal. It could also be there is something else he wants.

After the preliminaries, there are a variety of deals you could offer. You're essentially saying the company is valued at $500K, so 20% and no salary, or 10% and $1K/wk, or 0% with $2K/wk are all about the same, assuming you can afford them.

Ted Cohn COO/CTO Entrepreneur

February 25th, 2016

I would caution you consider not making him a co-founder too early and give away too much stock. 20%-25% seems like a lot unless you are desperate and cannot find an alternate resource. If you both work part time, then perhaps it makes sense.

An alternative might be to structure a sweat equity consulting agreement for him where he is paid in vested shares on an hourly basis or by milestone. You can compute this rate from what he might earn normally if paid cash and give him a risk premium (25-100%). Then you can evaluate his work over a probationary period. Later you may then decide to bring him on as a cofounder or is worth the 20%. At least he is earning equity now at an elevated rate and you have a way to terminate him if necessary. This gives you added benefit of not having the possibility of booting a cofounder right away.

Lorenzo Polacco Snr Director, Sales & Advertising Operations at Yahoo!

February 25th, 2016

The free lance work he will be doing is where I think you have your biggest risk. If the engineer needs money to live, then he will need cash and that will be his priority. So your risk is that you give away equity and then have someone focused on working other jobs (which is also probably why he asked for you to hire a junior engineer..).
So, you should probably try to offer a mix of cash + equity and try to avoid the free lance work or at the very least agree on a minimum, uninterrupted time commitment to the startup.

Peter Jordan Revenue hacker for startups - journey to the $1 of revenue

February 25th, 2016

You should look for alternatives. With a high equity ask and no sweat equity for your current needs, then keep looking. You are a startup not a big corporation so it makes sense to keep the organization as flat as possible and avoid having too many managers and not enough worker bee's.

Mitchell Bolnick Business Mentor, Adviser, Consultant for Start-ups, Small Businesses, Growing Businesses

February 25th, 2016

Do you have a valuation of your business? If not you really need one and I can help. The concept of his counter offer does not help, so I would say no to that. In fact the whole concept bothers me and makes me wonder how committed to you this person really is. Sent from my iPhone Thanx, Mitch

Tom Jay

February 25th, 2016

Developers are easily replaced, don't tie yourself into a person that might not be around long term.

Continue to pay for their services and you maintain the whole company.

If you are making him a partner then that is something else but they should be providing a level of partnership services otherwise you are asking them to work for free unless you are going to pay them even if you don't get funding.

Rob G

February 25th, 2016

many different ways to structure the arrangement, but what he has proposed is not one of them - he gets the equity and you pay for some other guy to do the work, perhaps  under his direction?  Sounds like a nonstarter.  There's likely to be far too many nuances to solve here so you might want to find an advisor that can work with the 2 of you cooperatively to work something out so you don't start out with conflict.  i would certainly tie equity to performance/deliverables (for both of you?) plus an options pool or at least and agreement for how you will fund one and make sure everything is documented so everyone is clear going in with eyes wide open.